November 2, 2017

Avon Products Inc. AVP - NYSE $2.15

Note: More details to come; changes are highlighted. Except where highlighted, no other sections of this report have been updated.

Reason for Report: FLASH UPDATE: 3Q17 Earnings Release

Prev. Ed.: Jul 13, 2017; 1Q17 Earnings Update

Flash Update [Earnings update in progress; to follow]

On November 2, 2017, Avon Products Inc. continued its dismal earnings surprise trend for the fifth straight quarter in third-quarter 2017. However, the company’s revenues reversed its negative surprise trend after four consecutive misses. Also, both the top and bottom lines improved year over year. Though the company is witnessing improving trends in various markets, management issued a soft outlook for 2017.

Notably, Avon posted adjusted earnings from continuing operations of 3 cents per share in the third quarter, lagging the Zacks Consensus Estimate of 7 cents. However, the reported figure increased by a penny from the prior-year quarter. We note that the bottom line was pressured owing to a tough environment and comparison in Brazil.

On a reported basis, the company posted earnings per share of 1 cent compared with 7 cents in the year-ago quarter.

Deeper Insight

Total revenues grew 1% year over year to $1,417.8 million and also came ahead of the Zacks Consensus Estimate of $1,409 million. On a constant currency basis, total revenues remained flat.

While Active Representatives declined 3% compared with the prior-year quarter, Ending Representatives dipped 2%. This is because Active Representatives and Ending Representatives were hurt by decline in various segments. However, average orders were up 3% owing to growth in all segments, mitigated by flat Europe, Middle East & Africa (EMEA) orders. While total units sold dipped 5%, price/mix improved 5%.

Adjusted gross margin expanded 30 basis points (bps) year over year to 61.2%, mainly on the back of positive impact from price/mix.

However, adjusted operating margin contracted 70 bps to 6.3%. The year-over-year decline was due to higher bad debt expenses, alongside increased Representative, sales leader and field expenses, all mainly in Brazil. These factors were partly negated by positive lower incentive compensation plan costs and lower fixed costs that include cost-reduction gains from the Transformation Plan.

Segment Performance

Avon’s revenues of $482.8 million in Europe, Middle East & Africa inched up 1% year over year. On a

© Copyright 2017, Zacks Investment Research. All Rights Reserved. currency neutral basis, revenues dipped 2%, mainly owing to a 2% drop in Active Representatives. However, average orders remained flat. While price/mix in the region increased 3%, units sold declined 5%. Ending Representatives rose 1%.

Revenues in South Latin America decreased 1% year over year to $589.7 million and remained flat in constant-dollars, mainly owing to 6% decline in Active Representatives, offset by 6% growth in average orders. While price/mix increased 7%, units sold were down 7%. Ending Representatives also declined 6%.

North Latin America’s revenues rose 5% year over year to $206 million and also increased 2% in constant-dollars attributable to 1% growth in both Active Representatives and average orders. While price/mix grew 5%, units sold fell 3%. However, Ending Representatives inched up 1%.

The Asia-Pacific division’s revenues declined 1% to $130.1 million but increased 3% in constant dollars, mainly owing to 3% improvement in average order. While Active Representatives and price/mix remained flat, units sold was up 3%. Further, Ending Representatives dipped 3%.

Financial Details

Avon ended the third quarter with cash and cash equivalents of $663.8 million, long-term debt of $1,873 million and total shareholders’ deficit of $820.5 million (excluding non-controlling interests).

Transformation Plan Update

Avon is in the second year of its three-year Transformation Plan that was announced in January 2016. The plan mainly focuses on investing in growth, enhancing cost structure and improving financial flexibility. Crossing the half-way mark of the plan period, the company has witnessed significant progress compared with its targets of enhancing cost structure and improving financial resilience.

In 2016, the company surpassed cost saving targets, realizing cost savings of roughly $120 million and considerably improved balance sheet as it reduced debt by about $260 million and extended maturity profile.

In 2017, the company targets cost savings of $230 million including run-rate savings from 2016 along with in-year savings from current-year initiatives. Per Avon, savings realized through the nine months of 2017 indicates that it has roughly $25 million of savings target outstanding for the year.

Going forward, management is likely to focus on the business foundations and improve overall performance to attain its savings target. Though Avon is facing challenges, it is expected to focus on investment in modernizing systems, delivering unique and competitive Representative experience. Further, it aims to provide deeper insights and analytics into Representative’s behavior and requirements to boost experience.

In fact, the company also remains encouraged to minimize service disruption along with pilot programs that cover service from end to end.

Outlook

Following the mixed quarterly results and favorable trends, management expects modest growth in the fourth quarter of 2017. Though management remains focused to drive growth through innovations, solid team execution, improving Representative experience, it will take time to realize the benefits from its strategies.

