Despite its stock's falling price today, Avon Products (NYSE:AVP) isn't on shaky ground. But a close look at first-quarter operating results demonstrates that sales momentum is inclined toward the other end of the globe.
On their surface, first-quarter numbers appear to be rock solid: total revenues up 7%, operating profit up 14%, and EPS up 16%. This follows the company's Feb. 17 announcement of an 18% dividend hike and a new $1 billion share repurchase program over the next five years, to be funded quite smartly from internal cash flow. It's certainly not the kind of earnings release that should make investors nervous.
But within the first hour of trading after the release, the stock moved down about a dollar, nearly 2.5% off the previous close of $40.08. It seems that results in North America were on shifting sands, with revenue down 5%, driving a 14% reduction in operating profit. The company made up for that with a strong showing overseas, with international sales up 13% and operating profit up 19%. There was standout growth in Russia and China.
It seems that nearly all large U.S. retailers these days are pointing to an expected sales eruption in China to drive long-term growth prospects. You hear it continually from the likes of Wal-Mart (NYSE:WMT) and Starbucks (NASDAQ:SBUX), and even Best Buy (NYSE:BBY) is opening "lab stores" in China. Avon definitely deserves some credit for its performance in China. Last year, the company generated $220 million of revenues from China, operating through 1,700 retail location beauty counters and 6,300 stand-alone boutiques, mostly owned by franchisees. Just last month, Avon received approval to conduct a test of its traditional direct selling method in China. The test began in April and will use up to 3,000 representatives selling in the cities of Beijing and Tianjin and the province of Guangdon. Investors can definitely tell where Avon's eyes are focused: The picture on the cover of its 2004 annual report shows a smartly clad Chinese woman next to the heading "empowering women throughout the world."
Is the street treating Avon fairly? I would answer with a qualified yes at this point. At 22 times trailing 12-month earnings, the stock is not cheap by any means. While it's true that North America represents only one-third of Avon's worldwide sales and barely 25% of its operating profit, until the company reignites North American revenues and operating profits, the stock could stay on a rocky road for a while.
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Fool contributor Timothy M. Otte is married to a Mary Kay representative and welcomes comments on his articles. He owns shares of Wal-Mart but none of the other companies mentioned in this article.
