Direct-selling beauty products company Avon Products (NYSE:AVP) will announce its Q1 results on Tuesday. The company’s position has weakened over the past few months with poor earnings results and ongoing SEC investigations into alleged overseas bribery. The delay in finding a new CEO also delayed business recovery, making it susceptible to hostile take-over bids during rough times. After the weak results in Q3 and Q4, the company has been conducting a full reassessment of its long-term business plan and is likely to update the investors on Tuesday with its future strategy to arrest the decline in sales and operating margins after having hired a new CEO.
Avon sells its products to the end-consumer through direct-selling and has an active global sales force of over 6 million sales representatives. This business model separates it from peers such as L’Oreal (PINK:LRLCY), Procter & Gamble (NYSE:PG), Estee Lauder (NYSE:EL) and Unilever (NYSE:UL).
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Missed targets in 2011 with 2012 being a transition year
Avon’s business suffered disruptions and losses in the second half of 2011, missing its sales and earnings targets by a wide margin in Q3 and Q4. The total number of Active Representatives declined during the year after continuous growth over the last few years. The business has also been suffering due to SEC investigations for possible violation of the Foreign Corrupt Practices Act. The company is conducting a full reassessment of its long-term business plan and has recently appointed Sheri McCoy, who has spent 30 years at Johnson & Johnson, as its new CEO. Avon is taking on 2012 as a “year of transition” and is planning to focus on improving sales, cutting costs and cash generation. It is, however, not planning for the margin recovery this year.
Rejected Takeover Bids From Coty
Avon recently rejected an unsolicited $10 billion takeover bid from fragrance maker Coty, a company less than half of its size, calling the offer undervalued, opportunistic and uncertain. Even though Coty says it still maintains the offer, Avon has so far declined the offer for being much cheaper compared to its historical prices. The stock has suffered over 30% decline over the last few months with weak results, fall in the number of Active Representatives, costly and prolonged SEC investigation in corruption charges and delays in finding a new CEO that complicated business recovery.
We have $23 Trefis price estimate for Avon stock, at 5% premium to the current market price.