Why Avon Products Stock Dropped 10% Thursday

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What happened

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Knock-knock! Avon calling!

Shares of Avon Products (NYSE: AVP) got knocked for a 10% loop in early Thursday trading, before rising ever so slightly to close the day down "only" 9.3%. The culprit, as you might have guessed this time of year, was earnings.

Early this morning, Avon reported its fiscal third-quarter 2017 results, and the news was not great. On an adjusted basis (i.e. what we used to call "pro forma" earnings), Avon reported earnings of just $0.03 per share, which was less than half of the $0.07 per share that Wall Street analysts  had predicted it would earn.

So what

The news gets worse. When calculated according to GAAP, or generally accepted accounting principles, Avon earned only one penny per share -- down 86% from the $0.07 per share Avon earned in the same quarter last year. This was despite Avon posting revenue of $1.42 billion, up about 1% from last year, and beating estimates by a similar 1%.

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Reviewing the results, Avon CEO Sheri McCoy accented the positive revenue number, calling the third quarter "a productive period" for Avon and noting that revenues improved "in many of our top 15 markets." That said, operating margins on Avon's revenues took a big hit, falling 210 basis points to 5.9%, which is what caused the earnings miss.

Now what

McCoy proceeded to characterize Q3's results -- revenues that barely moved from last year, combined with earnings that plunged -- as merely "mixed," and "a slow start." Despite this positive spin, the CEO was forced to admit that it's now unlikely Avon can make up lost ground and hit its full-year guidance in the time remaining before the year closes.

About the most she could promise is "modest improvement" over Q3 results in Q4, and perhaps "slightly positive performance compared to last year." Given that Avon is now $0.20 in the hole for this year, the chances of Avon emerging at the end of Q4 with any positive profit for the year look exceedingly slim.

No wonder investors are selling.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.