Is it Time to Buy Avon Now?

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You may remember when Avon Products (NYSE: AVP) was trading as high as about $23 a share last spring, partly buoyed by a $10.7 billion, unsolicited offer to buy it out by rival Coty. However, Avon snubbed the offer, knowing full well that its finances were in disarray, which was clearly reflected in its lackluster stock performance.

Determined to right its financial ship on its own, Avon, with a new president at its helm, has made several changes since blowing off Coty. These changes are part of a turnaround plan meant to bolster the company's position. This may lead to other, and even better, offers from other companies that may see it as a prime takeover target. Bank of America was so impressed with the company’s turnaround plan that it upgraded Avon to “buy” from “neutral” on Friday. It has a price target of $20.

The changes, laid out last month, are hoped to help the company achieve an annual cost-savings target of $400 million by the end of 2015. One of the first steps is reducing its global workforce by 1,500 people. Avon has struggled to turn strong profits through selling its goods in South Korea and Vietnam, so it is exiting these markets. This should help it concentrate on high priority and profitable markets.

When the company reported its earnings results for the third quarter, the results were as disappointing as those from the quarter before that, and the quarter before that, and…well you get the picture.

Total revenues for the third quarter were down 8% to $2.6 billion, while the amount of the company’s debt was up $152 million to $2.2 billion. For many customers, an alluring part of shopping with Avon has traditionally been going over the products with a representative. It’s like having your own beauty consultant show up at your home to go over everything from nail polish to bath oils. However, it seems there are not as many people wanting the sales job anymore. Avon, reported that the number of its active sales representatives was down in the third quarter. Given the increasing number of people who shop online, I applaud Avon for its efforts to also appeal to online shoppers. Sales reps can still reach their customers through online orders, too.

Avon will spend between $80 million and $90 million to implement its turnaround plan, of which roughly $50 million to $60 million is expected to be recorded in the fourth quarter. We’ll see how that turns out soon. Avon reports its fourth quarter earnings on Feb. 11. The company is banking on the initial steps of its plan to account for about 20% of its total targeted savings.

These steps are admirable, but they came at a price to shareholders. Avon decreased its dividend by 74%. However, given these steps can help the company over the long term, the lower dividend may prove to be worth it.

None of these steps would likely have made any difference in building investor confidence if the company’s long time CEO had not resigned. Andrea Jung led the company for 13 years, but faced increasing pressure over the company’s slumping earnings. Her tenure as the first woman to be the chief executive of the company was also marred by allegations that the company bribed officials in foreign countries to sell its products.

Jung was replaced by Sheri McCoy, who seems up for the task of improving Avon’s finances. She has her work cut out for her, as there are plenty of naysayers who doubt the company. Some of the doubt stems from concerns over whether Avon will be able to compete with its peers, such as Estee Lauder (NYSE: EL) and Revlon (NYSE: REV).  

While Bank of America may be bullish on Avon, Zacks Investment Research is not. That’s partly because of the competition from these peers. On Christmas Eve, Zacks announced it would maintain its underperform recommendation on Avon partly due to that competition.

To get an idea of how Avon stacks up to them, I looked at some of their fundamentals. For the most part, Avon's metrics were in line with those of Estee Lauder and Revlon. Its operating margin was one of the exceptions. It was just 2.95%, compared to 12.35% for Revlon and 13.74% for Estee Lauder. It also had the lowest earnings per share, reporting it as $.27 (TTM) compared to $.78 and $2.22 for Revlon and Estee Lauder, respectively.

Short of being acquired, I see Avon as still facing too many hurdles to be considered a buy at this point. Furthermore, it will take several quarters of positive earnings to show its turnaround plan is working.

 


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