Avon Q1 2015 Earnings Review: Latin American Growth Seems To Be Recovering, However, North America Still Under Pressure

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Avon Products (NYSE:AVP), the direct selling company of beauty, household, and personal care products, delivered yet another weak quarter. In Q1 2015, the company’s sales declined by 18% to $1.8 billion. However, in constant dollar terms, Avon’s revenues grew by 1% due to growth in Europe, the Middle East, and Africa. The company’s active representative base declined by 1% on a year-over-year basis. However, there was a sequential quarter over quarter improvement in Avon’s representative base. As of December 2014, Avon had around 6 million active representatives. [1]

Avon’s bleak performance continued in North America (which accounts for more than 10% of its revenues). However, within the Latin American region (which accounts for over 50% of Avon’s revenues), Brazil showed signs of recovery. The company launched a new product positioning theme on May 1. Avon is trying to upgrade its direct selling model to a more social selling structure, whereby its active representatives can sell through the digital media.

Our current price estimate of $9.75 for Avon Products is at a significant premium to the current market price. We are in the process of updating our estimates.

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Avon’s Performance In Some Of Its Key Regions

Brazil

Latin America contributes to over 50% of Avon’s annual revenues. Within the Latin American region, Brazil is Avon’s single largest market. Brazil is the third-largest beauty market in the world.  This market has had a 10% annual growth rate for the last 17 years, up until 2013, when the growth rate in 2013 was 4.9%. [2] Direct selling contributes to approximately 70% of Brazilian market sales in the skincare, color, and fragrance categories. These factors fueled Avon’s erstwhile growth in Brazil.

In 2014, Avon’s sales received a setback in Brazil primarily due to Brazil’s weak economy, competition from retail channels, and Avon’s improper product pricing mix. Hence, as a recovery measure, towards the end of 2014, the company 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.

In the Brazilian beauty market, fragrance plays a crucial role in the overall product mix and the launch of Coty products helped Avon in filling the demand gap. Hence, in Q1 2015, Avon witnessed an improvement in its sales from this region. Coty had been positively received by the Brazilian beauty product users. Currently, Avon is strategizing on the pricing mix in Brazil and approaching the product price mix in a staged manner in order to regain the consumer confidence. [3]

However, Brazil’s IPI tax (one of the basic sales taxes in Brazil) will have an estimated 50 basis point impact on the company’s constant dollar adjusted operating margins for the full year 2015. In Brazil, Avon is a leading player in the color and skincare segments, and these segments would be dampened due to the IPI taxes.

Mexico

Sales in Mexico suffered in the first half of 2014 due to attrition in the representative workforce and an unsuitable portfolio price mix. The product portfolio and pricing have since improved. Avon tried improving the retention rate by helping representatives navigate the first six campaign cycles. In Q1 2015, growth was still sluggish in Mexico, despite a boost in the active representative base. There was a slowdown in average orders in the Fashion & Home category. [3]

North America

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

In Q1 2015, though some cost management initiatives proved effective, the company still faced a serious slowdown. Revenues in North America declined by 17% on a constant dollar basis and the active representative pool also fell by 17%, on a year-over-year basis. Avon has increased its advertising expenses for North America for its products as well as for recruitment of representatives. The management still expects the region to turn around. [3]

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.

Avon’s Product Positioning Drive And Plans For 2015

Avon is repositioning its brands with the tagline ‘Beauty for a purpose’. The theme was introduced to its representatives on May 1st and will be extended to consumers with a full integration expected by the end of 2015. The company will shift its marketing focus to the digital and social media.  The company is also transforming its business model into a social selling model with the aid of mobile, digital and social media. Avon.com, Avon’s social selling model, currently present in the U.S., will be expanded to other markets. Social selling gives representatives the ability to use their own e-stores for 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 of Avon products. Avon plans to roll out this model to other geographies in the future. [4]

Avon’s skincare segment reflected sequential improvement over the last five quarters. In Q2 2015, Avon plans to launch an upper market product line called Nutra Effects. There will be a few key additions to its Anew line. Within the color cosmetics segment, Avon has planned a few product lineups in mascara, lipstick and eye color. The color segment is being boosted with strong advertisements in key markets. [3]

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Notes:
  1. Avon Reports Q1 2015 Results, Avon Press Releases, April 30, 2015 []
  2. Multinationals Target Brazil’s Beauty Industry for Growth Despite Drop, GCI Magazine, June 2014 []
  3. Avon’s Q1 2015 Earnings Call Transcript, Seeking Alpha, April 30, 2015 [] [] [] []
  4. Avon’s Q4 2014 Earnings Call Transcript, Seeking Alpha, February 12, 2015 []