Just Take Warren Buffett's Money and Run, Avon


Avon Products (NYS: AVP) is getting a second chance.

Coty is back with a sweetened buyout offer for the consumer-direct marketer of cosmetics, fragrances, and other beauty products. Coty -- a beauty goods specialist itself -- is now offering to take Avon out at $24.75 a share. The $10.7 billion proposal is 6% higher than the $23.25 a share offer that Avon rejected last month.

In an interesting twist for Warren Buffett buffs, Berkshire Hathaway is listed as one of Coty's equity funding sources in the possible deal.

Will Avon shareholders look a gift buyout in the mouth?

Things haven't gone well for Avon since rebuffing Coty's first offer. The company went on to deliver an unimpressive quarterly report last week.

Revenue slipped 2% to $2.6 billion, and that's actually the good news. Gross margins got hammered, and adjusted income from continuing operations plunged 72% to a mere $45.7 million. Analysts were holding out for a lot more.

Avon also went ahead and replaced Andrea Jung, and while there's nothing wrong with hiring Sherilyn McCoy as its new CEO, that move will also make it less likely for Coty or anybody else to attempt a takeover if Coty gets shot down again.

Why would Avon keep fighting what is clearly a trend against its business? There may be value in Avon's products and brands, but not in the decaying consumer-direct model. The desire for folks to get hounded at work by someone that moonlights as an Avon rep or approached at a PTA meeting by an aggressive stay-at-home mom making money through Avon is waning.

That's not just an opinion.

Revenue fell in all of Avon's geographical regions outside of Latin America in its latest report, and the number of active Avon representatives in North America has declined by 10% over the past year.

This isn't a knock on the Avon reps, since we all know a few (though fewer than before). This isn't a knock on Avon's makeup, coloring products, fragrances, and skin care creams.

Outside of Tupperware (NYS: TUP) -- which is at least showing meager growth through innovation in kitchen storage containers -- this is just a model that's sorely out of place.

Even analysts have no idea how quickly the model is eroding. Let's take a look at the past year of earnings reports.


EPS Estimate



Q2 2011




Q3 2011




Q4 2011




Q1 2012




Source: Thomson Reuters.

It's not just that Avon has come up short each time out, it's that the disparity between what Wall Street thinks and how bad things are on Avon's bottom line is widening.

Let Coty take you away with Buffett's money, Avon.

Avon falling
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At the time thisarticle was published The Motley Fool owns shares of Berkshire Hathaway and Tupperware Brands. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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