In this article, let's take a look at Avon Products Inc. (AVP, Financial), a $5.47 billion market cap company, which is the world's leading direct marketer of cosmetics, toiletries, fashion jewelry and fragrances, with about 6 million sales representatives worldwide.
New Management
The company failed to turnaround the business and had regulatory problems, including some allegations of bribery in China. As a result, it had replaced the principal executives of the firm. Then, it planned a $400 million cost savings program in order to become profitable. The plan includes personal reductions exiting some markets such as South Korea and Vietnam, cutting losses in regions and businesses in order to achieve highest returns. Apart from exiting South Korea and Vietnam, the firm is cutting ties with Silpada, which we think is the right decision. Silpada was acquired for $650 million in 2010, so the company will have written off about 90% of the purchase price.
Amid all the efforts made, some things are still needed, like investments in technology, infrastructure, while developing its portfolio. We say this because the firm had underinvested in technology for years. As a matter of fact, the management plans to spend $150-200 million over three years.
Talented People
The company hired a top manager from the outside to lead operations. Pablo Munoz, who had a vast experience in Tupperware's domestic operations, should contribute to revert the situation.
Return Reduction
Avon didn´t generate consistent improvement, so returns on invested capital were reduced. For example, between 2005 and 2012, returns declined 24% on average. The part most important is that we believe this can continue in the next decade.
Revenues, Margins and Profitability
Looking at profitability, revenues decreased by 12.77% and earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.04 vs $0.19). The net income has decreased by 41.2% year over year, falling from $32.3 million to $19 million.Â
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| AVP | Avon Products | -21.54 |
| USNA | Usana Health Sciences Inc | 29.22 |
| IPAR | Inter Parfums Inc | 4.54 |
| RDEN | Elizabeth Arden Inc | -29.49 |
| MED | Medifast Inc. | 21.91 |
| Â | Industry Median | 8.35 |
The company has a current ROE of -21.54% which is lower than the industry median and the one exhibited by Inter Parfums Inc. (IPAR, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Usana Health Sciences (USNA, Financial) and Medifast (MED, Financial) could be options. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a price-to-book ratio of 5.76x, indicating a premium versus the industry average of 1.93x while the price-to-sales ratio of 0.58x is below the industry average of 1.09x.
Final Comment
Despite its weaknesses, we think the company has a well-known brand, a global geographic reach and an attractive business model.
Investors would be making a short-sighted error not viewing Avon for what it is, which has a bright long-term future.
Hedge fund gurus like Ray Dalio (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Murray Stahl (Trades, Portfolio) sold out this stock in the second quarter of 2014, while Joel Greenblatt (Trades, Portfolio), Jeff Auxier (Trades, Portfolio) and Jim Simons (Trades, Portfolio) have reduced their positions.
Disclosure: Omar Venerio holds no position in any stocks mentioned
