Inside Wall Street: Avon's newly made-up face

Turnaround at the world's leading beauty company solidifies as earnings, margins continue to improve.

By Gene Marcial Jun 26, 2013 4:50PM

File photo of Avon products (© Scott Eells/Bloomberg via Getty Images)Wall Street loves a turnaround, so keep your eyes peeled on Avon Products (AVP), which is in the throes of a solid recovery after several years of rough and tough sledding in a fiercely competitive industry.

 

Shares of the global direct marketer of cosmetics, toiletries, fashion jewelry and fragrances are on the rebound after four years of sluggishness, which had driven Avon's stock to a low of $13.70 a share last year.

 

Declining sales and profits and a highly leveraged balance sheet pulled the stock to the ground. But the stock has since snapped back, to $21 after two quarterly results this year beat the Street’s ho-hum expectations.

 

Some bulls who see sales growth accelerating along with expanding operating margins see the stock leaping to $27 a share this year. It’s quite obvious where the source of new growth will emanate: North America, where Avon has a market share of only 18%, significantly lower than its 47% share in Latin America, and 27% in Europe, Middle East, and Africa.

 

The U.S. market in particular hasn't been saturated, so that's where Avon's fresh management team is now focusing and basing its turnaround for the long-term. Management expects the resilient U.S. economy, now in a recovery mode and where consumer confidence is improving, will help drive Avon’s recovery.

 

After a recent meeting with Avon CEO Sheri McCoy and CFO Kimberly Ross, "we believe management is cautiously optimistic on continuing to execute its turnaround, including achieving long-term targets of low double-digit operating margin and a resumption of mid-single-digit sales growth by 2015-2016,"  says Mark S. Astrachan, analyst at investment firm Stifel. He recommends buying the stock with a price target of $27.

 

He believes investors will increasingly focus on Avon's sales growth, which has languished since 2008. Astrachan sees sales growth improving, as continued operating margin improvement is anticipated. "The company’s long-term mid-single-digit growth is based largely on global beauty market growth and developing market exposure," he says.

 

Keys to accelerating sales growth, says Astrachan, are sustained improvement in Russia and Brazil, two of Avon’s most important growth markets, and better results in a number of other major markets, including the U.S., United Kingdom, and China. Astrachan believes CEO McCoy is committed to ramping-up sales growth in the U. S.  Avon markets its products in 100 countries through its operations in 65 nations with about six million independent sales representatives.

 

The company has appointed Pablo Munoz as senior vice president of North America to lead the turnaround in that major market. "We are very pleased that Avon has hired an executive with broad direct selling experience in both beauty and house wares," says Connie M. Maneaty, analyst at BMO Capital Markets, who rates Avon as outperform with a price target of $27 a share.  

 

Zacks Investment Research, which on June 21 upgraded its recommendation on Avon to outperform from neutral, says the company’s "turnaround strategies aimed at accelerating the top-line growth, trimming down costs, and improving working capital are paying off as evident from its improved operating results in the last two quarters."

 

Avon has also been beefing up the health of its balance sheet by its refinancing activities and taming costs -- by reducing jobs and exiting operations in under-performing markets. As a result, Avon expects to bring down costs by $400 million by 2016.

 

Avon has laid down plans to cut about 400 jobs globally and close down operations in Ireland. And it will restructure or close operations in several under-performing markets, mainly in Europe, Middle East, and Africa, notes Zacks. Management expects these moves alone will achieve annualized savings of about $45 million to $50 million. These actions, says Zacks, should help Avon streamline operations by improving focus on high-priority markets, such as the U.S., and enhance efficiencies.

  

So Zacks figures Avon will boost earnings from here on. For 2013, it expects Avon will earn $1.15 a share on projected sales of $10.642 billion, vs. last year’s profit of 85 cents a share on sales of $10.717 billion. For 2014, Zacks expects earnings to jump to $1.40 a share on estimated sales of $11.027 billion.   

 


Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.




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