With No Buyers For The Company And A Host Of Struggles, Avon’s Third Quarter Might Not Look Too Promising

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Avon Products

Avon Products (NYSE:AVP) is slated to release its Q3 2015 earnings on November 4th. So far in 2015, the company hasn’t been able to recover from its prolonged state of losses. The company, which has witnessed its last profitable year in 2011, faced a 17% decline in its revenue for the first half of 2015 to $3.6 billion. Poor performance across all metrics resulting in an over 70% decline in its stock price (over the last one year) has forced the company to look for a suitable buyer. The company’s representative based model has been deemed outdated in this era of retail and online shopping, coupled with channels such as travel retail. Buyers are less prone to buying cosmetics through the door-to-door channel and its representative attrition rate is alarming. Avon’s direct selling model seems to be meeting its demise. The company has still not been able to attract a firm buyout offer for the whole or a part of its business. The former beauty giant is grappling with performance issues in all its important regions. The currency headwinds are exacerbating its decline even further. We expect Avon Products to show very little improvement in its performance over the third quarter.

We will update our current price estimate of $4 for Avon Products post its earnings release.

See Our Complete Analysis for Avon Products Here

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No Takers For The Company Yet

Avon had recently been in talks with private equity firms to sell off its entire business, or a portion of it. The company had been in discussions with Cerberus Capital Management LP and Platinum Equity LLC. [1] These private equity firms specialize in distressed investing and the deal that they were allegedly considering is called Private Investment in Public Equity (PIPE). This is considered a backup option when a full sale for a company seems difficult. As an illustration of this sale, we can think of shoemaker Crocs which in 2014 received a $200 million investment from Blackstone Group and hence the private equity firm gained a 13% ownership in the footwear company. [2]

However, though the talks have been going on for almost two months now, nothing concrete has materialized. It seems that buying a stake in Avon might not work for either its peer or a private equity company, right now. Avon’s direct selling model is passé, its representatives, who are contractual workers, seem to be increasingly leaving the company with the improvement in economic conditions in nations such as the U.S. having created more permanent jobs, and though it is trying to revive performance in its major areas of operation, till now there has been little success to speak of.

A recent report by The Street shows that Avon has a much higher debt-to-equity ratio of 55.23 as compared to the industry average. The company’s debt management is extremely risky currently. Avon’s current quick ratio of 0.60 implied that its current assets may be inadequate to meet its short-term liquidity needs. It’s return on equity is starkly lower compared to the industry average as well as its past debt-to-equity levels. [3] Avon’s stock lost around 25% in value over the last month.

AVP Growth

(Source: Avon Products Rating Reports)

 

Avon Is Struggling In Brazil And The Remedial Measures Have Still Not Been Effective Enough

Currently, Avon’s largest market, Brazil, is under great pressure due to weak economic conditions, the depreciation of the Brazilian Real, and last, but not the least, Brazil’s IPI tax (one of the basic sales taxes in the country) that came into effect since May. This tax is dampening Avon’s sales in the color and skin care segments. Avon is the leading player in Brazil in these two segments.  However, along with the above-mentioned conditions, an improper product pricing strategy by Avon, and competition from retail channels, dampened Avon’s Brazil sales figures since 2014. Consequently, towards the end of 2014, to recover the Latin American market and Brazil specifically, Avon had entered into an alliance with KORRES (a Greek skincare brand) and Coty (a French beauty and personal care company). Avon’s initiatives did improve its performance in Latin America to some extent. [4] Currently, Avon is spending on retention programs and hiring more representative in this region. The company has also planned a pipeline of product launches towards the second half of 2015. [5]

Developments Over The Second Quarter That Might Have A Bearing On The Q3 Performance

In the second quarter, Avon divested Liz Earle, its wholly-owned, UK-based natural skincare brand, which was acquired by Walgreens (NASDAQ:WBA) for £140 million. Avon planned to use the funds to revive its declining capital structure. Avon also closed a  $400 million, 5-year senior secured revolving credit facility, that will replace the previous $1 billion unsecured revolving credit facility. Avon is trying to migrate more representatives to sell through the online channels and it plans to take more actions towards this end. Avon.com – Avon’s online portal,  is showing double digit growth though the growth is still less than 10% of the total business.

Avon had guided to marginal year-over-year improvements in its constant dollar basis performance for 2015. The company expects approximately 17 point negative impact on revenues due to foreign currency translation. [5]

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Notes:
  1. Avon Discusses Stake Sale With Private-Equity Firms, Fox Business, September 11, 2015 []
  2. Avon Discusses Stake Sale With Private-Equity Firms, Fox Business, September 11, 2015 []
  3. Avon Products Rating Reports, The Street, September 13, 2015 []
  4. Avon’s Q1 2015 Earnings Call Transcript, Seeking Alpha, April 30, 2015 []
  5. Avon’s Q2 2015 Earnings Call Transcript, Seeking Alpha, July 30, 2015 [] []