Furthermore, Avon expects results to fall short of expectations in 2017. The company now expects both constant-dollar revenues and adjusted operating margin in the band of flat to slightly up compared with

Zacks Investment Research Page 2 www.zackspro.com January 18, 2012 the prior-year period. Also, it expects to achieve cost savings target and generate positive free cash flow for 2017 on the back of slower-than-anticipated capital expenditures in the current year.

MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON AVP.

Portfolio Manager Executive Summary [Note: only highlighted material has been changed]

Avon Products Inc. (AVP) engages in manufacturing and marketing beauty and related products worldwide. The company markets its merchandise through direct selling and independent representatives as well as through distributors. Avon markets in over 100 countries through nearly 6 million independent sales representatives.

Of the four firms in the Digest group covering the stock, one firm provided positive rating and three assigned neutral ratings. However, none of them rendered a negative rating to the stock.

The following is a summarized opinion of the diverse brokerage viewpoints:

Neutral or equivalent outlook (3/4 firms or 75.0%) – Most firms believe that a major turnaround for Avon is still away. The firms contend that the benefits of recent divestiture of its North American business will take time to reflect in its results. Moreover, these firms believe that the direct selling category trends remain pressured as retail-based selling is dominating over customer attention. This is likely to bear an impact on Avon’s results.

However, the company is on track with its Transformation Plan that was announced in Jan 2016 and focuses on investing in growth, enhancing cost structure and improving financial flexibility. These firms also remain hopeful about the company’s long-term targets that should facilitate cash flow improvement, lift margins and drive overall growth.

Nevertheless, the firms prefer to remain on the sidelines owing to the decelerating free cash flow per share and expect the earnings to witness volatility in the near term.

Positive or equivalent outlook (1/4 firms or 25.0%) – Though Avon’s near-term earnings remain constrained, the bullish firm believes that the company’s core fundamentals will remain intact due to its powerful global brand equity and well-established distribution platform in the emerging markets. These factors position the company for a major turnaround when the current management issues as well as litigations and investigations are resolved.

The firm further perceives that although the company’s profits have been unsatisfactory owing to several years of execution blunders, Avon may beat market expectations, especially with regard to its EBIT margin over the next three years, which in turn will boost its bottom line. This is because the firm is optimistic about the impact of the company’s market growth advantages over peers, its cost-saving plans and potential fixed expense leverage. July 13, 2017

Overview [Note: only highlighted material has been changed]

The firms identified the following issues as critical for evaluation of the investment merits of Avon:

Zacks Investment Research Page 3 www.zackspro.com January 18, 2012 Key Positive Arguments Key Negative Arguments

 Strategic Efforts Paying Off: Avon outlined some  Slowdown in Brazilian Market: The company is hit strategic measures focused on accelerating top- by the slowdown in growth of developing markets, line growth, cutting costs and improving working particularly in Brazil which is a major growth driver for capital. Avon’s turnaround strategies are paying Avon. off, as evident from its improved operating performance in the Latin American region.  Currency Fluctuation: Strengthening of the U.S. dollar against major currencies, such as the euro,  Continuous Innovation: Several new products as pound, Mexican peso and Brazilian real, will have a well as product extensions are always on deck as negative impact on the company’s top-line growth. part of Avon’s continuous innovation initiative. Analysts believe that this tradition gives Avon a  Avon's Emerging Market Exposure: With emerging competitive advantage. markets representing roughly 85% of the company's sales and most of its growth, the firms are worried  Sales Representative Motivation: New about slowing growth as these markets gradually incentives, reward programs and emphasis on mature and competition intensifies. sales leadership persistently motivate the company’s sales force. Avon believes its sales  Lower Level of Brand Equity than its HPC Peers: force model to be a competitive advantage. Avon invests more in marketing support in an effort to strengthen the Avon brand globally. However, the  Better Top- and Bottom-line Insulation from Avon brand is still inferior in several large markets, Volume Declines: Avon’s direct-selling business such as the U.S. model is expected to provide relatively better top- and bottom-line insulation from volume declines.

Headquartered in New York City, Avon Products Inc. directly sells cosmetics, fragrances, toiletries, jewelry, and accessories. The company markets around the world through nearly 6 million independent sales representatives and is the world’s largest direct seller. The company’s products are classified under the following categories: Beauty, Beauty Plus, Beyond Beauty, and Health and Wellness. Beauty products include cosmetics, fragrances, and toiletries under the brand names of Avon Color, Anew, Skin- So-Soft, and Advance Techniques, among others. Beauty Plus consists of jewelry, watches, apparel and accessories. Beyond Beauty products include home products, gifts and decorative items. Health and Wellness products include vitamins, exercise equipment and other related items.

