Headquartered in New York City, Avon (AVP) is an international manufacturer and direct selling company in the beauty, household and personal care categories. The company is currently paying close to 10% in dividends to investors, pleading with the market to wait for the turnaround. It could be a profitable thing to do, at least in the short term. Just last month, the stock was in the $4.00 range and now at $2.56 (as of 1:53 pm EDT), it looks interesting, especially with faces of the brand like Maria Sharapova, Lucy Hale, Julianne Hough, and Fergie still relevant in today’s hyper socially-connected world.
Founded in 1886, the first 125 years were blissful and filled with growth based on the first social network —Â word of mouth marketing. Yet since 2011, the stock has been in full blown sell off mode, going from $30 to a recent all time low of $2.41. Declining revenue, margins, and profits contributed heavily to this fall, but the brand value was the real eroding source. Once raving fans are not to be found as they once were. This is a product of reaching maximum capacity and, like a lot of big brands, not using new trends correctly, not keeping inventory costs in check, and not doing well in their main business model. Avon has slipped with direct selling. The more than 36,000 employees selling “The Company for Women” product have failed to stabilize its competitive positioning and financial performance.
Speaking of performance, the financial statements show a company that generated close to $100 billion in sales over the last decade and just shy of $4 billion in net profit, after you take out the $1.5 billion loss over the last three years. The enterprise value is hovering just above the $2.8 billion mark, and the company is carrying $2.3 billion in debt, somewhat offset by its $624 million cash position. To be fair, looking at all of these numbers doesn’t give you a good picture of what’s possible for the company going forward. Fundamentally, the company looks horrible right now, but what you have to think about is the company’s brand power.
According to Tenet Partners’ CoreBrand Index (the longest continuous quantitative database examining the corporate reputations and brand valuations), Avon ranks 37 of the top 100 brands and has seen continued strength despite the lackluster financial performance. In fact, Avon's brand power is still right in line with Estee Lauder, L'Oreal, and Revlon, which not too long ago was going through its own crisis.
While gross margins come in very high at 60% of total revenue, the problem is SG&A costs which are 92% of the gross profit, leaving very little room to generate profits. By comparison, market leader (by revenue and capitalization) Estee Lauder (EL, Financial) spends just 81% of its gross on SG&A. If Avon could get to those levels, they’d generate about $100 million in net profit. Turning a profile would definitely boost the company’s price multiple and with the average P/E in the consumer products market around 22, that would put Avon’s market value at $2.2 billion. I don’t believe that this too far-fetched, and I look forward to seeing what the future holds for this brand.
As for the gurus, Avon is a darling of Donald Yacktman (Trades, Portfolio). He owns 8.75% across the Yacktman funds, joining Joel Greenblatt (Trades, Portfolio) who owns 2.42% of the outstanding shares. Wallace Weitz (Trades, Portfolio) owns 8.2 million shares (1.9%) as well. If you’re thinking about options, the February 19 puts at the 2.50 strike are yielding 10% with the Jan. 20, 2017 put leaps yielding 40%.
