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.
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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