After exiting its North American business, the company presents segment performance under four reportable segments: the Europe, Middle East & Africa (EMEA); South Latin America; North Latin America; and Asia Pacific segments. Additionally, the company accounts results of the deconsolidated Venezuelan operations, the Liz Earle business that was sold in Jul 2015, royalties for using the Avon name and trademarks in other countries and product sales to the North American business under a new segment called “Other operating segments and business activities.” Its website is http://www.avon.com. The company’s fiscal year coincides with the calendar year. July 13, 2017

Long-Term Growth [Note: only highlighted material has been changed]

The firms believe that Avon has a healthy tradition of continuous product innovation that distinguishes it from its peers. The company, however, has been facing some long-term structural challenges such as heightened competition in the emerging markets and the decreasing relevance of its business model in the developed markets.

In order to cope with the challenges, management has laid down some strategic measures that are focused on accelerating top-line growth, trimming costs and improving working capital. Management is continually looking for scope to ease business issues and direct the company towards the growth trajectory, reviving its competitive position among peers.

Zacks Investment Research Page 4 www.zackspro.com January 18, 2012 In an effort to revive its business from waning top and bottom lines, and a highly leveraged balance sheet, Avon recently divested its UK-based natural skincare brand, Liz Earle, deconsolidated its Venezuela business and separated its North American business operations. Apart from this, Avon has shut down its operations in some underperforming markets like South Korea, Vietnam, and Ireland. Avon has also made significant progress in improving its balance sheet through refinancing activities and cut costs by slashing jobs and exiting operations in the underperforming markets.

Further, Avon is continually working on its long-term target of bringing down costs through a Transformation Plan announced in Jan 2016. The plan targets bringing down costs over the long term and investing these savings back into growth initiatives like media, IT systems and social selling. As a first step toward the execution of the plan, Avon completed the separation of its North American business in Mar 2016, and exceeded its 2016 cost targets.

Further, 2017 marked the beginning of Avon’s second year into the plan, with the company being well- placed to generate targeted savings of $230 million in 2017. With the Transformation Plan underway, Avon is on track to deliver savings of $350 million over a three-year period, including $200 million from supply chain reductions and about $150 million from other cost reductions.

Moreover, management plans to invest nearly $350 million over a three-year period starting 2016, including $150 million toward media and social selling; and $200 million for service model evolution and information technology. This is mainly aimed at bolstering the overall Representative experience. Additionally, the company anticipates the plan to help it attain its long-term goal of delivering low-double digit operating margin and constant-dollar revenue growth in the mid-single digits. July 13, 2017

Target Price/Valuation [Note: only highlighted material has been changed]

Rating Distribution Positive 25.0% Neutral 75.0% Negative 0.0% Avg. Target Price $4.79 Highest Target Price $6.00 Lowest Target Price $4.00 No. of Analysts with Target Price/Total 4/4

Risks associated with the price target primarily include failed new product launches, inability to achieve targeted cost reductions, higher-than-expected advertising and promotional expenditures, operational disruptions during SAP implementation, further slowdown in consumer spending in the U.S. or abroad, increases in gasoline prices, which can curtail sales activity in the U.S., unfavorable changes in the value of the U.S. dollar relative to foreign currencies, and a general decline in consumer product and/or cosmetic stock valuations.

Recent Events [Note: only highlighted material has been changed]

On May 4, 2017, Avon reported posted adjusted loss from continuing operations of $0.07 per share for first-quarter 2017, lagging the Zacks Consensus Estimate of break-even. However, results were in line

Zacks Investment Research Page 5 www.zackspro.com January 18, 2012 with the prior-year loss per share of $0.07. Total revenue rose 2% year over year to $1,333.1 million and surpassed the Zacks Consensus Estimate of $1,327 million.

Revenue [Note: only highlighted material has been changed]

Provided below is a summary of revenue as compiled by Zacks Digest:

Revenue ($ M) 1Q16A 4Q16A 1Q17A 2Q17E 2016A 2017E 2018E Digest High $1,306.5 $1,568.1 $1,333.1 $1,420.0 $5,717.7 $5,825.5 $5,953.1 Digest Low $1,306.5 $1,568.1 $1,333.1 $1,420.0 $5,717.7 $5,825.5 $5,953.1 Total Revenue $1,306.5 $1,568.1 $1,333.1 $1,420.0 $5,717.7 $5,825.5 $5,953.1 Y-o-Y Growth -15.8% -2.4% 2.0% -1.0% -7.2% 1.9% 2.2% Sequential Growth -18.7% 11.3% -15.0% 6.5%

The Zacks Digest average revenue of $1,333.1 million in 1Q17 increased 2% year over year (y/y) but declined 15% sequentially. On a constant currency basis, total revenue declined 1%. The year-over year growth in revenue came on the back of positive impact from currency.

Active Representatives declined 3% compared with the prior-year quarter, while Ending Representatives dipped 1%. Active Representatives were hurt by decline in all segments except North Latin America, which was relatively flat. Ending Representatives fell due to decline in Asia Pacific. Average orders were up 2% driven by growth in all segments, offset by decline in Europe, Middle East & Africa (EMEA).

