Focus On Top Markets And Bestselling Brands, And A Strict Financial Discipline Might Spell Growth For Avon In Q1 2017

by Trefis Team
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Avon Products
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Avon Products is set to release its Q1 2017 earnings results on May 4th. After 5 years of persistent weakness, which pushed the 130-year old company to the verge of bankruptcy, Avon finally found the ground beneath its feet last year after Cerberus Capital came to its rescue. Towards the end of 2015, Avon sold off 80% of its North American business to Cerberus Capital and, in turn, received an investment of $605 million from the latter. Since then, Avon chalked out a strategic road map to make a recovery. The company followed its Transformation Plans and reaped significant benefits last year. Though Avon’s net sales continued its decline, in 2016 it was only by 7% y-o-y as compared to a 19% decline in 2015. In fact, in constant dollar terms, Avon’s revenues grew by 3% y-o-y in 2016. We expect the company to improve further this year and it might also be possible for Avon to actually register a year-on-year growth in its top line in fiscal 2017.

Focusing On Important Markets And Products

With an eye towards growth, Avon is currently focusing on its top ten markets (that accounted for 70% of its revenues in 2016) and its top 40 brands. The ten markets in order of importance are: Brazil, Mexico, Russia, Philippines, UK, Argentina, Colombia, Turkey, Poland, and South Africa. It has segregated its brands under three tiers: Upper Mass, Mass, and Value.

Latin America accounts for over 50% of Avon’s revenues and Brazil is Avon’s most important market. Though the region was still under the impact of bad debt in the second half of 2016 due to Brazil’s poor economic climate, Avon gained market shares in color, fragrance, and skincare in the market towards the end of 2016. This was boosted by its innovative product launches in the Upper Mass category including Avon Life (created with designer Kenzo Takada) and the Avon Attraction fragrance. The Beauty For A Purpose brand marketing helped in the company’s sales growth. A new digital platform was launched in Brazil over the second half of 2016, in order to facilitate the representatives’ ease of doing business with Avon. The platform included features like mobile responsiveness, a better system for the placement of orders, integration of social media, training videos, credit and data management, up sell and cross sell capabilities, and an easy returns and exchange option. The platform is expected to be fully integrated by now.

Change in Management

From January 2017, Avon had started operating its U.K. head office with Jamie Wilson assuming the position of its Executive Vice President and Chief Financial Officer. Avon’s erstwhile Chief Financial Officer and Chief Operating Officer, James Scully, is continuing in his position of the Chief Operating Officer and will carry on leading Avon’s transformation plans. Also, effective January 3, 2017, Chris Wermann assumed the role of Avon’s Chief Communications Officer.

The Company Progressed Well With Its Three-Year Plan 

Last year, Avon made huge progress with all the three pillars of its growth plan, namely investing in growth, improving cost structure, and improving financial resilience. With a focus on the digital media and its top 10 markets, Avon planned on investing over $350 million in its business starting from 2016. Out of this amount, $150 million would be invested in media and social selling and $200 million on information technology, mainly capital expenditures to improve the working experience of its representatives. It had also targeted saving $350 million in cost during the same period, out of which an estimated $120 million cost savings was completed in 2016 itself. The company wanted to improve the financial health of its balance sheet by reducing debt to the tune of $250 million in 2016, in reality it reduced debt by $260 million last year thereby extending its maturity profile with no long term debt due till 2019. All in all, Avon’s three-year plans are going well on track and this year, too, we expect significant progress.

 

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Avon Products

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