Avon U.S. Operational Outlook Remains Bleak on Improving Job Market

Avon Products (NYSE:AVP) is a U.S. based manufacturer and direct seller of beauty, fashion and home products. The company began operations in 1886 and currently has more than 6 million independent representatives selling its products across geographies. However, Avon’s financial performance has been impacted strongly by various lapses in its turnaround strategy. For the last three fiscal year periods, its bottom line has been in the red and the outlook for its future remains very bleak.

In this note, we take a look at how the improving job market in the U.S. could further strain financial performance for Avon Products. We have a Trefis price estimate of $14 for Avon Products, in line with its current market price.

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Improving Full-time Job Market Could Suppress Avon U.S. Performance

Avon’s representative base expanded rapidly during the peak years of the U.S. economic recession. The company had a representative base of nearly 5.4 million in 2007, which increased to 6.5 million in 2010. Most of this growth was fueled by the burgeoning demand from emerging markets, particularly Latin America. Avon lost approximately 2,000 representatives between 2007 and 2008 in the U.S., while global representative additions topped 400,000 during the same period.

However, overall representative numbers have started to decline gradually since 2010, pulled down by a rapid decline in U.S. representative count. The representative base for Avon U.S., which is completely independent and non-contractual, shrunk from approximately 471,000 in 2009 to 370,000 in 2012 and 314,000 by 2013. This steep reduction in representative count shrunk U.S. revenues by 15% last fiscal year for Avon. The introduction of the Service Model Transformation (SMT) in the North American market and a global fallout with its hiring and training platform have resulted in significant representative churn as representatives found the migration difficult.

Apart from the lapsed strategy, one significant macroeconomic reason for Avon’s deteriorating performance in the U.S. after the financial crisis could be the changing employment scenario. According to the Bureau of Labor Statistics, the total number of part-time workers increased from 25 million in 2007 to 27 million in 2009 and has remained flat since. During the same period, number of full-time employees declined from 121 million in 2007 to 113 million in 2009, but have gradually increased to 116 million in 2013. As the U.S. economy gains steam and adds more full-time jobs, non-contractual jobs would certainly lose sheen. Hence, the improving employment scenario for full-time workers could certainly put additional pressure on Avon’s plans to grow its representative base.

We currently forecast Avon’s global representative base to shrink further in 2014 before beginning to stabilize in 2015. However, we could see a steady slide in representative count if the company’s turnaround process takes longer than anticipated in the recovering U.S. economic scenario.

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