Inside Wall Street: Has Avon hit bottom?

Don't count on it. Things could get uglier for the world's largest direct seller of beauty products.

By Gene Marcial Jul 13, 2012 1:42PM
You might think that Avon Products (AVP), after falling more than 50% since October 2011, would be an enticing opportunity for bargain-hunters and aggressive contrarians.

Wrong!

Instead, the world's largest direct seller of beauty products could become the next Research In Motion (RIMM).

 

Many investors had incorrectly assumed RIMM was the perfect technology bargain when the stock started to fall. What happened instead was the stock just kept falling, to a level where the downside momentum got worse. RIMM has crashed from $68.35 on Feb. 12, 2011, to a low of $7.26 on July 13, 2012.

 

Meanwhile, Avon's stock has tumbled from $35.41 on Oct. 13, 2010, to a low of $15.24 on July 13, 2012. Some optimists think Avon may have hit bottom and is possibly now a great bargain.

 

But a number of investment pros don't agree, including S&P Capital IQ, which has downgraded Avon to "sell" from "hold."

 

"On a multiple analysis, we cut our target price to $14 a share from $21," says Esther Kwon, an S&P analyst who has reduced her 2013 estimated earnings by 11 cents a share, to $1.10. One of her concerns is the continuing global economic weakness and lower growth prospects in Avon's largest market, Brazil. According to Kwon, its biggest competitor there has been reinvigorated after making significant investments last year. She sees an increased risk of a dividend cut in 2013.

 

In hindsight, Avon should have accepted Coty's unsolicited offer to acquire the company for $23.35 a share in April. Avon's stock has dropped significantly since it rejected the offer.

 

Avon's problems with government regulators are also a concern. The SEC review of a potential violation of the Foreign Corrupt Practices Act and a subpoena from the agency in connection with Regulation Fair Disclosure are complicating efforts by Avon's new management to turn the business around and "acting as an overhang on the shares,"  Kwon says.

 

She estimates Avon will earn 83 cents a share in 2012, well below last year's $1.63, excluding restructuring and other one-time charges. With such depressed earnings, its yearly dividend of 92 cents a share may not be sustainable, since the projected 2012 per-share earnings are much less than the payout.

 

Avon has operations in 65 countries, and its products are distributed in 42 other countries. Latin America accounted for 45% of sales and the U.S. about 19%. Western Europe, the Middle East and Africa combined generated 14% of total sales, while the Asia-Pacific accounted for 8%.

 

In an effort to cut overall costs and adjust to lower demand for its beauty, fashion and home products, Avon has reduced the number of its sales representatives worldwide. The number in the Asia-Pacific has been reduced by 11%, North America by 8% and in Western Europe, the Middle East Africa by 2%. Only Latin America got a boost, with a 3% increase.

 

Avon has been trying to rejuvenate worldwide sales since 2005, when it started a restructuring program focused on revamping its global chain operations, streamlining various parts of its operations and cutting overall operating costs. The massive effort hasn't succeeded in achieving its goals, however, with total sales remaining sluggish, ranging  from $8.9 billion in 2007 to $120.8 billion in 2010. Sales did increase in 2011, to $11.2 billion, but S&P estimates that sales will inch up only to $11.5 billion in 2012.

 

"Although sales were strong in the Latin America and Western Europe, Middle East and Africa regions at the beginning of 2011, they slowed dramatically in the second half of the year, and we expect sales to continue to struggle in 2012," Kwon says. With the challenging comparisons in the first half and recent slowdown in sales momentum, Kwon assumes operating margins narrowed in the first half of 2012.

 

The analyst sees sales in the U.S. rising by just 1% in 2012, and China won't be much help either. Kwon says China appears to be having difficulty transitioning from beauty boutiques to the now permitted direct-sales marketing system.

 

Is it too late to short or sell the stock now that it has fallen so much already? Maybe, since the stock is already close to S&P's reduced price target of $14 a share. But it surely isn't a buy right here, unless you know something the pros don't -- like Coty coming back at this depressed price to relaunch a takeover bid.



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.

