Why Avon Will Never Be Great Again

×
AvonInvestors are starting to realize that when it's Avon Products (AVP) calling, it's probably best not to answer.

The consumer-direct marketer of cosmetics, fragrances, and other beauty products delivered another unflattering quarterly report this week.

Revenue declined 2% to $2.6 billion, but it gets uglier as you work your way down to the bottom line. Cascading gross margins and investments in global initiatives that are only delaying the inevitable are gnawing away at Avon's profitability. Adjusted income from continuing operations plummeted 72% to $45.7 million -- or $0.10 a share.

That's bad, especially when analysts were holding out for a profit of $0.28 a share.

A Basketful of Misses


Avon has become a bit of a hot mess lately.

Andrea Jung finally stepped down as CEO last week, yielding the seat to Sherilyn McCoy. Jung was the first female CEO in Avon's 126-year history, and that's an interesting distinction for a corporation that bills itself as "the company for women." Unfortunately for Jung, the company's poor stateside performance and allegations of bribery to foreign officials made her an easy target.

She obviously had her shortcomings, but it was largely a case of crummy timing.

Several decades ago, Avon made perfect sense. Many wives stayed at home, and some overprotective husbands didn't want them out shopping. Along came Avon with its growing fleet of representatives offering makeup, coloring products, and skin-care creams. Between the trailblazing women who signed up to be Avon reps and the customers who welcomed them into their homes, the model rocked for a long time.

Avon was to cosmetics what Tupperware (TUP) is to kitchen storage containers. Both models feel sorely out of date in this day and age, but at least Tupperware continues to grow through innovative products. Yes, Avon has plenty of proprietary products, but we live in a copycat world where online retailers with lean overhead can undersell Avon when it comes to mainstream beauty-care products.

This isn't just an opinion. Revenue fell in all of Avon's geographical regions outside of Latin America, where machismo -- let's be frank -- is a prevalent though inevitably fading component of some of the region's cultures.



Before one argues that gender liberation bodes well for Avon customers turning into aggressive and productive field agents, let's fly back to North America, where the number of active Avon representatives has declined by 10% over the past year.

Avon, despite the company's notable efforts to reposition itself in pursuit of a turnaround, will continue to meander as it waddles toward irrelevancy with every passing year.

Wall Street Misses the Memo

You have to wonder what analysts have been thinking in assessing Avon's prospects.

Watching too much Mad Men, perhaps?

This isn't the first time that they have overestimated Avon's earnings potential, thereby underestimating the problem. Let's go over the past year of earnings reports.

EPS Estimate

EPS

Surprise

Q2 2011

$0.50

$0.49

(2%)

Q3 2011

$0.46

$0.38

(17%)

Q4 2011

$0.51

$0.39

(24%)

Q1 2012

$0.28

$0.10

(64%)

Source: Thomson Reuters.

Can you see the problem? It's not just that Avon has come up short on the bottom line every single quarter over the past year. It's the trend of the growing gap between what Wall Street expects and what Avon delivers.

Wall Street is getting dumber with every passing quarter in failing to diagnose the problem with Avon.

These same pros see Avon's sales falling only slightly this year. They see earnings falling to $1.47 a share after ringing up $1.64 a share in 2011. It's a safe bet that Avon will earn less than the analysts are predictin, and it's hard to take seriously projections of profitability growing to $1.62 a share next year.

Avon hasn't even bottomed out. Why should we take analysts forecasting a turnaround seriously? This is a company that earned more than $2 a share during the recession-challenged 2008, but it's not the same company that it was then, and the chances are slim that Avon's throwback model will bounce its way back into popularity.





This isn't a knock on the people who lean on Avon for income.

Every Avon rep that I have met over the years has been amazing. Everything that I've read about McCoy is encouraging. She's a former executive at Johnson & Johnson (JNJ), which beyond pharmaceuticals and baby shampoo is also the company behind Neutrogena, Aveeno, Lubriderm and other beauty products. However, Avon is simply stuck with an outdated business model that will keep fading over the years until the weight of its balance sheet -- which as of now sports a reasonable $2.2 billion net debt position -- crushes the company.

Avon rebuffed a buyout offer last month from beauty products specialist Coty. Really? This is the kind of arrogance that can cost a company. If shareholders feel that better offers will come or that Avon will bounce back on its own, they may as well join the analysts on the couch watching AMC on Sunday nights -- living in denial and living in the past.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Johnson & Johnson and Tupperware Brands. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, as well as creating a diagonal call position in Johnson & Johnson.




Increase your money and finance knowledge from home

Investing in Emerging Markets

Learn to invest in a globalized world.

View Course »

Basics Of The Stock Market

Stock Market 101 - everything you need to know but were afraid to ask!

