Avon Products, Inc. (NYSE:AVP)‘ sales and overall earnings witnessed a heavy decline during the last two years, however, the company considers 2013 its year of transition. It is making special efforts to prop up sales and revamp its cost structure. A recent increase in earnings estimates for Avon Products, Inc. (NYSE:AVP) was underpinned by higher-than-expected bottom-line performance during the first quarter of 2013.
Investors with a long-term investment horizon should hold on to its stock, as the company is expected to report robust growth through increased spending on marketing, an improved cost structure and the direct selling distribution network. These initiatives enable me to give a buy rating to this stock with a long-term horizon.
Steps in the right direction
Avon Products, Inc. (NYSE:AVP)’s direct selling enables it to get rid of the high retail margin charged by various pharmacies and departmental stores. Additionally, it allows the company to sell products at highly competitive prices, while earning higher profits. It is noteworthy that the average retailer margin for beauty care is as high as 40%, and in contrast, the commission paid to Avon Products, Inc. (NYSE:AVP)’s sales representatives is only 25%.
Direct selling also facilitates the company to be closer to its end consumer and form a direct relationship. Such a strategy will enable the company to deeply comprehend its end consumer and channel its R&D resources in a direction, which will allow it to offer more consumer-centric products.
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.
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.
Investors should note the increasing presence in rapidly growing markets coupled with more consumer-centric products suggest Avon Products, Inc. (NYSE:AVP) is moving in the right direction to post solid numbers in its so called transition year.
The new initiatives
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 valuation offered by Trefis, Avon invested approximately $121 million in developing the new representative value proposition (RVP) program.
It is interesting to note that historically, whenever there has been an increase in the number of Avon’s sales representatives, its sales have exhibited a similar growth pattern.
Initiatives such as the RVP program will bolster the representative count; in addition, it will also push employees to exceed their sales targets in order to earn higher bonuses. I believe such efforts will stimulate its sales and margins to another level.
Earlier this year Avon Products, Inc. (NYSE:AVP) 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 successfully implement the cost-cutting initiative, 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. I expect such efforts to bolster the bottom line in the coming quarters.
