Avon Products (AVP) Stock Weakness Is Buying Opportunity, Says Jefferies

Avon Products (AVP)  reported third-quarter results that were below analysts' expectations last week, but Jefferies sees positive trends emerging in Brazil and Mexico.

"Despite the 3Q miss, results show continued progress against long-term objectives. We view recent share weakness as a buying opportunity," the firm wrote in an analyst note on Monday.

Third-quarter revenue fell short of Wall Street's estimates due to a slowdown in Europe, the Middle East and Africa and declines in the Asia Pacific region. But revenue from Mexico, which is a key market, accelerated for the second straight quarter, Jefferies noted.

On a constant dollar basis, Mexico revenue was up 9% during the period, while Brazil revenue increased 6% in constant currency.

Brazil is Avon's largest market and makes up about 20% of revenue. "The country saw positive growth in both active/ending representatives, and is gaining market share in all three beauty categories," the firm said.

The company's three beauty categories are skincare, fragrance and color.

A key tenet of the firm's thesis on Avon is that the company can execute on its three long-term goals: low-single digit active representative growth, mid-single digit constant currency revenue and low-double digit adjusted operating margin. Jefferies believes the company is still executing on these objectives. 

Additionally, the firm said a slight gross margin decline due to currency headwinds was more than offset by improvement in selling, general and administrative expenses (SG&A). Gross margin was 60.9%, down 20 basis points in the quarter.

"An expected positive inflection in GM did not come to fruition in 3Q (-20bps vs. our/consensus +25bps) as FX continued to be a headwind, which more than offset strategic pricing and lower supply chain costs," the firm added.

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