Why Avon Will Never Be Great Again
Investors are starting to realize that when it's Avon Products (AVP) calling, it's probably best not to answer.
The consumer-direct marketer of cosmetics, fragrances, and other beauty products delivered another unflattering quarterly report this week.
Revenue declined 2% to $2.6 billion, but it gets uglier as you work your way down to the bottom line. Cascading gross margins and investments in global initiatives that are only delaying the inevitable are gnawing away at Avon's profitability. Adjusted income from continuing operations plummeted 72% to $45.7 million -- or $0.10 a share.
That's bad, especially when analysts were holding out for a profit of $0.28 a share.
A Basketful of Misses
Avon has become a bit of a hot mess lately.
Andrea Jung finally stepped down as CEO last week, yielding the seat to Sherilyn McCoy. Jung was the first female CEO in Avon's 126-year history, and that's an interesting distinction for a corporation that bills itself as "the company for women." Unfortunately for Jung, the company's poor stateside performance and allegations of bribery to foreign officials made her an easy target.
She obviously had her shortcomings, but it was largely a case of crummy timing.
Several decades ago, Avon made perfect sense. Many wives stayed at home, and some overprotective husbands didn't want them out shopping. Along came Avon with its growing fleet of representatives offering makeup, coloring products, and skin-care creams. Between the trailblazing women who signed up to be Avon reps and the customers who welcomed them into their homes, the model rocked for a long time.
Avon was to cosmetics what Tupperware (TUP) is to kitchen storage containers. Both models feel sorely out of date in this day and age, but at least Tupperware continues to grow through innovative products. Yes, Avon has plenty of proprietary products, but we live in a copycat world where online retailers with lean overhead can undersell Avon when it comes to mainstream beauty-care products.
This isn't just an opinion. Revenue fell in all of Avon's geographical regions outside of Latin America, where machismo -- let's be frank -- is a prevalent though inevitably fading component of some of the region's cultures.
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Before one argues that gender liberation bodes well for Avon customers turning into aggressive and productive field agents, let's fly back to North America, where the number of active Avon representatives has declined by 10% over the past year.
Avon, despite the company's notable efforts to reposition itself in pursuit of a turnaround, will continue to meander as it waddles toward irrelevancy with every passing year.
Wall Street Misses the Memo
You have to wonder what analysts have been thinking in assessing Avon's prospects.
Watching too much Mad Men, perhaps?
This isn't the first time that they have overestimated Avon's earnings potential, thereby underestimating the problem. Let's go over the past year of earnings reports.
EPS Estimate | EPS | Surprise | |
Q2 2011 | $0.50 | $0.49 | (2%) |
Q3 2011 | $0.46 | $0.38 | (17%) |
Q4 2011 | $0.51 | $0.39 | (24%) |
Q1 2012 | $0.28 | $0.10 | (64%) |
Source: Thomson Reuters.
Can you see the problem? It's not just that Avon has come up short on the bottom line every single quarter over the past year. It's the trend of the growing gap between what Wall Street expects and what Avon delivers.
Wall Street is getting dumber with every passing quarter in failing to diagnose the problem with Avon.
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These same pros see Avon's sales falling only slightly this year. They see earnings falling to $1.47 a share after ringing up $1.64 a share in 2011. It's a safe bet that Avon will earn less than the analysts are predictin, and it's hard to take seriously projections of profitability growing to $1.62 a share next year.
Avon hasn't even bottomed out. Why should we take analysts forecasting a turnaround seriously? This is a company that earned more than $2 a share during the recession-challenged 2008, but it's not the same company that it was then, and the chances are slim that Avon's throwback model will bounce its way back into popularity.
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This isn't a knock on the people who lean on Avon for income.
Every Avon rep that I have met over the years has been amazing. Everything that I've read about McCoy is encouraging. She's a former executive at Johnson & Johnson (JNJ), which beyond pharmaceuticals and baby shampoo is also the company behind Neutrogena, Aveeno, Lubriderm and other beauty products. However, Avon is simply stuck with an outdated business model that will keep fading over the years until the weight of its balance sheet -- which as of now sports a reasonable $2.2 billion net debt position -- crushes the company.
Avon rebuffed a buyout offer last month from beauty products specialist Coty. Really? This is the kind of arrogance that can cost a company. If shareholders feel that better offers will come or that Avon will bounce back on its own, they may as well join the analysts on the couch watching AMC on Sunday nights -- living in denial and living in the past.
Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Johnson & Johnson and Tupperware Brands. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, as well as creating a diagonal call position in Johnson & Johnson.
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