) sells everything from shower gels, skin creams and fragrances to
fashion jewelry, watches, decorative housewares and even
nutritional supplements. While others sell their products through
third party establishments such as drugstores, department stores or
even retailers like Wal-Mart and Tesco, Avon sells its products to
the final consumer through direct selling. In this way, it
separates itself from
), Procter & Gamble (
), Estee Lauder (
) that also sell beauty and personal care products. We value Avon
with a $36.60 Trefis price estimate of its stock, which is close to
30% premium to its current price.
More Avon Ladies are Key for Growth
As direct selling offered an alternate source of income for many
during the downturn, Avon aggressively expanded its sales force
from 5.2 million in 2006 to over 6 million by 2009 allowing it to
post a 13% increase in revenues in 2007 and 8% growth in 2008.
As macro conditions improve, employment opportunities will
increase and people will be drawn to back to full-time jobs. Hence,
we currently forecast the number of sales representatives to rise
at a very moderate rate of 2% over our forecast horizon reaching 7
million. If however the sales force were to grow at 3% instead,
which is very achievable still, we can expect a further 8%
potential upside to our current estimates.
Programs Help Improvement Operations
Avon's EBITDA margins improved in the past due to product
improvement initiatives aimed at eliminating less profitable
products and reducing overlap (in terms of characteristics) in the
product portfolio. This reduced the number of products and led to
lower inventory levels, lower inventory obsolescence expense and
better utilization of production and warehousing capacity.
Sourcing initiatives helped Avon shift purchasing towards a
globally-coordinated programs with larger volumes (at better prices
and trade terms with suppliers) and help it benefit from economies
of scale. Accounts receivable and payables would also be better
managed with fewer but larger orders.
…Which Help Profit Margins
As a result of continued improvements with its product and
logistics programs, we expect EBITDA margin to rise gradually from
12% currently 2010 to around 14% in 2015.
While we expect a marginal increase in working capital on
account of macroeconomic recovery leading to relaxed credit terms
with vendors and suppliers, Avon's measures to control operating
costs shall keep check on inventory levels and short-term
liabilities. Hence, we forecast a stable outlook for working
capital at close to 10% of revenues over our forecast horizon.
You can see a detailed analysis of our
$36.60 Trefis price estimate of Avon here