Avon Products (NYSE:AVP) is a multi-billion dollar manufacturing company that sells cosmetics and other home products through its direct-selling business model. The company is the world’s largest direct-selling organization, with over 6 million representatives across the world. Despite being the largest direct-seller of cosmetics, Avon’s top line has seen deterioration in the last few quarters due to the slow progression of its ambitious restructuring strategy. In addition, the company’s extensive international footprint subjects its top line to adverse currency fluctuations.
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The company has three operating segments, namely Beauty, Fashion and Home products. In this research note, we look at various factors influencing growth in revenues for the Home products segment. We have a Trefis price estimate of $21 for Avon, which is approximately 16% higher than its current market price of $18.
Macroeconomic Factors, Holiday Season Support Higher Sales In Q4FY13
Avon’s home products consist of various third-party decorative and gift products, housewares, and other entertainment and leisure products. The company generally sources these products from various third-party suppliers and sells them through its representatives base worldwide. Although the home products segment is the smallest operating segment for Avon, the segment has shown positive growth in both reported and constant dollar revenues during the nine months in 2013.
Reported revenues for the segment stood at $741 million in the January – September 2013 period, up 5% over sales from the same period in 2012. On the other hand, Avon’s Beauty and Fashion product segments showed declines of 6% in reported revenues during the same period. Factors such as higher product pricing and better merchandising of home products have contributed to this positive growth from the home product segment. In addition to favorable company specific factors, we believe that macroeconomic tailwinds typically tend to increase household product spending.
The recent talk about an acceleration in the Federal Reserve’s QE tapering program has forced many customers within the U.S. to refinance their properties before mortgage interest rates spike upwards. The fear of an accelerated QE tapering pushed various emerging market currencies higher. Higher home sales and refinancing within the U.S., and weaker global currencies against the dollar, should support an increase in home products sales for Avon, despite a reduction in volumes sold as a result of weak consumer sentiment.
Although global online retailers such as eBay (NASDAQ:EBAY) and Amazon (NASDAQ:AMZN) voiced a cautious outlook for holiday season sales, there is a likelihood,in our view, that the forthcoming holiday season could support strong demand in decorative and household products. We expect home products sales to amount to approximately $312 million during the fourth quarter of fiscal 2013 for Avon. However, lapses in the company’s restructuring program have dented Avon’s growth and continue to lead to a reduction in active representative count for the company.
Problems with the company’s global hiring and training system, combined with strained relationships with employees in North America following the launch of Avon’s pilot Service Transformation Model (SMT), led to a 3% reduction in the company’s active representative count in Q3 alone. (See: Avon Posts Dismal Q3 Results With Lapses In Turnaround Strategy) Since the company’s sales are directly proportional to the number of active representatives, there is a significant downside risk to the company’s stock, depicted through the chart shown below. A reduction in representative base could lead to a reduction in sales per representative, which reduces our price estimate by impacting all of Avon’s operational divisions.