Avon's Operational Improvements Support its Outlook

By Trefis Team,

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Avon ( AVP ) 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 L'Oreal ( LRLCY ), Procter & Gamble ( PG ), Estee Lauder ( EL ) and Unilever ( UL ) 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 .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
Referenced Stocks: AVP , EL , LRLCY , PG , UL

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