AVON: Will Take Time to Makeup

Rahul is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After what seemed like an eternity of self inflicted horrors there is some light visible (apparently) at the end of the tunnel for Avon (NYSE: AVP). With a new CEO in place and a more focused strategy the company is looking forward to a makeover and like any other transformation this one will also require time and patience. Also, it is somewhat assuring to see that management is almost adamant in its stance of turning the tide in its favor so much so that it rejected a takeover offer from Coty for $24.75 per share.                

Saving the Financial Blushes    

The third quarter results were far from satisfactory and management accepts there is no bunny in the hat for the next quarter too. Sales went south by 6.4% for the first nine months. However the highlight was the slashing of the dividend by almost 75% to $0.06. These decisions were a little sour for the shareholders when competitor Revlon (NYSE: REV) announced a regular dividend on its Preferred A shares; but were necessary for providing stability to the upcoming capital expenditure of around $150- $200 million which the company plans to invest in its IT infrastructure over the next three years. This move was long awaited and is more than welcome. Cash flow from operations was $220 million down by $27 million from previous year which was offset by working capital improvements. The company plans on continuing to improve the operating cycle so as to give a net savings of $100 million in the working capital in the next three years. What the company needs to do now is to keep the SG&A expenses under control.

The Action Plan

Apart from a pending FCPA investigation there were some other operational areas which could use more than just some touch ups. For instance the carrot approach of incentivizing top sellers was unsustainable; the company was yet to come to terms with its IT infrastructure; the marketing strategy of the company could use an overhaul where it heavily relied on its representatives which sadly reduced by 1% in North America alone.

All said and done the road ahead looks convincing. “Driving top line growth” and “aggressively reducing cost” are the foundations of an action plan which, the CEO herself admitted can only give results in the long run. Coming out of its “poor executor” image the company announced a reduction of 1500 positions over the next three years in a bid to achieve the targeted savings of $400 million by 2015. The efforts though conventional are still encouraging. In addition to that, the company plans on exiting South Korea and Vietnam, concentrating in developing its efficiencies in its dominating markets.

The Bottom Line

Going long on this stock in the present circumstances is a risk worth taking and for those who are already in possession the advice would be to hold up for two particular reasons:

Firstly, the global beauty industry is growing at the rate of 6%. Avon has a worldwide presence; with its products being sold in 100 countries, it has a direct sales force of around 6.4 million people, its Current Ratio and Debt service Coverage ratios indicate that it has enough liquidity to survive in the near future and its action plan has all the necessary ingredients to develop a perfect concoction of turnaround. All it needs to do is to get its execution act together and hold its fort across the product markets in North America, China and Brazil from competitors like Estee Lauder, L’Oreal.

Secondly, the rumours of Coty taking another shot at the takeover are doing rounds in the market. Since Coty wants its own management to be at the helm of decision making this news is far from lucrative, but the shareholders could find solace if an open tender offer comes up.

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