Avon Products Inc. (NYSE:AVP), a manufacturer and marketer of beauty and related products, has not exactly been the prettiest stock in the market. So far this year, the stock has fallen nearly 15% and trades down 30% over the past 52 weeks. The company's Chinese bribery scandal and soft performance has left the stock trading at levels that it hasn't seen since the market crash in 2008-2009.
While the stock might appear ugly on the surface, the replacement of CEO Andrea Jung with Sheri McCoy in 2012 and management's subsequent turnaround plan could finally be starting to pay off. Investors may want to take a second look at the stock given these promising turnaround plans, as well as the stock's attractive valuation and improving fundamentals over the past few quarters.
CEO Sheri McCoy has taken a number of steps to turn around Avon's soft performance and improve its underlying fundamentals. After refinancing the company's debt and improving cash flow, management refocused on profitable markets and exited areas like South Korea, Vietnam, and Ireland, while growing its business in Latin American and Middle Eastern/African countries.
In June, the company announced that it would continue to "right size" its cost structure by cutting its global headcount by 600 positions - largely in the North American business unit - to achieve annualized savings of $50 million to $55 million. The total approved cost-cutting actions to date are expected to generate before-tax cost savings of approximately $240 million to $250 million.
Ms. McCoy also hired Tupperware Brands' (NYSE:TUP) Pablo Munoz to head the company's struggling North American operations. Under his guidance, the company plans to reduce representative attrition - a key problem in North America - by providing them with greater earnings opportunities, while improving product pricing by removing products across overlapping categories.
In the end, the reduced representative attrition and improved pricing could help boost top-line revenue, while the $240 million to $250 million in cost-cutting could reduce expenses and bolster its bottom-line net income. According to a recent article on The Street, analysts feel that the turnaround strategy could help earnings per share reach a $1.40 level that could imply a $25.00 per share valuation.
Rep Growth Risks Remain
Avon Products' largest risk stems from its recruiting efforts for representatives, particularly in North America. In a recent conference call, Wendy Nicholson of CitiGroup Research called the decline in reps "kind of stunning", particularly in the United States. CEO Sheri McCoy admitted that a lot of work remains and that management continues to work to find ways to boost the rep numbers.
"What we're still seeing is that we have a lot of work to do in terms of getting sales leaders focused on recruiting, and they are, but also working to make sure that we're retaining representatives … One of the areas that we're spending a lot of time on is looking at how do we do a better job of recruiting and do it in a way that attracts people that want to stay with Avon."
On a related note, the market is concerned that attracting new reps may involve offering greater discounting. Ms. McCoy hinted on the same conference call that management continues to experiment with the depth and frequency of discounts, particularly in the skincare space where they are focusing. These decisions could ultimately also influence top-line revenue and bottom-line net income.
"A lot of work has been done in North America, evaluating what's the appropriate depth of discount, the frequency of discount. And in some cases, we may have pushed too far where we've cut it. Perhaps, we're not giving enough frequency of discount. And we've done a lot of work. As we look at rep count for the year, we can't comment on that right now as it relates to the total company."
Management's success in addressing these concerns will ultimately determine whether its turnaround is sustainable or not. After all, cost cutting tends to only help in the short term, with top-line revenue growth being necessary to generate long-term shareholder value. Rep growth and pricing are the two most important factors to watch in determining the likelihood of that outcome over the coming quarters.
Avon Products stands at an interesting point in its corporate history. After experiencing a prolonged rough patch, management has managed to significantly cut annualized expenses and return the company to profitability. Investors willing to assume the risks associated with a turnaround may want to take a closer look, while paying particularly close attention to rep growth on the top-line.
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