- Although home products sales account for less than 10% of
sales for Avon, the company has seen consistent growth in
revenues from the segment due to strong pricing and focus on
high-end home decor products.
- Additionally, macroeconomic factors such as strengthening
U.S. economy and expanding inflation in Emerging Market
economies could bolster home product sales for the company,
with an increase in sales volumes and an increase in product
- Avon's recent Q3 results lacked assurance, with continued
down-tick in the company's Active Representative count.
- We believe that the company's weak performance will
continue in the near term, with negative growth in Beauty and
Fashion product segments.
- We expect a mid-single-digit growth in revenues for the
company's Home products segment for Q4. However, continued
reduction in representative count poses considerable downside
for Avon's stock price.
Avon Products (
) is a multi-billion dollar manufacturing company that sells
cosmetics and other home products through its direct-selling
business model. The company is the world's largest direct-selling
organization, with over 6 million representatives across the world.
Despite being the largest direct-seller of cosmetics, Avon's top
line has seen deterioration in the last few quarters due to the
slow progression of its ambitious restructuring strategy. In
addition, the company's extensive international footprint subjects
its top line to adverse currency fluctuations.
The company has three operating segments, namely Beauty, Fashion
and Home products. In this research note, we look at various
factors influencing growth in revenues for the Home products
segment. We have a
Trefis price estimate of $21
for Avon, which is approximately 16% higher than its current market
price of $18.
See our complete analysis for Avon Products
Macroeconomic Factors, Holiday Season Support Higher
Sales In Q4FY13
Avon's home products consist of various third-party decorative
and gift products, housewares, and other entertainment and leisure
products. The company generally sources these products from various
third-party suppliers and sells them through its representatives
base worldwide. Although the home products segment is the smallest
operating segment for Avon, the segment has shown positive growth
in both reported and constant dollar revenues during the nine
months in 2013.
Reported revenues for the segment stood at $741 million in the
January - September 2013 period, up 5% over sales from the same
period in 2012. On the other hand, Avon's Beauty and Fashion
product segments showed declines of 6% in reported revenues during
the same period. Factors such as higher product pricing and better
merchandising of home products have contributed to this positive
growth from the home product segment. In addition to favorable
company specific factors, we believe that macroeconomic tailwinds
typically tend to increase household product spending.
The recent talk about an acceleration in the Federal Reserve's
QE tapering program has forced many customers within the U.S. to
refinance their properties before mortgage interest rates spike
upwards. The fear of an accelerated QE tapering pushed various
emerging market currencies higher. Higher home sales and
refinancing within the U.S., and weaker global currencies against
the dollar, should support an increase in home products sales for
Avon, despite a reduction in volumes sold as a result of weak
Although global online retailers such as eBay (
) and Amazon (
) voiced a cautious outlook for holiday season sales, there is a
likelihood,in our view, that the forthcoming holiday season could
support strong demand in decorative and household products. We
expect home products sales to amount to approximately $312 million
during the fourth quarter of fiscal 2013 for Avon. However, lapses
in the company's restructuring program have dented Avon's growth
and continue to lead to a reduction in active representative count
for the company.
Problems with the company's global hiring and training system,
combined with strained relationships with employees in North
America following the launch of Avon's pilot Service Transformation
), led to a 3% reduction in the company's active representative
count in Q3 alone. (See:
Avon Posts Dismal Q3 Results With Lapses In
) Since the company's sales are directly proportional to the number
of active representatives, there is a significant downside risk to
the company's stock, depicted through the chart shown below. A
reduction in representative base could lead to a reduction in sales
per representative, which reduces our price estimate by impacting
all of Avon's operational divisions.
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