Is Avon’s Makeover Finally Gaining Traction?

Investors seem to think so. On a day when major stock indices are all in the red, Avon (AVP) is up slightly in late afternoon market action, climbing 0.85% to $13.10 after earlier gaining as much as 8.3% to above $14 a share.

It isn't all wine and roses for the door-to-door beauty products company. Today, it posted another quarter of lackluster sales and lower profits. But executives at the embattled beauty company believe signs of a sales turnaround in a key market are proof it can pull out of a years-long slump.

Quarterly sales grew in the U.K. for the first time since 2010, thanks in part to management changes. Still the company’s overall performance remained weak despite a two-year effort to turn around its operations under CEO Sheri McCoy.

Revenue dropped 13% to $2.2 billion as product volume dropped 6% and the number of active representatives worldwide suffered a like decline. Net profit tumbled to $19 million from $31.9 million.

Citigroup analyst Wendy Nicholson wrote:Is Avon’s makeover Finally Gaining TractionI

While the top line was weak and the rep deterioration is discouraging, the margins weren't quite as bad as we'd expected.

McCoy is trying to reinvigorate recruiting for Avon reps, introduce new products, slash costs, and exit unprofitable markets. She has targeted double-digit operating margins by 2016, well above last year’s 7.9%. My colleague David Englander remarked in May that these efforts could produce lovely results.

Barclays analyst Lauren R. Lieberman advised caution in a note published today.

With AVP shares so weak heading into earnings, we think today's results fall into anti-disaster territory. Organic sales growth was still very weak (and below our estimates), but profitability was less bad as margins were down less than we'd expected and North America was break-even despite another dramatic revenue decline (-20%). Longer term, we do think the Street will need to see signs that revenues are stabilizing before it can find a reason to get more positive and it was a bit of a mixed bag this quarter with very disappointing trends in the critical markets of Brazil and Mexico, but less severe declines in Russia and improvements in the UK, Turkey & South Africa.