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Avon to Consolidate US Operations Into New York Facility

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Avon Products, Inc. AVP, which is rumored to be in takeover talks by Brazil’s Natura, plans to consolidate its U.S. operations into the existing New York facility as part of its strategy to streamline business. In doing so, the company will sell its offices at Rye, NY by 2019. This move is in sync with the company’s increasing focus on simplifying its U.S. operations. Further, this will lead to cutting down of workforce by nearly 100 employees. 


Management remains on track with its three-year Transformation Plan that was announced in January 2016. Avon is in the third year of its plan that mainly focuses on investing for growth, enhancing cost structure and improving financial flexibility. In this regard, the company expects to achieve cost savings of $65 million in 2018, with roughly $15 million generated in the second quarter. Furthermore, the company anticipates achieving a long-term target of delivering the mid-single-digit constant-dollar revenue growth and low double-digit operating margin.


In addition to generating cost savings, the company boasts a strong balance sheet and substantial liquidity. Apparently, the company lowered gross debt to about $1.6 billion as of Jun 30, 2018, through the early redemption of 2019 bonds. Backed by the efforts taken so far to improve balance sheet, the company is positioned to make investments in its business, while meeting its financial commitments.


However, Avon is facing headwinds from unimpressive top-line surprise trend, having missed sales estimates in six out of the trailing eight quarters. The disappointing sales trend can be attributed to soft Representatives growth. In the second quarter of 2018, the top line was impacted by lower Active Representatives, mainly in Brazil, Russia and Mexico, along with challenges in key markets, particularly in Brazil. Further, negative impact due to the trucker strike in Brazil hurt sales. 


While management has been aggressively trying to boost Representatives by enhancing delivery and service, besides improving retention levels, this might take some time. Looking ahead, the company expects modest improvement in revenue trends in the second half of 2018. However, the company believes there is lot of work to be done to restore the business and boost top-line growth.


We note that this Zacks Rank #3 (Hold) stock has gained 7.9% year to date compared with the industry’s growth of 1.4%. 



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