Depreciating bolivar
Venezuelan operations contribute approximately 14% to Avon’s earnings. Recently, the bolívar has depreciated by a staggering 32%. According to valuation offered by Trefis, if this trend continues, Avon will realize a massive impact of $50 million on its earnings in the near term. Hence, this remains a concern for the company’s shareholders.
Competitive landscape
Estee Lauder Companies Inc (NYSE:EL) competes directly with Avon in the beauty and personal care market. The company recently reported 6% revenue growth from its international operations. The growth was predominantly driven through increased promotional activities for its heritage and prestige brands.
In addition, Estee Lauder Companies Inc (NYSE:EL) experienced a large increase in orders from its retailers, after the company implemented SAP-based technology as part of its all-new “modernization initiative.” The growth in the number of orders resulted in a $94 million increase in its revenue.
Furthermore, Estée Lauder now follows a radically innovative multi-pronged digital strategy in order to support its existing distribution networks, which is expected to bolster its revenue. Going forward, the company plans to increase its focus on high margin divisions such as skin care.
My bullish view on Estee Lauder Companies Inc (NYSE:EL)’s stock is based on the number initiatives taken by the company in order to create more value through its supply chain network..
Similarly, Avon also competes with Revlon Inc (NYSE:REV). Revlon Inc (NYSE:REV) has presence across the globe, as it generates a large volume of its revenue through all key markets such as the U.S., Latin America, Canada and Asia Pacific.
The company holds a dominant presence across Europe, and the recent macroeconomic rut has resulted in declining sales from the region.
At present, Revlon Inc (NYSE:REV) operates on an extremely high debt level, which restricts its ability to match companies such as Avon Products, Inc. (NYSE:AVP) and Estee Lauder in R&D spending. In an industry, where earnings heavily depend on the company’s ability to offer radically innovative products through R&D, Revlon’s high debt level doesn’t provide much hope for investors.
Invest now and earn later
During this brief analysis on Avon Products, Inc. (NYSE:AVP), we have emphasized the efforts made by the company to restructure its business and ensure it remains on track to post solid earnings.
I believe the heavy investment made in the RVP program, coupled with the $400 million cost-cutting initiative and direct selling distribution, will revive the company’s margins. Avon certainly seems primed for a big 2013.
The article A Case for Investing in Avon originally appeared on Fool.com and is written by Ashit Gulati.
Ashit Gulati has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Ashit is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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