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Avon (AVP) Stock Rallies on Likely Takeover Bid From Natura

Zacks Equity Research

Avon Products Inc. AVP rallied more than 10% after its Brazilian rival, Natura & Co. confirmed about early takeover talks between these two. Sources revealed that Natura is also considering acquiring the North America business of Avon, which was split into two by selling 80% stake to the private-equity firm, Cerberus Capital in 2016, as part of the deal.

Notably, the U.S. business had been a troubled segment for Avon, as door-to-door selling business lost footing in the country. This was the key reason why Avon sold this business to Cerberus. Following this, Avon moved the headquarters to London, citing opportunities for growth in international markets, particularly Brazil. Notably, the direct-selling business still holds prominence in Brazil, unlike the United States.

Avon confirmed a possible transaction with Natura while it revealed no further details. Moreover, Natura filed with the securities exchange as a confirmation of discussions between these two companies. However, we would have to wait for more details on the deal, which remained under covers.

As we all are aware, Avon is focused on transforming the business through the ‘Open Up Avon’ strategy. The strategy revolves around the company’s aspirations to turnaround the business while driving long-term value for shareholders.

As part of the strategy, it focuses on reviving the direct-selling business, renovating the brand, enhancing e-commerce and other capabilities to aid a performance-driven transformation. Recently, it also announced plans to improve operating efficiency, slash inventory levels and reduce portfolio complexity by certain restructuring efforts, including a 25% decrease in Stock Keeping Units (SKUs), a 15% reduction in inventory levels and 10% job cuts. These jobs cuts are estimated to fetch Avon annualized pre-tax savings of nearly $97 million by 2019 end.

All these efforts are likely to help the company simplify operations and generate higher cost savings. By 2021, it intends to generate total cost savings of $400 million by expanding manufacturing and distribution, outsourcing efficiencies, zero-based redesigning of back office functions, reducing certain facilities, and managing revenue, interest and tax. Backed by this strategy, Avon accomplished cost savings of roughly $40 million in 2018.

In addition, management expects to invest roughly $300 million toward commercial, digital & IT infrastructure projects. Investments in digital & IT infrastructure initiatives also include reinforcing the company’s balance sheet, where its cash-generating abilities must exceed investment plans. Through this strategy, it expects to achieve low-single-digit revenue growth and low-double-digit margin expansion by 2021.

Driven by the positivity surrounding the Open Up strategy, Avon’s shares have soared 104% in the past three months, outperforming the industry’s growth of 24.3%. However, this Zacks Rank #5 (Strong Sell) stock continues to struggle with negative earnings and sales surprise trends, owing to soft Representatives growth. It delivered negative earnings surprise in 11 of the last 14 quarters. It has also witnessed sales miss in seven of the past 10 quarters.


You May Count on These Better-Ranked Cosmetics Stocks

The Estee Lauder Companies Inc. EL has an impressive long-term earnings growth rate of 12.5% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Inter Parfums, Inc. IPAR has a Zacks Rank #2 (Buy), with an expected long-term earnings growth rate of 12.3%.

Revlon, Inc. REV, also a Zacks Rank #2 stock, has an expected long-term earnings growth rate of 6%.

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