Avon Products Earnings Preview: What We’re Watching

by Trefis Team
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Avon Products (NYSE:AVP), the world’s largest direct-selling organization, will report its first quarter earnings for the fiscal 2013 on April 30 after delivering a lackluster performance in 2012. The company operates in 65 countries and territories across the world in addition to distributing its products in 43 other countries. The company generates 72% of its revenues through the sales of beauty products which includes color cosmetics, fragrances, skincare and personal care. The rest 28% of the sales come through Fashion and Home products. Fashion consists of jewelry, watches, apparel, footwear, accessories and children’s products. Home consists of gift and decorative products, housewares, entertainment and leisure products, children’s products and nutritional products. The operating profits of the company declined by 63% to $315 million while revenues decreased by 5% to $10.5 billion in 2012. See a detailed analysis of the 2012 performance here.

Avon Products competes with other players like Estee Lauder (NYSE:EL), Revlon (NYSE:REV) and L’Oreal (PINK:LRLCY) in the beauty and personal care industry.

See Our Full Analysis for Avon Products

Rising number of sales representatives to boost revenues

Avon Products generates all its revenues through direct selling and thus its sales representatives serve as an important pillar for the company’s growth. Growth in overall sales generally coincides with growth in the number of sales representatives. The number of representatives rose from 6.2 million in 2009 to 6.5 million next year which resulted in an increase in revenues from $10.2 billion in 2009 to $10.8 billion in 2010. Since then the number of representatives declined to 6.3 million in 2012 resulting in lower overall revenue of $10.5 billion.

These representatives earn by purchasing Avon products at a marked down price directly from the company and then selling them to the end consumers at published prices. A representative contacts customers directly, selling primarily through the brochure, which highlights new products and special promotions for each sales campaign. Thus, the representative serves as the “store” for Avon Products.

The total number of active sales representatives declined by 1% in 2012; however, we estimate the number of representatives to grow in Q1 since the company has invested almost $121 million in developing Representative Value Proposition (RVP). RVP includes the Sales Leadership program, the focus on enhanced incentives and optimum discount structure, increased sales campaign frequency, improved commissions and new web enabled e-business tools to improve the earnings opportunity for its representatives. We believe these measures can help Avon Products to increase the number of representatives. [1]

Devaluation of the Venezuelan currency to impact bottom line

As a result of devaluation of Venezuelan currency in February to as much as 32%, we expect Avon Products to recognize a negative impact of about $50 million on the operating profits in Q1 2013. Latin America contributes more than 45% to the total sales for Avon Products, out of which, Venezuela contributes more than 5%. Venezuela operations also represent 14% of Avon Products’ consolidated operating profits. [1]

The $400M Cost Savings Initiative to drive bottom line

The company launched its “$400M Cost Savings Initiative” in Q4 2012 which aims at containing costs and returning Avon Products to sustainable growth. The company plans to engage in a structural global headcount reduction and exit from less profitable businesses in South Korea and Vietnam markets.

It is also working on reducing its inventory and working capital. In 2013 Avon Products plans to reduce global headcount of more than 400 associates, close underperforming markets in Europe, Middle East and Africa and exit from the Republic of Ireland. The company intends to spend about $20 million in the first quarter over the restructuring efforts. We expect these efforts to bear fruit and expect the bottom line to improve slightly in the upcoming results. [2]

We will update our price estimate for Avon Products, which currently stands at $20, after the company files its financials with the SEC.

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Notes:
  1. Form 10K, SEC [] []
  2. Avon Outlines Further Steps of Cost Savings Initiative, April 8, 2013 []
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