Tuesday, October 30, 2007

Avon Cash Position Down

Avon (AVP) issues quarterly results announcing Q3 total revenue up 14%. Net income in the third quarter 2007 was $139 million compared with $86 million in the year-ago quarter. Earnings per share were $.32 versus $.19 per share in the prior-year quarter, representing a 68% increase. Hey that sounds really good.

Keep reading the press release. Just before the Q3 regional highlights comments the company starts to mention their cash and debt positions. Many an eye glazes over before you comprehend the meanings here. Most news services have already written their story on the basis of the headline and the first few paragraphs.

Cash is down. That's very bad by any method of analysis. Cash generation was only $63 million in this quarter compared to $439 million in the comparable quarter last year. Avon wants you to think things are better but they are not producing cash. The press release indicates they are spending more money on inventories and incentive based compensation. Yet they have been claiming inventory simplification gains. The comments are not congruent and beg some questions.

Management does go on to say that the next quarter cash generation will improve dramatically. At the same time debt levels are now $788 million higher than at year end. The share buy back program is sucking up a lot of the cash.

If this keeps up Avon may become one of the first examples for failed share buyback programs that overwhelmed operations with debt.