Reasons Behind Our 25% Downgrade Of Avon’s Stock

We recently downgraded Avon Products‘ (NYSE:AVP)  stock price by ~25% from $3.82 to $2.83. Avon Products has been consistently performing poorly. The company’s talks with private equity firms for a buyout has not worked out, yet. Brazil–Avon’s most important region in terms of revenues–is still reeling under economic setbacks, leading to poor demand for superfluous items such as beauty products. The situation in Brazil is further worsened by Brazil’s steep IPI taxes, which are further eroding Avon’s skincare and color cosmetics revenues. Finally, currency headwinds had been doing significant damage to Avon’s earnings. Though the company is taking restorative measures, such as promoting online sales and restructuring its management structure (effective January 2016), the company is yet to show concrete signs of recovery and growth.

See Our Complete Analysis for Avon Products Here

No Luck With Buyers, Yet

Avon’s recent talks with private equity firms to sell off a part, or its full business, has not borne any successful results yet. The companies that Avon allegedly went into discussion with were Cerberus Capital Management LP and Platinum Equity LLC. ^[1] These private equity firms specialize in distressed investing and had been considering the Private Investment in Public Equity (PIPE). This is considered to be a backup option when a full sale for a company seems difficult. ^[2]

However, there seems to be no taker for even a part of the company. And the reasons are obvious. Avon experienced an almost 70% decline in its stock price over the last one year and witnessed its last profitable year way back in 2011. Its direct selling model is losing relevance in the current era of retail and online shopping. Avon’s cash position is precarious and its representative base is dwindling due to attrition. According to a report by The Street, Avon’s debt management is facing significant risks, its quick ratio suggests its current assets might fall considerably short of meeting its short-term liquidity concerns, and its return on equity is significantly lower than its own previous levels, as well as that of the industry average. ^[3]

Avon’s Third Quarter Performance

The company faced around a 19% decline in its revenue for the first nine months of 2015, to $5.3 billion. Brazil–the largest revenue contributing country for the company (~20% as of 2014)– ^[4] has been more than partly responsible for Avon’s bleak performance. Brazil’s economic slowdown restricting the spending on beauty, combined with the country’s IPI tax (introduced in mid-2015), are some of the reasons for weak sales in the country. Avon’s North American region is yet to recover from the erosion of the representative base and from the lackluster demand for the products. There were rumors about Avon trying to sell its North American business but nothing materialized. Finally, currency headwinds have been a major dampener for Avon (especially in Latin America from where it derives around 50% of its sales). Weak currencies have led to an erosion of over $350 million in pre-tax income, for the first nine months of 2015.

Some Management Changes Expected Next Year

Avon has announced some management changes effective January 1, 2016. John Higson, who currently looks after the EMEA and Global field operations, will also have Latin America under his purview, with the combination of EMEA and Latin America. Fernando Acosta, who currently heads Northern Latin America and Global Marketing, will be dedicated to the brand marketing and innovation aspects, including the company’s move towards social selling. Jim Scully, the current Chief Financial officer, will also assume the role of Chief Operating Officer. His responsibilities will include enterprise strategy, infrastructure, and global supply chain. ^[5]

However, even if these changes bring about improvement in Avon’s performance, we believe it will still take considerable time to lift up the company from the current quagmire of problems.

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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 Annual Report, 2014 [↩]
5. Avon’s Q3 2015 Earnings Transcript, Seeking Alpha, Nov 4, 2015 [↩]