Tags: AVPRIMM
45Comments
Jul 13, 2012 3:40PM
avatar
This is the most crappy message board, it has been over run by computer generated advertisements on lonely women and how to meet a guy. 
Jul 13, 2012 3:55PM
avatar
I have been using Avon Anew skincare for 2 years.  Started due to economy tanking and couldn't afford my pricey European brand.  I am totally amazed.  I look younger and get comments all the time by long long time friends that I look so good.  This is not a pitch to sell it.  IT IS A FACT.  Trust me at my age I tried several products before stumbling on to Avon.  Stand up America don't let a 100 year old company fold.  Even my 14 year old uses and loves loves the Mark line.
Jul 13, 2012 4:18PM
avatar
I am an Avon rep and have been for 18 years. It's so frustrating to be embarrassed to sell their products. The quality has plummeted, to the point of turning them into another Fingerhut. Everything is always on backorder, and there are routinely NEW PRODUCTS in the brochure that suddenly become unavailable, with absolutely no explanation from Avon. Any time they develop a quality, award winning product, they REFORMULATE IT until it's crap. If Avon IS done, I for one won't be surprised. 
Jul 13, 2012 4:44PM
avatar
What is going on ,this is about saving Avon ,you Morons go and Date somewhere else !
Jul 13, 2012 5:08PM
avatar
I was an Avon sales representative and I used everything from Maybelline to Lancome and my skin never was better than using the Avon products, I am 50 and people say I look 30, I also stay out of the sun et. I think I will sell it again because of the results...Everyone can see the results just are better with these products used correctly, and they last a lot longer, for example a compact will last three times as long. Yes of course I would run out and get some eye liner if mine was missing but for the planned skin care these products produce. I would attach a picture of my skin before and after if I could...you can see!!! I don't even sell it anymore and love it that much! Plus for the quality you just can beat the prices. I will say this as well, many older folks don't want to leave the house that much, also the disabled. I gave them beauty make overs that made them so happy! House bound clients can really benefit emotionally from the lift a beauty consultant and make over provides...what fun!!!
Jul 13, 2012 4:16PM
avatar

Stick  to the topic about " Avon" This is not " The lonely hearts" message board. Avon has been around a very long time and if you do not change a little bit Evey now and then and bring a "bang" feature to bring it all up to the modern times, you will fail. I think makeup is made by so many companies now it makes it very hard. although they do sell other items but so do many of the stores. alot of "competition" out there.

 

The people can only ask so many tiems to get people to buy and if they will not do it then it is time to come up with new products that 'wow" the people as it is not anything like waht they are seeing or they will become bored, as they see so many and they know Avon is about the same as it always was and now they maybe want some changes?

 

Just a thought on this subject. and easy thought truly, anyone could think of this to make it work.

 

Perhaps, a glimmering ( some are and some not)

 

A makeup that works for you for a long time, and you can take it off somehow with a certain product but otherwise once you get it just as you want it, it will last for days and days without causing any problems to lips , eyes or where ever it is placed?

 

Some really special and Neon looks, would maybe work, and yet keeping the sedate look and the other products is for those who really do not want to have it changed. People want to look like the stars on TV now so we must find makeup they can do so they look just like all those people they see in commercials without knowing how to put it on, but some how have items to help them make it go on properly?

 

Well who am I to even think of things, but just in case someone reads it who can think of ways to make it work out chemically speaking, this might give them a little edge for a time anyway.. If they want it?

Carol

Jul 13, 2012 5:18PM
avatar

I have been selling Avon for 45 years and using it.I understand the frustrations quoted about the things they discontinue. I am too but most of the time the product is either improved or the packaging is changed. Granted some of the products are a bit pricey but I make sure my clients can afford it by lowering prices. Don't give up on Avon, like every other company it has its ups and downs.

to the woman who couldn't find her perfume any more. Contact me I may have it. ldybtrfly53 at yahoo dot com.

