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In this article
Avon releases its earnings report, showing that its restructuring program is finally paying off.
Avon increased its advertising dollars by 80% over the same first quarter last year.
Revenue in China, due to Avon's ability to begin direct selling door-to-door there, increased by 44%.

Earnings Reports: Avon's Restructuring Pays Off

I've been bullish on Avon Products Inc. (AVP:NYSE) for a little over a year now. Of course, if you were a Market Report reader back in February, you remember selling our free recommendation on AVP for gains of 19% over the course of about seven months.

I really do get impatient. If a play doesn't pan out after almost a year, I'd rather take the money and run and invest in something much more worthwhile for the short term.

But I never gave up hope on AVP.

See, back in 2006, the company announced its complete restructuring. Almost anyone in middle management was moved or removed. The company also announced that it had received its direct selling license from China. Originally, Avon was only allowed, under Chinese law, to operate storefronts that sold Avon products. After the People's Republic of China approved its ability to send representatives to individual houses to peddle their cosmetics, it added a potential $1 billion to Avon's cash coffers.

Today, I'm happy to report that AVP is pulling up finally and realizing its potential.

Avon jumped up 3.47% on its open today on fantastic earnings. Its first-quarter revenue was up 9% to $2.2 billion… and most importantly, the company saw revenue growth in every region where it operates.

Sales were up 10%, and according to the earnings report, AVP earned 34 cents per share in the first quarter.

Earnings Reports: Avon Sees Strong Growth in Advertising and China

Andrea Jung, president of Avon, made sure to mention that the company is still in the middle of its turnaround plan, which also includes increasing advertising dollars and selling off supplies from the storefronts that will be closed in China in lieu of its ability to have door-to-door sales do the major footwork.

One of the main reasons Avon saw such good growth is its willingness to pump more money into advertising its products, and according to the company's first-quarter earnings report, it paid off. Advertising was up 80% compared to this same time last year. AVP pumped out $71 million in the first quarter alone to promote sales.

While Avon did do well, it incurred costs of $10 million this past quarter for its restructuring plans.

And what about China? That area is already proving to show strong growth potential for the cosmetics company as originally expected. Revenue in China grew 44%, half of which was spurred on by direct selling representative sales. Operating profit in China was $3 million compared to a loss of $1 million in the first quarter of 2006.

From the looks of things, Avon is still a strong buy. While it is extremely overbought on the daily chart right now, it continues to retain strong support at its 200-day Moving Average and its 10-day Moving Average.

The next stop for AVP is its lifetime high around $46 per share. Currently the stock is trading for $41.29.

I anticipate a touch to $46 in the next six months. I'm not officially instituting a recommendation on the stock, but if you wanted to rebuy it at this time, I wouldn't blame you.

***

Ann Sosnowski is a small and mid-cap stock analyst for Taipan Financial News. She is the editor of Diligent Investor, a monthly newsletter that balances conservative and moderately risky investments that pertain to current market trends. She is also the editor of Diligent Investor Micro-Cap Hot Sheet, a monthly newsletter that finds the hottest penny and micro-cap stocks on the market.

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