We have downgraded our long-term recommendation on Avon Products Inc. (AVP) to ‘Underperform’ from ‘Neutral’ with a target price of $25.00 per share. Also, the company has a Zacks #5 Rank, implying a short-term ‘Strong Sell’ rating on the stock.
New York City based Avon Products directly sells cosmetics, fragrances, toiletries, jewelry, and accessories. The company markets to women around the world through 6.2 million independent sales representatives and is the world’s largest direct seller. The company’s products are classified under the following categories: Beauty, Beauty Plus, Beyond Beauty, and Health and Wellness.
However, Avon recorded feeble operating performance in the fourth quarter of 2010. The company’s earnings per share plunged 13.2% to $0.59 from $0.68 per share in the year-ago period. The decline was principally due to reduction in operating margin, which resulted from unfavourable product mix, rising commodity cost and a 27% sales decline in Venezuela.
Moreover, Avon ended fiscal 2010 with a long-term debt of $2,408.6 million, reflecting a debt-to-capitalization ratio of 59%, which is substantially higher, and could negatively influence the company’s credit worthiness and make it more vulnerable to the macro-economic factors and competitive pressures.
Additionally, the North American market continues to remain sluggish with volume falling 14.0% in the fourth quarter of 2010. Moreover, the company’s initiatives to change the product mix and reposition the business in the U.S. market will require significant expenditure to support increased advertising and promotional activities. This is likely to undermine Avon’s overall operating performance, moving forward.
Apart from this, Avon faces competition from a variety of products and product lines both nationally and globally. The beauty and beauty-related products industry is extremely competitive and the number of competitors and degree of competition in this industry varies extensively from country to country. Globally, Avon competes against products sold to consumers by other direct-selling and direct-sales companies and through the Internet and against products sold through the mass market and prestige retail channels. The major competitors of the company are L’Oreal SA (LRLCY.PK) and Revlon Inc. (REV).
Besides, the company is expecting a mid single-digit revenue growth in fiscal 2011, which can be achieved through strong field programs coupled with an innovative product pipeline.
As well, call it luck; on November 08, 2010, Avon sold out its entire ownership interest (74.67%) in Avon Japan to TPG Capital, otherwise the scenario could have been worst for the company due to the recent crisis in Japan.
AVON PRODS INC (AVP): Free Stock Analysis Report
REVLON INC-A (REV): Free Stock Analysis Report
Zacks Investment Research
