Avon’s Q1 Earnings Likely Hit By Representative Base Erosion, Currency Headwinds, And Weak North American Sales

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Avon Products (NYSE:AVP), the direct selling company of beauty, household, and personal care products, experienced a rough year in 2014. The company’s sales declined by 12%, to $8.6 billion, as it faced a weak economic environment and underwent restructuring in its operations. Avon faced a grim economic environment, especially in the Latin American region (which accounts for over 50% of Avon’s revenues) and North America (which accounts for more than 10% of its revenues). The company underwent major management restructuring and experienced a significant attrition of its representative base. Avon has been on a downhill journey since 2011 (its last profitable year) as its direct selling model is losing market share to retail outlets and online shopping.

In Brand Finance’s Brand Cosmetics 50 report, Avon witnessed a 39% brand value erosion to reach $3.9 billion. Brand Finance attributed the reasons for Avon’s poor performance to the changing constructs of social and economic framework that did not support Avon’s formerly popular direct selling marketing model. This was a significant brand value decline for Avon, as the brand secured the second most popular beauty brand position in 2014. [1]

Our current price estimate of $9.75 for Avon Products is slightly higher than the market estimates. We shall update the price estimate shortly after the earnings release.

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See Our Complete Analysis for Avon Products Here

Avon Might Turn Around Its Latin American Performance With Strategic Alliances

Within the Latin American region, Brazil is Avon’s single largest market and Brazil is also the third largest beauty market in the world. Direct selling penetration is relatively high in Brazil compared to other emerging markets, and this has favored Avon, particularly in the skincare, color and fragrance categories. Brazil is currently affected by a weak economic environment, higher consumer debt, and a currency devaluation. Growth is slow and the competition is intense. However, given its emerging middle class, the importance of beauty products, and the high penetration of direct selling in the company’s core categories, Avon will continue investing in Brazil and expects significant positive growth in the long term. In 2014, the company has forged strategic alliances with KORRES, a Greek skincare brand, and Coty, a French beauty and personal care company, to provide a boost to the Latin American, and specifically to the Brazilian, market.

Avon Might Be Contemplating Restructuring Of Its North American Business

In North America, Avon’s sales have been hit due to a drop in the representative pool. In 2014, North America experienced 17% constant dollar decline in revenues and an 18% decline in the active representative base. North America contributes over 10% to Avon’s net sales.

Avon had nearly 470,000 representatives in North America in 2009, which declined to 258,000 representatives by the end of 2014. The recovering North American economy and the subsequent creation of full-time jobs is expected to pile on an additional pressure on Avon’s representative base because Avon representatives are usually non-contractual workers.

Currently, the U.S. team has reallocated resources to continue improving the representative experience with a focus on recruiting and retention processes. Avon re-launched avon.com, which allows the representatives and consumers a more contemporary social selling model. For 2015, the management expects North America to turn profitable and display significant growth.

On a separate note, in view of its losses, Avon might be contemplating on strategic changes. This could include the sale of its North American business, according to the Wall Street Journal. The company has not yet commented on the issue. [2]

Persistent Representative Base Erosion Might Put A Dent In Q1 2015 Performance, As Well

Avon’s direct selling model is based on its active representative base. As of 2014, the company had a representative base of 5.96 million, reflecting a 4% year-on-year decline. Avon competes with prominent color cosmetics and skincare companies, who sell through retail outlets, standalone shops as well as through digital media. The dependence on active representatives for most of its sales and the current attrition of representatives is causing a major dent on the company’s sales. Over the long term, digital channels such as e-commerce are likely to cannibalize sales from the direct-selling channel for Avon, leading to a reduction in its representative base.

Currently, Avon is trying to create additional channels through its active representatives, such as the social seller. This gives the representative the ability to use her own e-store and do online selling. Avon is also trying to complement its direct selling model with a retail approach. For example, in Poland, representatives and sales people run their own retail store for Avon’s products. Avon plans to roll out this model to other geographies in the future. [3]

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Avon Products (NYSE:AVP), the direct selling company of beauty, household, and personal care products, experienced a rough year in 2014. The company’s sales declined by 12%, to $8.6 billion, as it faced a weak economic environment and underwent restructuring in its operations. Avon faced a grim economic environment, especially in the Latin American region (which accounts for over 50% of Avon’s revenues) and North America (which accounts for more than 10% of its revenues). Internally, the company underwent major management restructuring and attrition of its representative base. Avon has been on a downhill journey since 2011 (its last profitable year) as its direct selling model is losing market share to retail outlets and online shopping.

Our current price estimate of $9.75 for Avon Products is at a more than 10% premium to the current market price. In this article, we list down key scenarios which can lower our valuation for the company by almost 40%.

See Our Complete Analysis for Avon Products Here

Notes:
  1. L’Oreal Paris Named The Most Powerful And Valuable Cosmetics Brand, Cosmetics Design, April 9, 2015 []
  2. Avon exploring sale of North America business: WSJ, Reuters, April 14, 2015 []
  3. Avon’s Q4 2014 Earnings Call Transcript, Seeking Alpha, February 12, 2015 []