The FINANCIAL -- Avon Products, Inc. on February 15 announced its results for the fourth quarter and fiscal year ended December 31, 2017.
Highlights for Fourth Quarter of 2017:
Total Revenue was relatively unchanged at $1.6 billion; Declined 2% in constant dollars
Active Representatives and Ending Representatives declined 2% and were relatively unchanged, respectively
Operating Margin increased 150 bps to 8.3%; Adjusted1 Operating Margin increased 250 bps to 9.8%
Diluted Earnings Per Share From Continuing Operations of $0.17; Adjusted Diluted Earnings Per Share From Continuing Operations of $0.12
Jan Zijderveld, Avon CEO, said, "I am excited to be joining such a special business at this important chapter in the company's history. Very few brands have Avon's brand recognition, extensive global reach and operate in attractive beauty channel categories. In a world where trust in companies is becoming a scarce commodity, our Representatives' relationships with their consumers has never been more relevant or compelling."
Jamie Wilson, Avon CFO, remarked, "Our top line remains under pressure as we continue to operate in challenging macro and competitive conditions, particularly in our largest markets. We delivered improving operating margins in the fourth quarter supported by continued benefit from our ongoing cost savings initiatives. Importantly, we continued to strengthen our cash position, enhancing the financial flexibility necessary to fund priority investments."
Zijderveld went on to say, "With the support of the Board of Directors, and the reality of our current performance, I am taking a fresh look, diving deeply into our business, starting with spending time in our key markets to gain a full picture of the operating climate as a basis to improve performance. I am committed to accelerating the pace of change and to positioning Avon for success."
Fiscal 2017 overview:
Total Revenue was relatively unchanged at $5.7 billion; Declined 2% in constant dollars
Avon realized more than $250 million of cost savings, exceeding its target of $230 million for 2017
Active Representatives and Ending Representatives declined 3% and were relatively unchanged, respectively
Operating Margin decreased 80 bps to 4.8%; Adjusted Operating Margin decreased 30 bps to 6.2%
Diluted Loss Per Share From Continuing Operations of $0.00; Adjusted Diluted Earnings Per Share From Continuing Operations of $0.06
Foreign currency favorably impacted both Diluted Loss Per Share and Adjusted Diluted Earnings Per Share by an estimated $0.07 per share, driven by the strength of the currencies of the countries in which the Company operates against the U.S. dollar
Fourth-Quarter 2017 Income Statement Review (compared with fourth-quarter 2016)
Total revenue for Avon Products, Inc. was relatively unchanged at $1.6 billion and declined 2% in constant dollars.
From reportable segments:
Total revenue was relatively unchanged at $1.6 billion and declined 2% in constant dollars.
Active Representatives declined 2% primarily due to decreases in South Latin America and North Latin America.
Average order was relatively unchanged primarily due to growth in South Latin America that was offset by a decline in Europe, Middle East & Africa.
Ending Representatives was relatively unchanged primarily due to growth in Europe, Middle East & Africa that was offset by a decline in South Latin America.
Gross margin was 61.0%, up 70 basis points and Adjusted gross margin was 61.1%, up 80 basis points, primarily due to the favorable net impact of price/mix.
Operating margin was 8.3% in the quarter, up 150 basis points, while Adjusted operating margin was 9.8%, up 250 basis points. The operating margin comparison was unfavorably impacted by higher costs to implement ("CTI") restructuring in the current year. Both the operating margin and Adjusted operating margin year-over-year comparisons were favorably impacted by lower bad debt expense, primarily in Brazil, and lower fixed expenses, including the benefit of cost reductions associated with the Transformation Plan. These factors were partially offset by higher Representative, sales leader and field expense to drive Representative activity, according to Avon.
The provision for income taxes was $1 million, compared with $53 million for 2016. The difference is primarily driven by tax benefits associated with the enactment of the Tax Cuts and Jobs Act in the U.S., net valuation allowances released in several markets in Europe, Middle East & Africa, and a favorable court decision in Brazil. On an Adjusted basis, the provision for income taxes was $51 million, compared with $44 million for 2016.
Income from continuing operations, net of tax was $90 million, or $0.17 per diluted share, compared with a loss of $10 million, or a loss of $0.03 per diluted share, for 2016. Adjusted income from continuing operations, net of tax was $65 million, or $0.12 per diluted share, compared with $9 million, or $0.01 per diluted share, for 2016. Earnings allocated to convertible preferred stock had a negative $0.04 impact on Diluted earnings per share and a negative $0.03 impact on Adjusted diluted earnings per share in the fourth quarter of 2017, compared with a negative $0.01 impact on both Diluted earnings per share and Adjusted diluted earnings per share in the fourth quarter of 2016.
Loss from discontinued operations, net of tax in the fourth quarter of the prior year of $1 million, or $0.00 per diluted share, was associated with the previously separated North America business. There were no amounts recorded in discontinued operations in the fourth quarter of 2017.
Adjustments to Fourth-Quarter 2017 GAAP Results to Arrive at Adjusted Results
During the fourth quarter of 2017, the following adjustments were made to GAAP results to arrive at Adjusted results and, in total, reduced Diluted earnings per share from continuing operations by approximately $0.05:
The Company recorded CTI restructuring within operating profit of approximately $24 million before and after tax, primarily related to the Transformation Plan, due primarily to contract terminations and the impact of the Company's decision to exit its Australia and New Zealand markets. Following a review and determination that there is no path to long-term profitability in these markets, the Company chose to close these operations.
The Company recorded a $50 million net income tax benefit that included an approximate $30 million net benefit recognized as a result of the enactment of the Tax Cuts and Jobs Act in the U.S., a release of valuation allowances of $26 million associated with a number of markets in Europe, Middle East & Africa, and an approximate $10 million benefit as a result of a favorable court decision in Brazil, partially offset by a charge of approximately $16 million associated with valuation allowances to adjust deferred tax assets in Mexico.