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Avon's China Unit Sale In Sync With 'Open Up' Strategy

Zacks Equity Research

Avon Products, Inc. AVP has signed an agreement with TheFaceshop Co., Ltd. — a subsidiary of LG Household & Health Care Ltd. — to divest its manufacturing operation in Guangzhou, China. TheFaceshop will purchase the entire stake of this manufacturing business worth net proceeds of $44 million. Notably, the transaction, which is likely to be concluded by February this year following approvals by customary regulatory authority, is in sync with the company’s "Open Up Avon" strategy.

Per the terms of the agreement, both the companies also agreed to sign a manufacturing and supply agreement. The second agreement states that the Guangzhou plant will make products for Avon's Chinese business and other markets as well as maximize its production capacity. Moreover, the Guangzhou factory will retain Avon's associates.

This latest agreement marks Avon's strategic shift to reinforce its business with best partnerships for competently manufacturing and marketing quality beauty products on a global scale. This move also strengthens the company’s foothold in the evolving Asian region, especially the Korean beauty market.

LG Household & Health Care Ltd. is the leading consumer goods and beauty company in South Korea, thus enabling Avon to grab higher share in China and other Asian markets. In the recent past, Avon has partnered with Korean innovation experts, Bonne, to launch its first K-beauty collection. These products harness the high performance, amazing texture and eye-catching designs that are iconic in the K-beauty products. Notably, the range of masks and hand creams uses top quality, advanced ingredients like Cica, Chaga mushrooms and Hydrogel. These masks give Avon an edge over other products in the market, making customer experience more luxurious and indulgent.

With these launches and partnerships, Avon is targeting the Korean beauty market, which is the home to skincare innovation. By 2020, the market is expected to reach $13.1 billion.

The agreement with TheFaceshop highlights Avon’s commitment to "Open Up Avon" strategy, which is aimed at bringing the company back on its growth trajectory. Driven by this strategy, it remains on track to attain the long-term financial targets for 2021. The plan mainly focuses on reviving its direct selling business, renovating the brand, enhancing e-commerce and other capabilities to aid a performance-driven transformation.

By 2021, management intends to generate total cost savings of $400 million backed by optimization of manufacturing and distribution; outsourcing efficiencies; zero-based redesigning of back-office functions; and managing revenues, interest and tax. It expects to invest roughly $300 million in commercial, digital & IT infrastructure projects. Additionally, the company aims to reinforce its financials, wherein its cash-generating abilities must exceed the investment plans. Also, it expects to achieve revenue growth in a low-single digit and margins in low-double digits by 2021.


 

In the past three months, shares of Avon have lost 4.1% compared with the industry’s 3.4% decline. Currently, Avon carries a Zacks Rank #3 (Hold).

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