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Avon Products Incorporated (NYSE:AVP) recently experienced one of the worst phases in its history. Although the company achieved a CAGR in revenues of 0.5% over five years, which is quite evident in the table below, majority of the regions experienced a negative growth in sales. AVP could only achieve a positive growth in revenues in Latin America, which has become the most important region for the company. However, even in Latin America, the company experienced a loss in revenues in the financial year. These figures look even more alarming given that the overall cosmetics market showed a growth of 4.6% in 2012.

Segment Revenues

(USD millions)

2008

2009

2010

2011

2012

CAGR

(5-Years)

Latin America

3,884.1

4,103.2

4,640.0

5,161.8

4,993.7

%age of Total Revenues

36.97%

40.21%

42.71%

45.71%

46.60%

Growth (YoY)

5.64%

13.08%

11.25%

-3.26%

6.48%

Europe, Middle East & Africa

3,071.2

2,777.9

3,047.9

3,122.8

2,914.2

%age of Total Revenues

29.23%

27.22%

28.06%

27.66%

27.19%

Growth (YoY)

-9.55%

9.72%

2.46%

-6.68%

-1.30%

North America

2,522.0

2,293.4

2,193.5

2,064.6

1,906.8

%age of Total Revenues

24.00%

22.47%

20.19%

18.28%

17.79%

Growth (YoY)

-9.06%

-4.36%

-5.88%

-7.64%

-6.75%

Asia Pacific

1,030.2

1,030.7

981.4

942.4

902.4

%age of Total Revenues

9.80%

10.10%

9.03%

8.35%

8.42%

Growth (YoY)

0.05%

-4.78%

-3.97%

-4.24%

-3.26%

Total

10,507.5

10,205.2

10,862.8

11,291.6

10,717.1

Growth (YoY)

-2.88%

6.44%

3.95%

-5.09%

0.50%

Source: Avon Annual Report 2012

Avon's Plans

Avon in its most recent annual report stated that the company would be initiating a cost saving plan, in order to bring down cost by USD 400 million till 2016. The $400M Cost Savings Initiative includes a global headcount reduction and related actions, as well as an exit from the South Korea and Vietnam markets. The company is also implementing its restructuring programs started in 2005 and 2009. These steps were aimed at bringing efficiency in the company's operations and allow it to achieve a sustainable growth. In this article we would be examining the effectiveness of the initiatives and the future outlook of the company post restructuring.

The Cost Structure

The company's revenues declined sharply in 2012 due to unfavorable foreign exchange movements, a decline in representatives (which was slightly offset by larger average orders) and weak macroeconomic environment. The company's largest sector, Latin America, showed an increase in revenues of 5%, after adjusting for exchange rate fluctuations but AVP was unable to sustain its market share in the mature markets of Europe and North America.

USD millions

2008

2009

2010

2011

2012

CAGR

Total Revenues

10,508

10,205

10,863

11,292

10,717

Growth (YoY)

-2.88%

6.44%

3.95%

-5.09%

0.50%

Adjusted Cost of Sales

3,946

3,888

4,032

4,138

4,165

Growth (YoY)

-1.47%

3.70%

2.64%

0.65%

1.36%

%age of Total Revenues

37.55%

38.10%

37.11%

36.64%

38.86%

Adjusted SG&A Costs

5,346

5,456

5,677

5,996

5,860

Growth (YoY)

2.07%

4.04%

5.63%

-2.27%

2.32%

%age of Total Revenues

50.88%

53.46%

52.26%

53.10%

54.68%

Plan Implementation Costs in Selling Costs

3.1

0.3

9.5

11.2

4.5

Plan Implementation Costs in SG&A

56.2

19.8

71.2

28.8

120

Source: Avon Annual Reports 2008-2012

Over the years, the company has been able to curb its Cost of Sales and SG&A Costs, however due to declining revenues the company was unable to reflect significant improvement in overall financial results. Having said that the substantial decline in the company's adjusted SG&A costs (adjusted for cost related to plans such as restructuring and cost saving initiatives) indicates that AVP is surely on the right track.

