Neutral on Avon Products - Analyst Blog
August 15 2011 - 9:23AM
Zacks
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 offers a significant future
upside potential.
Furthermore, 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
within 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.
Moreover, in a move to expand its fashion unit products, Avon
acquired Silpada (sterling silver jeweler) in July 2010, which was
part of its strategy to diversify in direct-to-home products beyond
its traditional beauty business. This apart, the company has also
acquired Liz Earle (online seller of natural skincare products) and
bought the trademark of baby care brand Tiny Tillia in a move to
enhance its product portfolio, boost margins and increase its
market share.
Additionally, Avon has completed its $150.0 million
state-of-the-art distribution site in Cabreuva, Brazil, which has a
capacity to ship 70% of Brazil’s overall unit volume. The new
distribution center has a feature of advance order picking
technology, which will help in improving productivity and order
accuracy. The new distribution center contains automated systems,
which will help to streamline workforce, resulting in cost
efficiencies and improved services to representatives.
On the flip side, 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’s financial performance may be substantially affected due
to its significant presence in international market (79% of total
revenue in fiscal 2010), which exposes it to unfavourable foreign
currency translations, economic or political instability and other
governmental actions on trade and repatriation of foreign
profits.
Furthermore, the North American market continues to remain
sluggish with sales falling 7.0% in second-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, which may exert pressure on margins to some extent
Avon Products holds a Zacks #3 Rank, which translates into a
short-term Hold recommendation.
AVON PRODS INC (AVP): Free Stock Analysis Report
REVLON INC-A (REV): Free Stock Analysis Report
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