Avon Is Still a Sell, But Sally Beauty and Nu Skin Could Be Worth Buying

Avon Products and Nu Skin use multi-level Marketing, or MLM, and hence both are exposed to the risks and controversies associated with this business model. In comparison, Sally Beauty Holdings has more of a conventional marketing model which is miles away from the controversy-prone MLM scheme of things.

Let's see which business model has been clicking and where investors should consider putting their money.

Avon in trouble
Avon markets its products globally through more than 6.2 million independent sales representatives. It is the world's largest direct seller of beauty products. Of late, developments at Avon haven't been encouraging. Legal troubles, currency devaluations, and steep sales declines in major markets have been troubling the company.

Moreover, Avon's MLM model isn't working in its favor and this is evident from the way the stock has plummeted after the company adopted the MLM model in 2005. In comparison, Nu Skin has gained more than 600% during the same period as shown below. This means that Avon is doing something wrong.

AVP Chart

AVP data by YCharts

In the recently reported third quarter, Avon reported a revenue decline of 7% and a sales representative decline of 3% versus the same quarter last year. In constant currency terms, revenue was down 1% to $2.3 billion. One of the major concerns was that the SEC was threatening to impose larger-than-expected penalties in regard to a bribery probe that has been running since 2008.

Avon's Asia Pacific revenue declined 19% on a constant dollar basis, mainly due to continued weakness in China as well as weakness in active representatives in other markets. China has a ban in place on all Amway-type pay plans, so MLM as such remains outlawed in the country. Many other countries in Asia have also started looking closely at such operations and they are also evaluating bans .

North America, which constitutes 20% of revenue for Avon, was also down 18% in constant-dollar terms and active reps in this location were down by 16%. The company doesn't see any dramatic improvement in the fourth quarter. A turnaround will be a long-term effort. Moreover, with declining sales in Asia Pacific, EMEA, and North America, getting back on track will be very tough for Avon.

Nu Skin on a roll
While Avon faces a challenging environment and it has an air of uncertainty lurking around its turnaround efforts, Nu Skin reported solid third-quarter results recently. It has already achieved its yearly sales target of $1 billion that it set for itself in Greater China, ahead of schedule. In addition, Nu Skin witnessed rapid growth in markets like Hong Kong and Taiwan, where it clocked growth rates of 69% and 79%, respectively .

Nu Skin reported a jump of 76% in revenue year-over-year to $928 million, crushing consensus estimates of $815 million by a huge margin. This growth was driven mainly by the performance of its largest segment -- Greater China -- where revenue surged 240%. On the back of strong revenue growth, diluted earnings per share, or EPS, came in at $1.80 which represented growth of 107% versus the same quarter a year ago. Nu Skin handsomely beat the consensus earnings estimate by 27%.

Nu Skin issued upbeat guidance for fiscal 2013 as a result of its strong performance in the third quarter. The company now expects 2013 EPS between $5.77-$5.82 and revenue in the range of $3.18-$3.21 billion. Going forward, analysts expect 66% growth in 2013 and 28.4% growth next year . In addition, for the next five years a growth rate of 28.8% per annum is expected for Nu Skin which compares to the industry average of 13.98%.

Both Avon and Nu Skin have similar business models, but one company is going through all sorts of woes and the other is flourishing. This indicates that perhaps the bribery scandal that is under investigation and the possibility of a heavy penalty from federal agencies could also be affecting Avon's performance.

Sally Beauty: The conventional pick
On the other hand, Sally Beauty is a large retailer and distributor of professional beauty supplies with 4,669 stores around the world. During fiscal 2013, it posted revenue of $3.6 billion, which was up 2.8% from fiscal 2012. Adjusted earnings per share came in at $1.42, representing an increase of 4.2% over 2012.

However, for the quarter, Sally Beauty missed the consensus estimate by $0.01 and EPS came in at $0.38. This was the fourth quarter in a row with an earnings miss. The miss was a result of the weak U.S. retail environment. Going forward, Sally Beauty's guidance for 2014 could be a cause of concern too as the company projected same-store sales growth in the range of 1% to 3%.

Sally has more exposure to the domestic market than its peers, so it has less leverage to make up for deficiencies in the U.S. with its international business. In contrast, Nu Skin receives the lowest share of its revenue from the North American segment, and with strong performance in Greater China it looks set to surge ahead.

Where to invest?
Investors who are looking to invest in these beauty companies should drop Avon altogether from their watchlists as the company is in trouble. The choice comes down to either Sally Beauty or Nu Skin. Conservative investors would be more inclined toward an investment in Sally Beauty, as it has a more conventional business model and its P/E ratio of 18.41 is lower than that of Nu Skin.

Those who are looking for rapid growth should definitely give Nu Skin a thought. The company is growing rapidly in China and it has also raised its guidance. Nu Skin is more expensive than Sally Beauty at a P/E of 26.49 but it also has a better growth rate. So, both Sally Beauty and Nu Skin look like good investment options, depending on investors' risk profiles.

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The article Avon Is Still a Sell, But Sally Beauty and Nu Skin Could Be Worth Buying originally appeared on Fool.com.

Fool contributor Prabhat Sandheliya has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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