Neutral on Avon Products - Analyst Blog

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

Zacks Investment Research