by Gerelyn Terzo | June 24, 2014 3:42 pm
Avon Products (AVP[1]) on Tuesday revealed it is slashing its workforce by about 2%, or 600 jobs[2]. The layoffs, much of which will occur in its corporate entity and throughout North America, are on top of 1,000 job cuts announced last year.
Avon is in the midst of a broader corporate restructuring, and the workforce reductions represent AVP’s latest attempt to drive its top line higher and return to (and maintain) profitability. But investors aren’t impressed by the continued strategy, sending shares marginally lower during Tuesday’s trading.
Lackluster growth has pressured the global direct seller of cosmetics, keeping its stock in a narrow range for the past year. Are investors right in balking at the latest moves, or is Avon taking adequate steps to right its sinking ship?
Before we examine what’s troubling Avon today, let’s take a look back. AVP went from surpassing its financial targets and being profitable prior to the global economic recession to letting revenue slip 10% in 2013 to about 2007 levels at $10 billion and reporting a financial loss from continuing operations of $1 million, or a penny per share.
Avon has been riddled with problems, not the least of which was a bribery probe for which the company settled with the feds for $135 million. The end result has been a 29% decline in shares during the past 12 months and a stock that can’t seem to break out of the $14-$23 range — and in fact has been trading at the lower end of that range for much of this year.
Avon is banking on its current $400 million restructuring effort to revive its ailing shares. Avon expects the job cuts, for which it will take charges of as much as $50 million, to yield savings of up to $55 million annually and for the overall restructuring to result in savings of between $240 million and $250 million based on the turnaround efforts taken so far.
The problems for Avon appear to be twofold: a lack of strategic direction in key markets like Mexico, Brazil and Russia, in addition to heightened competition in the cosmetics space.
For instance, in Avon’s recently reported first quarter, it revealed revenue declines across Mexico, Brazil and Russia of 12%, 10% and 23%, respectively (on a constant-dollars basis, Brazil revenue grew 5%). This follows a similar performance in the fourth quarter, when the company generated revenue declines of 15%, 3% and 7% in these countries, respectively.
Avon blamed a “decrease in active representatives” as well as “lower average order[s]” and geopolitical pressures in Russia for the revenue slowdown across regions.
What’s troubling is that the revenue slowdown is occurring in the very markets that Avon has identified as being “critical to the long-term health of the business,” according to Citigroup analyst Wendy Nicholson on the company’s fourth-quarter earnings call. AVP is a global company, and is bound to face headwinds in any one or more regions at a given time, so it must figure out a way to execute despite this fact.
A major thorn in its side is Sephora, which is owned by LVMH (LVMH[3]). In its 2013 annual report, LVMH seemingly bragged at how well its cosmetics division is doing when it rubbed salt in Avon’s wounds by saying:
“Revenue for selective retailing increased by 13% and by 17% on a constant consolidation scope and currency basis. The main drivers of this performance were Sephora, which saw very appreciable growth in revenue across all world regions, and DFS, which made excellent progress…”
Avon expects to be profitable in North America in 2015, where much of the recent job cuts will occur; and the stock trades at a forward P/E of about 18.
You might think that now is the time to acquire AVP shares in hopes of being rewarded from the company’s restructuring efforts, including the most recent job cuts. But as pointed out by Citi’s Nicholson, Avon’s troubles appear to be on execution, which is not something that can be fixed overnight.
Until there are clear signs of recovery in North America and emerging markets, AVP stock remains a risky play.
Instead, you might want to consider looking into LVMH.
As of this writing, Gerelyn Terzo did not hold a position in any of the aforementioned securities.
Source URL: https://investorplace.com/2014/06/avon-products-avp-stock/
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