We maintain our long-term ‘Neutral’ recommendation on Avon Products Inc. (AVP). Avon Products is a leading global beauty company, with over $10.8 billion in annual revenue in 2010. As the world's largest direct seller of beauty and related products, the company markets its products to women in over 100 countries through 6.2 million independent sales representatives. The company also derives a substantial portion of its revenue from high-growth emerging markets, which offer a significant future upside potential.
Moreover, Avon is in the midst of a multi-year restructuring program that primarily accelerates investments toward targeted growth opportunities, streamlines worldwide manufacturing operations, improves cost effectiveness and enhances organizational effectiveness. The restructuring program is expected to deliver annualized savings of more than $430 million when fully implemented by 2013. This apart, the company has also implemented two more restructuring programs, Product Line Simplification (PLS) initiative and the Strategic Sourcing Initiative (SSI), which provided combined benefits in excess of $450 million in 2010.
Furthermore, in a move to expand its fashion unit products, Avon acquired sterling silver jeweler, Silpada, in July 2010. This speaks of the company’s strategy to develop its direct-to-home products business beyond the traditional beauty focus. The company has also acquired Liz Earle (online seller of natural skincare products) and bought the trademark of baby care brand Tiny Tillia, which would boost its product portfolio, expand margins and increase its market share.
On the flip side, the North American market continues to remain sluggish with sales falling 2.0% in first-quarter 2011. Moreover, the company’s initiatives to change the product mix and reposition the business in the U.S. market will require significant expenditure to support increased advertising and promotional activities, a ploy that would inevitably put margins under pressure.
Over and above, Avon faces stiff competition from various products and product lines both domestically and internationally. The beauty and beauty-related products industry is highly competitive and the number of competitors and degree of competition in this industry vary widely from country to country.
Worldwide, Avon competes against products sold to consumers by other direct-selling and direct-sales companies and through the Internet and against products sold in the mass market and through prestige retail channels. The company competes head-to head with Revlon Inc. (REV).
Avon currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
AVON PRODS INC (AVP): Free Stock Analysis Report
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