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Will This Personal Care Products Company Take Care of Its Investors?

June 25, 2013 | About:

With a market capitalization of $9.08 billion, Avon Products Inc. (NYSE:AVP) is engaged in selling personal care products, fashion apparel and accessories, as well as home goods. It has nearly $11 billion in annual revenue. The company is the world's largest direct seller with more than 6 million active independent sales representatives. Its geographical segments are Latin America, EMEA region, North America and Asia Pacific. The 125-year old company grew over the years from its beauty (cosmetics color cosmetics, fragrances, skincare, personal care) product line to fashion (jewelry, watches, apparel, footwear, accessories) to home (gift and decorative products, houseware, entertainment, leisure, children's, nutrition).

Financial and Growth

On April 30, Avon posted first-quarter adjusted earnings of $0.26 per share, increasing more than twice from the $0.10 per share in the prior-year quarter. Adjusted gross margin was 62.5%, 160 basis points higher than the prior-year quarter, primarily due to lower freight costs and lower material costs.

After underperforming for many years, the company finally took a number of steps last year including upgrading senior talent, implementing stabilization plans for key markets, prioritizing product categories, reducing cost base and improving capital position. These strategies finally seem to be paying off as this was the second consecutive earnings beat for the company after reporting six quarters of lower-than-expected results. As a result of an improving outlook for the company, analysts have revised their estimates for the June 2013 quarter, and the fiscal year 2013.

This year, Avon Malaysia is eyeing a double-digit increase in total sales. Its managing director Carolyn Nur Amira Lee said despite what was a challenging 2012, the company managed to post a RM20 million increase in sales. The company will launch new blockbuster products in various categories for its customers. Lee also said that they will stay relevant to ever changing consumers’ tastes.

Avon has a strong presence in the international markets, as it sells products across the globe. At present, the company generates a large percentage of its revenue through Latin America, the Middle East and Asia Pacific. Strong growth can also be seen in South Africa.

The beauty and personal care market, which generates the largest percentage of the company's revenue, has witnessed a relatively higher growth rate in emerging markets than more saturated regions such as North America and Western Europe. Going forward, Avon seems primed to benefit from its growing presence in emerging markets such as China, Thailand and India, which are expected to grow exponentially over the next few years. Increasing presence in rapidly growing markets coupled with more consumer-centric products suggest Avon is moving in the right direction to post solid numbers in its so called transition year.

Positive Outlook

Recently, Avon announced the appointment of Pablo Munoz as senior vice president and president, North America, effective June 24, 2013. Munoz will oversee the Avon's business in the U.S., Canada and the Caribbean. In this role, Munoz will be responsible for executing the turnaround of Avon's North American business, and returning it to a solid and profitable position.

Avon generates a large percentage of its revenue through direct selling; therefore, the numbers of active sales representatives become an essential driver for the company. According to the value offered by Trefis, Avon invested approximately $121 million in developing the new representative value proposition (RVP) program.

Earlier this year Avon launched a “$400 million cost savings initiative,” which was primarily aimed at controlling costs and ensuring the company starts reporting consistent growth in earnings. To implement the cost-cutting initiative successfully , Avon plans to reduce its inventory level and working capital in order to maintain a healthy cash flow. In addition, an extensive restructuring program also involves reducing operations in all of its under-performing markets and increasing its focus on rapidly growing regions by dedicating higher marketing and R&D budgets.

Putting the Things Together

With an increasing number of women joining the work force around the world and thus having their own money to spend, the demand for personal care products are expected to rise. This is evident from S&P's Personal Products Index which has shown an overall uptrend since fiscal year 2008.

Emerging international markets have seen a rise in the demand for packaged products. Consumers who could not previously afford these products are now a source of revenue generation for many big global corporations. If rightly targeted, these emerging markets can provide better growth opportunities for Avon. I am therefore pretty bullish about this leading global beauty company.

Rating: 4.2/5 (10 votes)


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