Hey, People Who Pushed Avon Shares up 22% This Week: It’s Still the Door-to-Door Business
Looking back, 2011 and 2012 proved to be the years in which once-iconic brands stumbled, leading at least some of them to teeter upon the edge of extinction. Take JC Penney (JCP), for instance, whose much-anticipated overhaul has been an almost-unmitigated disaster, with shoppers staying away in droves. Best Buy (BBY) made its name by providing consumers with pretty much any electronic gadget or gizmo that they could dream of, at an affordable price, only to discover that Internet retailers could do the same with far lower overhead. And now BlackBerry, as the former Research in Motion (BBRY) prefers to be known, in honor of the once bleeding-edge phone/e-mail device it pioneered, is struggling to retain its relevance in the smartphone era.
These high-profile companies may have grabbed the headlines, but other iconic names are continuing to wage their own wars, and losing ground steadily. Among them is Avon Products (AVP), once so well known that its ad slogan, “Ding, dong; Avon calling!” became a catchphrase across North America. The problem is that these days, too few consumers are at home and people don’t have enough leisure time to peruse thick catalogs of beauty products to make Avon’s traditional business model as effective as it once was. The level of competition is also higher, with consumers able to snap up a wider array of cosmetic products on routine trips to the local drug store, the booming Ulta (ULTA) chain – or even online. That in turn creates a spiral, making it harder for the company to recruit sales staff as skillful and motivated as they once were. That spells trouble for Avon, which still relies on direct sales (even its online sales are routed to and handled by individual sales reps) for most of its revenue.
The nature of some of its woes can be seen in the chart above. In the 2011/2012 holiday season, sales peaked at a lower level than in the prior year, and didn’t increase at all during this past holiday season. Its earnings have followed a similar pattern. Meanwhile, its operating profit margins on a trailing 12-month basis has plunged to a five-year low of about 7.2%, which some analysts calculate to be about half of the industry average.
Of late, the company has succeeded in cutting its costs at a greater rate than its revenues are falling. But that isn’t going to be enough to make Avon look more appealing to shareholders or prospective investors, and a big part of the problem is the legacy of the events that buffeted the company last year. First of all, Avon bungled an offer of $24.75 a share from Coty – today, the stock trades at $20.79 a share and has been as low as $13.75. Then came a bribery scandal affecting Avon’s operations in some overseas markets, followed by an FDA letter warning the company of marketing missteps. Add that to turmoil at the top – CEO Andrea Jung was pushed out of that job to be replaced by Sherilyn McCoy last April, and Jung most recently stepped down as chairman, as well, after being dubbed one of the five worst CEOs of 2012 by Bloomberg BusinesWeek.
The market has responded favorably to these changes, and in particular to the assumption of the role of chairman by Fred Hassan, who oversaw a turnaround during his tenure at the helm of privately-held Bausch & Lomb. But the real drama in Avon’s share price came early this week, as seen in a stock chart, when the stock soared 20.3% in the wake of a hefty positive surprise in the form of the company’s fourth-quarter earnings.
Whether it was the fact that the results were better than expected or the relatively upbeat comments from management, investors experienced a sudden surge of enthusiasm for Avon’s shares. It’s slightly odd, given that the company reported a loss per share of 37 cents for the period (compared to a loss of a penny in the year earlier period), although that was attributable to restructuring charges, layoffs and other one-time events. Still, sales in the beauty business dipped 2%, and the company’s silver jewelry retailing unit, Silpada, saw revenue fall 18%. Sales in Latin America edged slightly higher – a good sign, given that much of Avon’s future growth prospects lie outside the United States – but the devaluation of the Venezuelan currency resulted in a $50 million blow to the company’s bottom line and reminded investors of the risks associated with relying on overseas markets for growth, especially in an uncertain economic climate with the U.S. dollar remaining relatively strong.
The quarterly results may have been encouraging, and the comments during the conference call certainly were. But that doesn’t mean that Avon has proven that a turnaround is underway, much less that any such turnaround would prove to be sustainable. Low expectations – indeed, the conviction that any earnings surprise would be of the unpleasant variety – are what accounted for this sudden surge in the stock price. At its current price, Avon’s stock trades at more than six times book value, while the dividend yield is a meager 1.2% -- neither the hallmarks of a great value stock. If Avon’s shares are calling to you at the current prices, it might be better to put the pillow over your heard to drown out the siren’s call.
Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at editor@ycharts.com.
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