Avon Products (NYSE:AVP) had a rough 2012, shedding nearly 18% over the course of the year. At the start of 2013, I suggested the company would succeed by cutting overhead and playing to its strength in Asia and Latin America.
Now, news has broken that Avon is doing precisely that: continuing its retreat from under-performing markets, including Ireland, and cutting more than 400 positions.
That’s promising news for the beauty company, especially since it was already moving in the right direction prior to the announcement. Year-to-date, AVP is up a whopping 49%.
In fact, household and personal care products as an industry have had a good run so far in 2013, up 16% compared to an 11% gain for the S&P 500. That’s helped make consumer staples the second best performing sector behind only healthcare.
Of course, that doesn’t mean all names in the sector are winners. Let’s take a look at two to buy and one to sell.
We have to start with Avon — my clear favorite. With its stellar gains so far, it’s hard for me to recommend that you stay on the momentum train … but that’s exactly what I’m going to do.
CEO Sherilyn McCoy and the rest of the company’s are efficiently carrying out Avon’s turnaround plan. Its fourth quarter adjusted EPS was 10 cents better than consensus estimates, while the full-year consensus estimate was 28% higher than at the beginning of the year.
As we’ve seen, Avon’s cost-cutting combined with a focus on its stronger markets is already beginning to pay dividends. With its debt situation sorted out, I look for big things from Avon throughout the year and into 2014.
Another to lead the charge in this arena is Estee Lauder (NYSE:EL) — the name behind MAC Cosmetics, Clinique and of course Estee Lauder cosmetics.
Of the eight companies with a market cap over $1 billion in the personal care products industry, only Elizabeth Arden (NASDAQ:RDEN) has performed worse than Estee Lauder in 2013. Such ‘underperformance,’ though, isn’t far behind the broader market and, in my opinion, is a contrarian signal to buy.
The beauty industry continues to grow revenues at 4% or more annually. Estee Lauder will continue to benefit from its leadership position in the beauty industry, especially with the help of emerging markets and the growing spending power for the middle class.
While Estee Lauder is typically known for its dominance in the prestige market, it’s making significant inroads in the mass market as well. In South Korea it has seen double-digit growth, while Brazil and China have each gained in this segment by around 9%.
Travel retail, like the shops you see in the airport, has been a key growth driver for the company. Over the past four years, the company’s travel retail business has delivered 15% compound annual growth and now represents over 11% of overall revenue.
An even bigger driver of growth is e-commerce, which has achieved compound annual revenue growth of 24% and today represents 4% of its overall business. The company expects its online revenues to triple in the next decade, producing an even stronger bottom line.
On the other side of the coin, though, is a business that I’ll never quite understand. Blyth (NYSE:BTH) is in the direct selling business, hawking candles via PartyLite. It also owns 81% of ViSalus — a direct seller of weight loss products. Gee, there aren’t too many of those around, right?
The biggest headscratcher, though, is IncontinenceSupplies.com. This is Blyth’s Internet business dedicated to urinary incontinence. It isn’t the fact that someone would sell this type of product online that I have a problem with; it’s that Blyth’s main products are candles and weight-loss shakes … which have absolutely nothing to do with urinary incontinence.
It’s as if someone decided at head office that it needed more online revenue and this was one of the resulting ideas.
Worse still, a law firm specializing in investor rights is investigating whether Blyth executives issued misleading statements about ViSalus’ viability in order to hide problems in other areas of its business.
And in mid-March, Blyth also announced Q4 adjusted earnings that fell 21% decline year-over-year. The company has a history of negative earnings surprises and, while its buyback announcement might have propped up the stock temporarily, this isn’t a business you want to own long-term.
The Bottom Line
If you’re going to invest in a direct seller, Avon’s the better call than Blythe … but you could hardly do wrong by tryig a different route and spritzing on some Estee Lauder instead.
Either way, personal care product companies are on the way up right now. As long as you avoid the obvious duds, you could pocket some nice gains.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.