Avon Products Inc. (AVP:US), the door-to-door cosmetics seller that’s the target of a $10 billion takeover bid from Coty Inc., fell the most in six months after reporting quarterly profit that trailed analysts’ estimates, hurt by higher labor and materials costs.
Avon dropped (AVP:US) 8 percent to $19.87 at the close in New York, the largest decline since Oct. 27. The New York-based company’s shares have gained 14 percent this year.
Net income in the first-quarter fell 82 percent to $26.5 million, or 6 cents a share, from $143.6 million, or 33 cents, a year earlier, Avon said today in a statement. Profit excluding some items totaled 10 cents a share. Analysts projected 28 cents, the average of 14 estimates (AVP:US) compiled by Bloomberg.
Avon, which named Johnson & Johnson’s Sherilyn McCoy as chief executive officer last month, is working to reverse three years of profit (AVP:US) declines and conclude an investigation related to the Foreign Corrupt Practices Act. Avon on April 2 rejected a $23.25-a-share cash offer from Coty, the maker of perfumes by Heidi Klum and Beyonce Knowles, saying the bid doesn’t reflect the value of the company.
“You’ve got input costs and spending costs that are too high and that’s where the misses come from,” Victoria Collin, an analyst at Atlantic Equities in London, said today in a telephone interview. Collin rates the shares neutral, the equivalent of a hold.
Costs as a percentage of revenue jumped 3.5 percentage points from a year earlier. Gross margin, or the percentage of profit left after subtracting the cost of goods sold, narrowed by 3.1 percentage points.
McCoy on a conference call today said she’d scrutinize every piece of the business and develop five or six priorities to address.
Avon said sales in Brazil, one of its largest markets, were hurt by increased competition. Sales declined 17 percent in its Silpada jewelry unit.
In North America, active representatives declined 10 percent, which Collin said was “most worrisome.”
A new sales model has caused some disruption in the unit, Avon executives said on the call, adding that the changes have also helped boost results among some top-tier representatives.
Total revenue in the first quarter declined 2.3 percent to $2.58 billion. Analysts projected $2.54 billion, the average of 12 estimates (AVP:US) compiled by Bloomberg.
Coty said April 16 it is confident in financing a purchase of Avon, including more than $5 billion from BDT Capital Partners and Coty’s owner Joh A. Benckiser SE. The company gave Avon until April 30 to respond to its offer, which some investors have said is too low.
Today’s results could give Coty some pause because they point to a long and difficult turnaround, said Ali Dibadj, an analyst at Sanford C. Bernstein & Co. in New York.
“If they want to actually make a case that they can run this business better, it may help them as well,” Dibadj said today in a telephone interview. “They may actually be able to inject a bunch of experience and brands and channels that this business could benefit from,” said Dibadj, who rates the shares market perform, the equivalent of a hold.
Buying Avon would more than triple Coty’s sales and help the company expand into emerging markets such as Brazil.
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