No one wanted to buy any stock from the Avon
For the second quarter, Avon booked $2.1 billion of net sales revenue, representative of a 5% increase. That's not so bad. Operating income, on the other hand, decreased 35%, coming in at $225.3 million (operating margin also declined, equaling 10.8% this quarter vs. 17.8% last year). And the bottom line was bottom of the barrel in quality -- net income dropped a precipitous 54% to $150.9 million, or $0.33 per diluted share.
Restructuring costs to the tune of $49 million weighed on the numbers, as well as stock compensation expenses. And the woeful news doesn't stop there. Looking through some of the highlights, we see that the North American territory had flat revenue growth, with a 7% decrease in active representatives. The Asia Pacific marketplace saw a revenue decline of 10% and an active representative decline of 14%. The Western Europe, Middle East, and Africa division only increased revenues by 2% and saw no change in active representatives. One of the brighter spots was Latin America, which saw double-digit increases in both revenues and active representatives. China also saw robust revenue growth.
Next up is the cash flow statement. You will see that net cash from operations for the last six months increased 24% to $289.4 million. Hey, that's cool. Fools love cash.
But add up the cost of capital expenditures ($63 million), the cost of dividends ($160.2 million), and the cost of share repurchases ($129.6 million), and you'll find that the number is larger than the operational cash flow (OK, I'll do it for you -- $352.8 million). Because management mentioned that debt increased because of an aggressive buyback, it's something to keep an eye on. A review of the latest 10-K shows that for the years 2003 and 2004, the costs of capital expenditures, dividends, and share repurchases didn't wipe out operational cash flow. The year 2005, however, showed how actually aggressive the share reduction was -- $728 million was used for repurchases alone, while the company saw operational cash flow equal out to about $896 million. Nevertheless, the company does have over $1 billion at its disposal to ride out the buybacks and the restructuring.
Avon is a valuable brand and a consumer icon. Heck, I buy products from an Avon lady myself. But would I buy the stock? With earnings down, the company in transition, and increasing debt, I personally wouldn't at this time. If I had to pick a consumer product brand for further due diligence, I'd be more inclined to go for Procter & Gamble
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