View Course »

Add a Comment

*0 / 3000 Character Maximum

17 Comments

Filter by:
Avonlady88

I can say that I disagree with this. i have only been selling Avon for a year, but the amount of money I make every two weeks shows that there isn't much of a downside to this business. I think it's an unfortunate thing when people feel free to discuss things that they know nothing about. Avon has always been a successful company and is the 2nd leading company in network marketing(for those who think that's a downfall). Avon is not a pyramid scheme but I can say that Mary Kay or Pampered Chef are. I know because I sold Mary Kay and hated it. $110 to sign up, plus an entire to do list before I could even place my first order! When signing up to become an Avon rep, it's only $20 or less to sign up, you submit an order every 2 weeks, you can work Avon around your daily life and it's a wonderful experience overall to meet new people every day. Avon's make-up products are the same quality as Mac without paying the Mac make-up prices. Even Dr. Oz featured products from our Anew Clinical line because it works so effectively in reducing wrinkles among other hings to give you a younger look and I have seen it work! How about the Skin-So-Soft Bug Guard? It's even proven to protect your skin much better than the known bug repellent Off! There's people in my upline who average $6,000 to $11,000 bi-weekly because of their hard work and I aspire to do the same. I could go on and on about the benefits of "Being your own boss," but who would seriously listen? My point is there are many amazing things about the Avon company that shows that we are still just as great of a company now, as we were when I was younger and purchasing products from my own Avon lady. Have a blessed night!

May 16 2012 at 1:03 AM Report abuse rate up rate down Reply
Wayne Bradshaw

SEATTLE (AP) — Border officials say they have seized more than 25,000 counterfeit purses that arrived in an ocean container from Coach Online Outlet.More than 8,500 of the purses were knockoff Gucci, Fendi, Burberry and Coach bags, officials with the U.S. Customs and Border Protection office said Monday. The bags were seized in Seattle March 13 and will be put on the Coach Purses Outlet .Officials said the combined manufacturer's suggested retail price of the handbags, had they been genuine, is more than $ 8.4 million.

May 05 2012 at 11:46 PM Report abuse rate up rate down Reply
joethightwad

After over 20 years in the same residence in a blue collar suburb of Chicago, never once has an Avon representitive come to the door or even left a catalog outside. I have, however, worked at three companies with large numbers of female employees, all of which had an Avon Lady or two peddling their wares among their friends on the premises. The business model is really not much more than the defunct Sears or Montgomery Ward approach with a personal touch. The products are good, though not especially competitive in price, particularly when compared with those offered by major discounters in large metropolitain areas. Besides, flea markets and garage sales across the country are awash in old Avon bottles.

May 03 2012 at 1:29 PM Report abuse rate up rate down Reply
momszoo54

I haven't bought a thing from this company in years. The stuff you get at the drugstore is just as good if not better and it's also cheaper!

May 03 2012 at 1:10 PM Report abuse rate up rate down Reply
mlapen

When do we get to see an article about companies that are great and continue to be great. This whole concept of "Why ______________ will never be great again is really getting old! And it's the ultimate low hanging fruit of journalism. Anyone can pick a company that has fallen on hard times and write this drivel. I propose an article entitled "Why Rick Munarriz wasn't ever great in the first place."

May 03 2012 at 12:15 PM Report abuse +1 rate up rate down Reply
ziegler21wp

Why would anyone buy Avon products?

May 03 2012 at 12:04 PM Report abuse +1 rate up rate down Reply
1 reply to ziegler21wp's comment
hmcallister0542

have you ever bought any? Maybe you should before you judge - Avon lead the way back in the '90's introducing the first Hydroloic Acid in their Nova line - after which Lancome and Clinique offered the same product at 5 times the price, mind you those companies HAVE to charge that much to cover the price of advertising in magazines and TV - more or less the same product for alot less. Let's not lose the common touch. Avon has afforded many women to stay home and raise their babies - now what's wrong with that?

May 04 2012 at 7:38 PM Report abuse rate up rate down Reply
Blessed One X 20

Youshould have said that perhaps Avon's numbers may never be great again - though there is no real telling. Plenty of companies have had surges when they've come into style for whatever reason. However, Avon's products will always be great, especially the old standbys like their Skin So Soft line. Sometimes things that have become not only staples in more homes than not, those great "All American" products that people will ALWAYS continue to buy, generation after generation.

May 03 2012 at 11:52 AM Report abuse rate up rate down Reply
Melissa

I personally have been impressed with AVON lately. I thought their selection of clothes has been very cute, as well as their jewelry! I'm surprised to read this article as I can see its points, but I thought AVON has really improved its marketing tactics in the last couple of years and have actually been interested in looking through the catalog! AVON seems way more modern than it used to be... as I used to think AVON was for old ladies and that all of their perfume smelled the same.

May 03 2012 at 11:52 AM Report abuse -1 rate up rate down Reply
Tom

I've often thought that companys like Avon and Amway do themselves a great disfavor by allowing the adoption of a network marketing sales approach. Both companys sell great products that a good salesperson could make a living marketing to the public. The introduction of network marketing models seems to place the selling of promising products last on a list headed by the crazed desire to generate as many salespeople as possible on the heirarchal levels below you in the network. Earning the required number of "points" to stay active each month, usually requires the purchase of the unpopular, less desireable products. No one is fixated on selling the company's products anymore; they just want more people under them earning their mandatory monthly points.

May 03 2012 at 10:38 AM Report abuse rate up rate down Reply
TTigerLilyx2

'overprotective husbands didn't want them out shopping'
How ludicris! What century and country can you possibly mean?
But they do need to stick to make up, all that branching out with junk is annoying.
Avon has had some the best and most unique products, and delivery of the products ever. Like some of their sponge eye shadow applicators, really handy!

May 03 2012 at 10:33 AM Report abuse +1 rate up rate down Reply