Avon: What is This Company?
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Troubled company Avon’s (NYSE: AVP) stock is at 16.95. That’s near the 52 week low of 16.09 and far from the high of 30.07. Some of that reflects investor disappointment that Coty snatched back its $24.75 a share offer, which had been backed by Berkshire Hathaway. Coty is tired of what it called Avon’s “total lack of engagement” which resulted in not meeting Coty's deadline for a decision. Since Avon did finally indicate interest in the offer, Coty's pull-out can be construed as an early setback in execution for new chief executive officer (CEO) Sheri McCoy.
But more of the price plunge could reflect the recognition by investors that this company doesn’t know what it is. Is its core competence, or crown jewel, its 6.4 million global direct sales force? Or is it evolving into a leading brandname in the beauty business, eventually taking on the bigs like L’Oreal? Ironically, if its goal is the latter, its should have jumped at Coty’s offer. Under the Coty umbrella, Avon could have been transformed into a hybrid of respected beauty products in retail along with an established direct selling force.
Avon, of course, is hardly alone in what I view to be identity confusion. In my analysis of the value of companies, I am finding plenty of disconnects between what generated profits in the past and what is being experimented with now. Apple (NASDAQ: AAPL), with its simplified model of building on the i-platform, is the exception. That clear positioning has allowed it to go into whatever direction it wanted, including retail. Many others haven't seemed to be as fortunate.
Take troubled Sears (NASDAQ: SHLD). Currently it’s positioned as an undifferentiated general retailer. And that’s not getting it turned around. Some recommend it could establish a strong brand if it would return to its roots in hard goods like drills and tires. In that space, it could be the new Eden for male shoppers.
Staples (NASDAQ: SPLS) started out as the supplier to small business for all its office needs. Now everything from its promotions to shelf space broadcasts the message of a consumer electronics merchandiser and service-provider. Which way does it want to go? It could be waiting to see if Best Buy survives before making that strategic decision.
Kellogg (NYSE: K), after its purchase of Pringles, has one foot in the high-growth global snack market and one in the lower-growth cereal one. How should investors think about the future of this company? Does Kellogg need to acquire more big brandname snacks and then split into two companies like Kraft?
Avon’s global direct sales force consists of middle and lower middle income women who do that part time and have rapport with customers who mirror themselves. That’s exactly what makes it an attractive takeover target. So few companies have that and want it for emerging nations in which direct sales is the standard way to reach consumers. In the U.S., when the direct sales force is nurtured and rightly rewarded, as Mary Kay and Amway are known to do, that channel can not only generate growing margins. It is in itself a powerful trusted brand.
When the former CEO Andrea Jung began to fill leadership positions at Avon, she experimented with shifting from essentially commodity products to becoming a player in the upscale beauty sandbox. She also tried to add retail as a channel. Her background was high-end retail. In addition, she was inexperienced with hands-on direct sales, which is an in-the-trenches push process. At work or in the neighborhood, the Avon Lady comes to us with the new catalogue. That's just the way it is.
Jung's reach beyond the old no-glamour Avon was symbolized by her Chanel suits and born-to-the-manor persona. One wonders about the extent of the disconnect between her and the direct sales force. In her article in FORTUNE “Avon: The rise and fall of a beauty icon,” Beth Kowitt points out that Jung tried to execute her vision through expensive advertising versus the $10 it costs to sign up an Avon Lady. That had a negative impact on the bottom line. She also tried adding retail as a channel but there wasn't much interest, at least not for long. Avon products were not a fit with the cosmetics at J.C. Penney.
As we know, Jung's vision didn't pan out. There is speculation that the current $0.92 per share annual dividend, which is higher than the industry average, might not be increased as it had in the past few years. That's not good news for the dividend investor. Jung is gone. But the organization remains without a clear identity. That in itself could prevent a turnaround. And unless another offer comes in, that’s Avon’s only option, at least for the time being.
Unfortunately, Avon may not be well positioned for a transformation. In an analysis of its financials, the value investor who calls himself “Wexboy” notes, for example, that a direct sales company shouldn’t have debt as 2% of revenues. Advertising costs, since the direct sales folks do the work in the field, shouldn’t have doubled since 2005. And, a reflection of a possible problem in supply chain management, shipping and handling is 9.5% of revenues.
Perhaps Jung's vision was on the money but the execution was faulty. Avon might be able to evolve into a respected and briskly-selling global beauty brand with a number of distribution channels. It could become a status symbol in Asia to wear Avon products. Or, it might be shrewd for Avon to beef up and leverage its experience in direct selling and stay in that box. There are no right or wrong answers here. But there is a need for the leadership to make the strategic decision about what it is and then align its financials for that course of action. This is what investors have to monitor.
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