Jul 13, 2012 5:16PM
avatar
from what I'm hearing Avon isn't the company it once was,I remember my mother was an Avon sales rep for years and did quite well thru out the '70's ,times has change and maybe Avon should too,its been an American institution for generations. I hate to see it go.
Jul 13, 2012 5:40PM
avatar

I don't know if Avon's stock has hit bottom or not. What I DO know is that their products work! If you're over 35 & haven't used their ANEW line, you should consider giving it a try. At 61 my skin is better than it's ever been. The little wrinkles have disappeared.

I don't intend to age gracefully...I plan to fight it every step of the way! AVON is how I'm doing it.

 

Jul 13, 2012 3:37PM
avatar

When I invest I try to look at what a product really is... Avon isn't worth investing in because it is going away.  Women at my work try to sell the products, but they are so cheap and crappy they can't sell them.  I would not invest in Avon, because Avon made poor decisions, and now it is done. 

 

Jul 13, 2012 4:33PM
avatar
That's because they stopped carrying long time favorites and expect people to continue to buy their products. I can't get the one perfume that I used to wear which has caused me to no buy anything from Avon not to mention their products are way to expensive.
Jul 13, 2012 6:54PM
avatar

Hey, MSN, 16 of these posts are SPAM!!!!

Get rid of them!!!

Put a stop to them!!!!

Pay attention, moderator!!

Jul 13, 2012 4:56PM
avatar
The problem is........there is so much make up at the stores and the competition does not makes it profitable for Avon.  I was a Avon gal years ago when you run out of make-up you need it now.  It is easier to drive to the store rather than placing an order, paying for shipping and waiting until your representative distributes the order.  I would not be surprised if Mary Kay falls too.  The make-up is so expensive and a pyramid to bring in others under you before you can make any money.  It is a get rich skim and nothing more.
Jul 13, 2012 7:36PM
avatar

I have used Avon for yesrs. I love thier beauty products & the prices even more!  You would think that in this economy, the business would be doing better with people looking for lower priced alternatives. However, there are several things that could be improved upon. I honestly have never seen an advertisement for Avon. The constantly are discontinuing products. They sell way too much junk like house wares, clothing, jewelry, and kids toys. My Avon rep is great, but I've had some in the past who didn't return calls or emails and took way too long to get product delivered. For this reason, I usually just buy online & have it delivered by mail.

Jul 13, 2012 6:19PM
Jul 13, 2012 6:14PM
avatar
My problem with Avon is that every time I found something I really liked they would discontinue the product.  I still miss my plum raisin lipstick. The products they would create to "replace" the discontinued ones never measured up.

Avon just doesn't know what it wants to be.  I prefer to go to Walgreens and get some Revlon or Black Radiance. It wasn't always that way though.  Avon used to be worth the effort.

Jul 13, 2012 6:43PM
avatar

Don't expect Mary Kay to bite the dust anytime soon.  It's not a publicly traded company, for starters.

Products only continue to get better, backed by years of research and development, and with price

points that are reasonable (and usually better than department store brands)  Markets continue to

expand, as does the sales force.  Mary Kay is also, no more a pyramind than Avon is.  You can

choose to build a team, but I make adequate profit from just selling my product (though I do have

4 downline consultants)

 

Incidentally, if you need product quickly, go to the consultant locator at marykay.com and put in your zip code.  Believe me, it won't take long to have someone standing at your door with the product you need. 

Jul 13, 2012 5:24PM
avatar
I used Avon in 1992; I liked it and sold it for awhile.  I returned to it again in 1999 and the caliber of the products had gone straight down the toilet.  It did literally NOTHING for my skin. 
The current situation illustrates what happens when a company takes their market for granted and cuts quality. 
Jul 13, 2012 7:10PM
avatar
Avon is resuming animal testing - which is inhumane and unnecessary.  So I won't be purchasing anything from them anymore.
Jul 13, 2012 5:23PM
avatar
Make up sales are a counter cyclical product.  I understand sales go up during a long-term recession.  We shall see.
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123
123 rated 1
266
266 rated 2
485
485 rated 3
660
660 rated 4
586
586 rated 5
652
652 rated 6
640
640 rated 7
504
504 rated 8
289
289 rated 9
159
159 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
TAT&T Inc9
VZVERIZON COMMUNICATIONS8
CTLCENTURYLINK Inc8
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.