Emerging markets are ugly for this cosmetics stock

The middle class may be emerging around the world, but that doesn’t mean it has to buy American. Avon Products (AVPquote) released its quarterly results on May 1, and there’s no packaging that can make these numbers pretty.

Avon is taking a beating in Brazil

Sales decreased 2% to $2.6 billion. Gross margin was down due to commodity prices, rising labor costs, and foreign exchange issues. Net income dropped a stunning 82% for the quarter, from $143.6 million to $27.6 million year-over-year.

Avon CFO Kimberly Ross called the company’s performance “challenged,” but claims that the company is making progress towards addressing its operational issues. 

Bernstein Research analyst Ali Dibadj told Reuters that Avon’s margins were a “disaster,” citing labor and promotional costs in Brazil, Argentina, Venezuela, and Russia. “It goes to show how much they have to spend back to grow just 1%,” he said.

Avon’s numbers show that the company is not competing well in its largest market of Latin America. Sales growth was all but stalled at $1.1 billion, a 1% increase, and operating profit fell 64% to $50 million. While sales were down 4% in Central and Eastern Europe, they were still more profitable than Latin America, where operating profit was down 19% to $65 million. 

Avon’s Latin American division is almost three times the size of its Central and Eastern Europe division, but makes less money.

Avon has a new CEO promising change and renewed growth, but investors are beating a path to the exits. The company’s stock dropped 9% on May 1 to close at $19.87. Given the fundamental structural problems revealed in Latin America, it’s hard to see them coming back any time soon.

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