Amidst Slight Improvement Of Its Business, Avon Hopes For A Better Future With New Strategies And Hirings

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Avon Products

Avon‘s (NYSE: AVP) Q3 2017 earnings, though still bleak, offered some signs of improvements. Its revenues increased by 1% y-o-y (flat in constant dollar terms) to $1.4 billion driven by 8 of its top 15 markets, however, its bottom line still remained dampened due to problems in Brazil, where it continued facing bad debt, challenges with representative retention, as well as stiff competition from other players. The growth it witnessed in the eight markets were mainly driven by the rise in average orders that was impacted by the price and product mix. Avon’s active representatives declined by 3% y-o-y in Q3 and that was mainly due to the challenges in Brazil where Avon has tightened the credit policies after bad debt issues last year. The company witnessed an improvement in the performance of its most important division, that is, Beauty. This was driven by new product launches and sales growth in the Color segment. Avon derives close to 75% of its total revenues from the Beauty segment. Avon is currently in the second year of its three year recovery plan. Among other things, the plan aims at a cost saving of $350 million by the end of next year. The company has achieved around $205 millions in savings for the first nine months of 2017 and expects to achieve $25 million more by the end of this year, thus being well on track to achieve its target. We have a $2.59 price estimate for Avon’s stock, which is higher than the current market price.

The Brazil Market’s Problems Continue

Avon derives over 50% of its revenues from Latin America and in that region Brazil is its most important market. However, the constant microeconomic and macroeconomic challenges plaguing Avon’s Brazil business is proving to be a constant impediment towards the company’s growth. Towards the second half of 2016, Avon experienced a growth in its active representatives in Brazil. This was due to the more relaxed credit policies for the new representatives. However, the relaxed policies in turn converted into delinquencies and an increase in bad debt. Hence, when the company tightened its credit policies in Q3 2017, the representative base started declining with fewer new joinees eager to join the team. In addition to that remain Brazil’s persistent economic problems and a tough competitive scenario in its beauty market. Avon’s management thinks that the steps they are taking towards launching innovative products, upping the marketing game, etc. will eventually lead this region towards recovery. However, it might take time for full recovery to be evident.

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Avon’s Short Term Focus Areas

  • Investments will be channeled towards the upgradation of its systems and the ease of mobile use in different markets, two things that will help the representatives in their roles of selling its products. Brazil has witnessed an upgraded system towards the beginning of this year and pilot projects are being run in other countries like China, Russia, and Poland.
  • The company will gather analytical data on each representative’s business in order to understand their functioning on a micro level. Towards this end, the company has started grouping representatives as top sellers, sellers, and new Representatives.
  • Following the announcement of the stepping down of its CEO in its Q2 2017 call, Avon has recently hired a group of new executive members, and the fresh induction of talent is expected to steer the company towards the path of growth.
  • It will focus on improving the end-to-end of its business model starting from forecasting customer demand, planning of operations, distributions, shipments to representative, and so on.

 

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such 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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