Avon Products Earnings Preview: Recovery Looks Distant

Avon Products (NYSE:AVP) is set to release its Q2 results this week. The direct-selling beauty and home products company’s Q1 earnings revealed that the business continued to remain compromised with sliding sales and a larger-than-expected drop in profits. Avon is likely to have faced another tough quarter with further weakness in its biggest markets of the U.S. and Brazil. The struggling company attracted a $10.7 billion takeover bid from perfume maker Coty with the backing of Warren Buffett’s Berkshire Hathaway in May, but missed its deadline to enter into talks, resulting in Coty withdrawing the offer. The stock has lost significant value since and currently trades at more than 30% discount to the price that Coty had offered.

Avon sells its products to the end-consumer through direct-selling with $11 billion in annual revenue and has an active global sales force of over 6 million sales representatives in more than 100 countries. This business model separates it from peers such as L’Oreal (PINK:LRLCY), Procter & Gamble (NYSE:PG), Estee Lauder (NYSE:EL) and Revlon (NYSE:REV).

View our detailed analysis for Avon’s stock here

Recovery Could Run Into Years

Avon’s new CEO of three months, Sherilyn McCoy, is in the process of reassessing the company’s long-term business strategy, and her priority is to stabilize the business and arrest the declines in sales, number of orders and active sales force. The company is also unlikely to see any margin recovery in the current year due to weak sales coupled with high commodity and labor costs as well as increased expenses in the Representative Value Proposition (RVP) in the U.S. and for sustaining representative engagement in Brazil.

Avon was disinclined to review any take-over proposals, including Coty’s offer until its new CEO completed the strategic and operational internal review of the business along with the cost structure and product portfolio, believing the company’s value could rise more from a turnaround. McCoy visited Avon’s top markets, United States, Brazil, China, Mexico and Russia recently to prioritize stabilization efforts and recovery. The recovery nonetheless will be prolonged, especially as its biggest markets of Brazil and U.S. may weaken further before they see a recovery. The company is also going through a long and costly bribery investigation that has held back recovery.

We have a $22 Trefis price estimate for Avon stock.