By Katey Stapleton
Fresh-faced beauties amped to buy springtime makeup can always rely on the likes of beauty distributors such as Avon Products (AVP), L'Oreal (LRLCY.PK) and Estee Lauder (EL) to make them gorgeous. In exchange, it appears the retailers themselves can rely on repeat customers and positive management strides for the coming year to produce top earnings.
Among the many changes the beauty industry is set to see throughout 2012, Avon named Sheri McCoy to the CEO position yesterday, a move that has analysts stirring with excitement. The market is set to accept this management switch-up with open arms, as McCoy has been known to revamp the palette of companies in the past.
According to a research report published yesterday by Bank of America, "Ms. McCoy was hired from [Johnson & Johnson (JNJ)], where she was Vice Chairman, Executive Committee, and a member of the Office of the Chairman, with responsibility for the Pharmaceutical and Consumer business segments (60% of JNJ's $65 billion in sales). Ms. McCoy had reporting responsibility for Pharma since 2009 and, more recently, had taken over responsibility for the Consumer business in an effort to improve business trends. Ms. McCoy was one of two finalists for the JNJ CEO position and is an extremely well-respected leader with turnaround experience."
As several challenges remain in the way of Avon's predicted improvement, (unorganized supply chain, under-pressure growth in international markets, tarnished U.S. brand equity), it is obvious the company chose the right person for the clean-up job.
"Long-term potential remains significant. With the right leadership and provided cash flow challenges are related to operational challenges and not systemic, we see significant upside to organic sales, gross and operating margins and free cash flow noting that two-thirds of world's population is still below middle class suggesting a significant beauty direct selling opportunity as middle class development accelerates. Maintain Buy and $26 price target," Deutsche Bank said in a research report released yesterday morning.
Avon's new management may want to take a tip from L'Oreal's cutting floor, as the company recently announced a fresh venture that is sure to increase sales and customer loyalty. The French cosmetic/hair product distributor has recently unveiled its new state-of-the-art global hair research center in Paris.
This development coupled with a positive outlook for the company's 1Q12 results is sure to set off an upgrade frenzy, according to J.P. Morgan.
"A solid start in Q112 should support management's positive FY12 outlook and lead to earnings upgrades thanks to a reappraisal of both top line and margin expansion. At 11.3x EBITDA12e, the stock has closed the discount with peers, though its superior EPS growth profile driven by a strong margin rise should lead to a premium rating," the research firm noted yesterday.
Another top-rated pick in the beauty sector, Estee Lauder, is experiencing positive sales in its duty-free airport stores. The Gwyneth Paltrow-backed brand is "a terrific long-term growth story, given its potential to both expand its profit margins and drive strong revenue growth. However, given its lofty valuation, we maintain our Neutral rating on the stock," Citi recently said.
Currently, beauty brands are either in a state of success or failure with very few operating in between. Over coming months, it will be interesting to follow the trends and discover who stays on as a top-pick and who gets left behind.
AVP is currently trading at $22.26, up +27.42% YTD, while LYLCY is trading at $23.34, up +12.05% YTD and EL is currently trading at $60.75, up 8.17% YTD.
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