Is Avon Blushing About Its Recent Earnings?


Cosmetics giant Avon Products (NYS: AVP) reported a 23% surge in its second-quarter earnings, even as the ghost of a federal probe into some fiscal irregularities loomed large over the stock.

Things were fairly normal at home for the company, but international operations proved an interesting segment of the company's quarter. Although Avon reported a jump in revenue in Latin America, revenue from China, a key market, witnessed a sharp decline.

Reports that federal authorities were looking into allegations that the company made improper payments to some overseas officials have weighed on investor sentiments.

Into the numbers
Avon posted a total revenue of $2.9 billion for the quarter, up 9% from the year-ago period. However, 7% of the growth was attributable to foreign exchange gains. This was in line with the company's expectation of low constant-dollar growth, but management still stands by its target of mid single-digit growth for the rest of the year. Unit sales were also down by 3%.

Still, gross margin rose by 100 basis points, to 64.4%. But taking foreign exchange gains and pricing benefit out of the equation, the margin actually fell by 0.3% due to an increase in product costs.

The areas of concern
Management's growth estimate seems to be powdering over poor performance in many important regions. Things are going slowly for Avon in North America and the company is looking toward other countries to accelerate growth. But revenue from China, a region where Avon is pushing for growth, declined 31%, even though the company reversed an operating loss in the year-ago quarter. Avon is restructuring its business model in China as it is adopting a direct-selling approach and the company remains optimistic about its results in the long term in Asia.

However, the company will undoubtedly be facing tough competition from the likes of Estee Lauder (NYS: EL) , Procter & Gamble (NYS: PG) , and Revlon (NYS: REV) , all of which have a strong presence in the Chinese market.

A Foolish thought
With a not-so-strong showing in various regions along with expectations of low growth, Avon doesn't look like a company that is going to do well in the year ahead. With unit sales dropping, I would prefer to stay away from this company. But you can still keep an eye on the company and others with our watchlist feature:

At the time thisarticle was published Harsh Chauhan doesn't own shares in the companies mentioned in this article.Motley Fool newsletter services have recommended buying shares of Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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