You have to admire the fact that Avon Products, Inc. (NYSE:AVP) continues to put on its optimistic game-face regarding its turnaround effort. After four straight years of shrinking revenue, a swing to a loss that continues to widen and a stock that’s down 76% from 2010’s peak prices, AVP shareholders are understandably getting a little frustrated.
Those flames of frustration were fanned on Thursday after AVP posted another round of disappointing quarterly numbers, sending Avon stock lower to the tune of 5%.
With no recollection of the last time AVP was truly “successful” and no end in sight to the weakening results, the time may have come to acknowledge Avon Products can’t be fixed as it stands right now.
On the other hand, one (relatively) fruitful way out of the mess AVP owners now find themselves in may exist.
AVP Misses the Target… Again
In Avon Products’ first fiscal quarter of 2015, revenue for AVP fell 18%, from $2.18 billion to only $1.79 billion. That figure also fell short of the top line of $1.83 billion analysts had been expecting.
On a per-share basis, Avon Products earned a profit of 4 cents per share, falling short of the expected income of 7 cents per share.
AVP cited the exceedingly strong U.S. dollar as a core cause for the setback, and to be fair, that’s been a common theme among many of this earnings season’s announcements. Investors are having a tough time swallowing the excuse, though, because — even factoring out the effects of disadvantageous exchange rates — sales were only up 1%.
AVP’s earnings report is a far cry from the turnaround that was supposed to be underway by this point in time. Indeed, it’s a major disappointment in light of the fact that current CEO Sherilyn McCoy was specifically recruited away from an executive position with Johnson & Johnson (NYSE:JNJ) back in April 2012 with the primary purpose of orchestrating a turnaround for Avon Products.
What’s Really Wrong With Avon Products?
Giving credit where it’s due, the fact that the turnaround effort hasn’t made much of a dent is not for a lack of effort. An improved recruitment model, the abdication of money-bleeding markets and cost-cutting layoffs are just some of the initiatives AVP has seen under McCoy’s guidance. None of those efforts have worked, however, because they don’t actually solve the true problem Avon Products faces now.
Here are those problems (in no particular order):
- Better competition from Wal-Mart Stores, Inc. (NYSE:WMT) and its ilk
- Competition from the internet
- Diminishing relative product quality (even if only perceived)
- A target market that’s being inundated to the point of numbness with other marketing messages
- A sales shtick that was once charming but is now passe because “that’s the way mom bought her Avon makeup”
These have broadly been taboo discussions about Avon Products, but the truth is the truth.
More importantly, for those who are holding onto hope that AVP might get its groove back, these are impasses for which there are no solutions.
Avon Products has three potential options here, each of which has been put on the table before.
First, AVP could sell the struggling North American division to a suitor that is capable of doing something with it that McCoy can’t. Second, Avon Products could put its entire global operation up for sale and say, “sayonara.” Or third, AVP could scale back (or even phase out) its representative model and instead place its brand products in retail stores where it would at least have a chance of competing with other brands.
Each option has upsides and downsides. None of the options suggests, however, there’s a lot of upside for Avon Products’ stock owners no matter which of the choices AVP makes. Worse, the longer Avon Products waits to decide, the more damage its brand name suffers.
A complete sale of the entire operation would serve as an “out” of a bad situation for all AVP owners. But, as 24/7 Wall St.‘s Paul Asnick recently opined, an offer of $10 per share is likely the absolute best current owners could hope for… miles away from the $22 per share offer from Coty Inc (NYSE:COTY) that Avon Products rejected in 2012.
A sale of just the North American operation would provide no immediate benefit to shareholders. It would, however, inject some much-needed cash into the coffers to fund new growth in overseas markets where Avon at least has a fighting chance. Even so, there’s no assurance its foreign operations can or will actually firm up the turnaround effort, even if the odds look better overseas.
A move into the traditional model of cosmetics marketing — and away from the sales-representative model –– is an interesting one. Sanford C. Bernstein’s Ali Dibadj recently explained:
“To monetize the North American business, the best thing to do would be to license the brand out.”
It’s a move that would cut commission expenses out of the operation, and streamline delivery. Moreover, there’s no “introductory period” necessary; Avon Products could immediately leverage its name. The downside to this option is, though, it could take some time to retrain consumers.
Weighing all the pros and cons of these options, the only path that’s truly plausible for the long haul AND maximizes shareholder value (by virtue of not letting it deteriorate the most) is licensing the AVP brand and moving the product into retail stores.
It’s an idea that’s diametrically opposed to something McCoy said a year ago, when she shared her vision for Avon Products while giving a lecture at George Washington University:
“We need to make sure we stay true to our core, which is direct selling, but make sure we contemporize it.”
What McCoy has failed to do at any point in time before or after making the remark, however, is explaining exactly what that looks like, and how AVP can train 6 million remote representatives to do it. Maybe that’s because it can’t be done. It’s time to quit trying and to quit pretending.
Yes, a move into retail venues will destroy Avon Products as we know it. It could also work against Avon stock for a while. It will also be very tough to do, simply because old habits are hard to break. Better to destroy Avon Products on your terms, however, than let the market destroy AVP on the market’s terms.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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