Struggling cosmetics manufacturer Avon Products (NYSE:AVP) is scheduled to report its Q2FY14 results on July 31. The company’s revenue base has shrunk at an accelerating rate, decreasing 9%, 10% and 12% in the last three quarters on a year-on-year basis. These spiraling sales resulted in shrinking margins sequentially and created greater net losses every quarter. For the last three quarters (Q3FY13, Q4FY13 and Q1FY14), Avon reported a net loss of $5.5 million, $69.1 million and $168.3 million.

Consensus revenue estimates for Q2FY14 stand at approximately $2,230.2 million, representing a 11% year-on-year decline in revenues. We have a revenue forecast significantly higher than the consensus estimate, at $2,460 million, and provide our rationale for the higher forecast estimate below.

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FIFA World Cup ’14 Could Boost Revenues from Brazil



Avon derives nearly half of its total revenues from the Latin American market, with Brazil being the largest contributor within the region. Last quarter, constant dollar revenues grew 7%, supported by an 8% increase in pricing mix that offset a 1% decline in units sold. The decline in units sold was created by a 1% decline in active representatives in the region. Revenues from Brazil declined 10% in reported terms and increased 5% in constant dollars, while Venezuelan constant dollar revenues increased 54% due to the inflationary pricing environment.

Constant dollar Q2FY14 revenues could see a strong support from the recently concluded FIFA World Cup in Brazil. The global tournament was expected to attract more than 3 million Brazilians and 600,000 international tourists to Brazil for the event. [ ] Avon has a 1.5 million representative network in the Brazilian market, and could have generated significant sales from the huge inflow of passenger traffic for the global event. [ ]

Additionally, the partnership between Avon and Coty to sell Coty fragrances through Avon’s representative network could also boost revenue growth rate from Brazil. Brazil is the world’s largest fragrance market, and the rapid increase in passenger traffic due to the FIFA World Cup could provide Avon with the perfect opportunity to leverage Coty’s strength in fragrance products and increase sell-through rates.

Venezuelan Bolivar Devaluation and Argentina Debt Default Crisis Could Curb Growth

Despite the prospects of growth from Brazil, macroeconomic crises impacting smaller markets such as Venezuela and Argentina should weigh on Avon’s Q2FY14 results. The company doesn’t report individual revenue share for Venezuela and Argentina, and the extent of currency depreciation witnessed in both these markets has been very significant. Last quarter, revenues from Venezuela expanded 54% in constant dollar terms despite a decrease in units sold. This is expected to temper down this quarter as units sales decline rapidly in the high inflation environment.

Currently, Avon applies the official Venezuelan exchange rate of 6.3 bolivars/dollar to determine the constant dollar growth. However, the Venezuelan Government devalued its official exchange rate to 50 bolivars/dollar, and Avon expects to implement this exchange rate under the SICAD II system from fiscal 2015. Had the new exchange rate system been employed in Q1FY14, Avon’s constant dollar revenues from Latin America would have declined from 7% to 2%. The rapid depreciation in the Argentine Peso would have had a similar impact on constant dollar revenues from Avon, although the revenue base it impacts is much smaller.

Restructuring and FCPA Bribery Charges to Strain Bottom Line

In addition to weak revenue prospects from the North American region, Avon’s bottom line is likely to be impacted by the $135 million aggregate fines relating to bribery charges with the company’s operations in China. Avon began an internal investigation on the matter in 2008 and finally reached a settlement with the Department of Justice (DoJ) and the Securities Exchange Commission (SEC) during Q1FY14 in relation to the Foreign Corrupt Practices Act (FCPA). [ ] Prior to agreeing to the $135 million settlement, Avon offered to pay $12 million in June 2013. Avon has spent more than $340 million in legal and other costs as of February, and the $135 million payment comes at a time when the company is struggling to turnaround its business. [ ]

Additionally, the company filed a recent 8-K filing with the SEC that indicated a $40 million charge relating to the $400 million cost savings initiative for the second quarter of 2014. In addition to incurring the $40 million expense in Q2FY14 to reduce its headcount, primarily in the company’s corporate and North America organizations, Avon expects to record approximately $5 million to $10 million before taxes as additional restructuring charges during H2FY14. Both the FCPA bribery charge and the restructuring charge are expected to shrink the company’s bottom line this quarter.

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