Geographic Breakdown

South Latin America

Revenues in South Latin America increased 17% year over year to $499.2 million and 2% in constant- dollars, mainly driven by 4% growth in average orders partly negated by 2% decline in Active Representatives. Units sold dipped 1%, while Ending Representatives increased 1% and price/mix rose 3%.

North Latin America

North Latin America reported a revenues decline of 6% year over year to $193.2 million, while the same increased 2%, in constant-dollars, benefiting from a 2% gain in average orders. Also, price/mix escalated 3% while units sold fell 1%.

Asia-Pacific

The Asia-Pacific division’s revenues fell 8% to $124.2 million and decreased 5% in constant dollars. The decline was due to lower revenues in most markets, neutralized by modest growth in Philippines. Active Representatives fall of 8% contributed largely to the decline, partly mitigated by 3% increase in average orders. During the quarter, Ending Representatives declined 8% and units sold fell 6%, and price/mix dropped 2%.

Zacks Investment Research Page 6 www.zackspro.com January 18, 2012 Europe, the Middle East & Africa

Avon’s revenues of $507.5 million in Europe, the Middle East and Africa slipped 2% year over year. On a currency neutral basis, revenues dipped 4%, mainly driven by a 3% fall in Active Representatives and 1% decline in average orders. Price/mix in the region went up 9%, while units sold declined 13%. Ending Representatives were down 1%.

Guidance

For 2017, the company anticipates constant-dollar revenue growth in the low-single digits range. The company’s expectations are based on projections of modest currency tailwinds as well as Active Representatives growth of 0% to 1% in second-half 2017.

Further, the company expects the second quarter of 2017 to remain challenging with gradual improvement expected through the balance of the year as growth initiatives gain traction. Consequently, the second half of 2017 will be better than the first half.

Please refer to the Zacks Research Digest spreadsheet of AVP for more extensive revenue figures.

Margins [Note: only highlighted material has been changed]

Provided below is a summary of margins as compiled by Zacks Digest:

Margins 1Q16A 4Q16A 1Q17A 2Q17E 2016A 2017E 2018E Gross Margin 60.3% 60.3% 61.2% 61.5% 60.5% 61.4% 61.8% EBITDA Margin 6.3% 9.1% 5.0% 8.7% 8.5% 8.4% 8.8% Operating Margin 4.2% 7.3% 2.9% 6.6% 6.5% 6.5% 6.9% Net Margin -2.1% 0.6% -2.1% 3.0% 0.6% 1.9% 2.7%

In 1Q17, adjusted gross margin expanded 90 basis points (bps) year over year to 61.2% on the back of favorable price/mix.

Adjusted operating profit declined 29.1% to $38.7 million, while adjusted operating margin contracted 130 bps to 2.9%. Operating margin gained from improved price/mix and lower costs to implement restructuring in the current year, which was more than neutralized by higher bad debt expenses – particularly in Brazil, an out-of-period adjustment related to equity compensation and higher transportation costs.

Guidance

For FY17, the company anticipates adjusted operating margin to grow about 100 to 140 bps.

Please refer to the Zacks Research Digest spreadsheet of AVP for more extensive margins figures.

Zacks Investment Research Page 7 www.zackspro.com January 18, 2012 Earnings per Share [Note: only highlighted material has been changed]

Provided below is a summary of earnings per share (EPS) as compiled by Zacks Digest:

EPS 1Q16A 4Q16A 1Q17A 2Q17E 2016A 2017E 2018E Digest High ($0.07) $0.01 ($0.07) $0.08 $0.04 $0.20 $0.33 Digest Low ($0.07) $0.01 ($0.07) $0.08 $0.03 $0.20 $0.33 Digest Average ($0.07) $0.01 ($0.07) $0.08 $0.04 $0.20 $0.33 Y-o-Y Growth 13.4% 265.6% 471.4% 65.0% Sequential Growth -53.4% 214.3%

The Zacks Digest average loss per share was $0.07 in 1Q17, flat with 1Q16 and compared unfavorably with earnings per share of $0.01 in 4Q16. The decline was mainly attributed to the loss witnessed in the North American business, which was slightly offset by positive currency effects.

On a reported basis, the company posted loss per share of $0.10 compared with a loss of $0.36 in the year-ago quarter.

Please refer to the Zacks Research Digest spreadsheet of AVP for more extensive EPS figures.

Research Analyst Rashmi Jaiswal Copy Editor Rajani Lohia Content Ed. Sumit Singh Lead Analyst Rajani Lohia QCA Sumit Singh No. of brokers reported/Total brokers Reason for Update Flash

Zacks Investment Research Page 8 www.zackspro.com January 18, 2012