Capital Structure and Financial Strength

USD millions

2008

2009

2010

2011

2012

Total Asset

6,074.0

6,823.4

7,873.7

7,735.0

7,382.5

Total Shareholder Equity

712.3

1,312.6

1,672.6

1,585.2

1,233.3

Total Debt

2,486.7

2,445.0

3,136.2

3,308.4

3,195.9

Long-Term Debt

1,456.0

2,307.2

2,408.6

2,459.1

2,623.9

Cash from Operations

733.9

754.7

689

655.8

556.1

Ratios

2008

2009

2010

2011

2012

Debt/Equity

3.49

1.86

1.88

2.09

2.59

Financial Leverage

8.53

5.20

4.71

4.88

5.99

Interest Coverage

13.3

9.8

11.9

9.0

3.1

Source: Avon Annual Reports 2008-2012 and Morningstar.com

AVP's financial condition has deteriorated, especially over the past 2 years. The company has shown a steady increase in its debt levels primarily for the purpose of financing its restructuring and cost saving initiatives. The company has accumulated its total debt and long-term debt at an average rate of 6.5% and 15.86% respectively. The company's Leverage ratio and the Debt/Equity ratio have also increased and for the very reason it now operates at a significantly higher leverage than the average industry. The interest coverage ratio has also declined primarily due to sharp decline in earnings because of decreasing revenues and increasing costs associated with restructuring and cost saving plans.

Looking at the future outlook of the company, it would require further sources of finance in order to cope with the expected commitments especially in 2013 and 2014, when these commitments are expected to be more than USD 1.1 billion. This is a serious problem for the company as it has seen a continuous decline in its cash from operations indicating that this source of cash has become less reliable. The availability and cost of external sources of finances would become a problem for the company in the coming years.

DuPont Analysis

ROE

ROA

X

Leverage Ratio

2012

-3.05

-0.56

5.99

2011

31.83

6.58

4.88

2010

41.4

8.25

4.71

2009

64.27

9.7

5.20

2008

126.26

14.85

8.53

Tax Burden

X

Interest Burden

X

Operating Margin

X

Asset Turnover

X

Leverage Ratio

2012

-0.17

0.70

2.94%

1.42

5.99

2011

0.71

0.87

7.57%

1.45

4.88

2010

0.63

0.88

9.88%

1.48

4.71

2009

0.68

0.91

9.80%

1.61

5.20

2008

0.71

0.92

12.53%

1.81

8.53

Source: Morningstar.com

The company has experienced a sharp decline in its ROE since 2008. Lowering profitability and declining revenues could be stated as the general reasons for this trend. According to the DuPont analysis the company's ROE is declining due to a decrease in ROA from 14.85% in 2008 to -0.56% in 2012. This in turn is attributable to a decline in operating margin, from 12.53% in 2008 to 2.94% in 2012. A decrease in the interest burden of the company is showing a decrease in interest charges as a proportion of total costs.

Future Outlook

Although the company is on the right track in terms of reducing costs and improving operational efficiency, but much still needs to be done. The company's future is not only dependent on how efficiently it operates its business but also on how effectively it can avail the growth opportunities.

Currently the company is heavily dependent on mature markets of North America and Europe, approximately 40% and has shown weak performance in these regions. The company has established itself in the emerging market of Latin America, which grew by around 10% yet completely ignored the second-fastest growing market of the Asia Pacific Region showing a growth of around 9.3%. The company would have to shift its focus from the developed markets towards these rapidly growing markets in order to achieve the sustainable growth rate that the company wishes to achieve.

In my opinion there is still a long way to go before the company starts achieving the desired results. Also the company has recently decreased its dividend payout ratio. Due to the reasons stated in this article and the uncertainty regarding the outcomes of its plans, I would give a sell recommendation on AVP.

Source: Avon - Still A Long Way To Go