Avon (NYSE: AVP
) sells everything from beauty and fashion products to home
products such as house wares, nutritional supplements and
decorative products - basically anything that makes for a good gift
for your mother.
Our price estimate for Avon Products' stock stands
, roughly 25% ahead of market price.
What makes Avon stand apart from the likes of
, Estee Lauder (
), Procter & Gamble (
), and Unilever (
) is not just its array of products but also the way it sells them.
Avon primarily sells its products through independent sales
representatives that make up the largest direct selling
organization in the world - over 6.2 million active sales
representatives buy these products from Avon at a discount to the
published brochure price and earn a margin on every sale. But the
difference doesn't end there.
Avon's Direct Selling Business Model Could Drive
Eliminating the conventional retail channel (drugstores,
department stores, perfumeries, pharmacies etc) helps Avon avoid
the relatively higher retailer margins (in excess of 40%) in favor
of the commission charged by sales representatives (which we
estimate to be close to 25%). This not only lets Avon offer
products at more competitive prices but also earn higher profits
from the sale.
Direct selling enables Avon to be in closer contact with the
final consumers, which creates better understanding of consumer
requirements leading to more efficient advertising and research
& development spending. Also, since products are shipped from
Avon's warehouse or centralized outlets once the order is placed,
it favors better inventory management.
The downside of direct selling is that it leads to dependence on
sales representatives. Avon has to incur expenses to advertise and
attract talent, train the sales representative and retain these
employees by ensuring that they make sufficient margins on sales.
We believe this partly explains the breadth of Avon's products
range. On any given household visit, a sales representative stands
a better chance to make a sale with a broader products
However, the very downside of direct selling has favored Avon
during the recessionary 2008-09 and we believe the slow pace of
recovery in the US could present further upside to our current $37
Trefis price estimate for Avon Products' stock.
While the rising industrial output in the US is indicative of a
recovery, November's unemployment data indicates that there is
still a lot of ground to cover. Unemployment rate rose to 9.8% in
November, the under-employment rate (which includes part-time
workers seeking full-time employment and those that have stopped
looking) stood at 17% and the proportion of unemployed who have
been jobless for 6 months or more rose to its highest ever at
Rising unemployment levels have caused more people to look for
alternative/incremental sources of income. And with the ongoing
holiday season, it comes as no surprise that Avon's direct selling
business stands to gain from this trend.
Our base forecasts suggest a decline in the number of sales
representatives during 2010-13 after a period of steep rises from
about 5.4 million in 2007 to 6.2 million in 2009. Our forecasts are
based on concerns of reduced earnings potential for each sales
representative and a more aggressive macroeconomic recovery. If the
number of sales representatives instead ticks upward slightly
towards 6.4 million by 2012, there could be 5% upside to our price
estimate for Avon Products' stock. Our current price estimate, at
$36.63, already stands about 25% ahead of market price.
Drag the trend-line in the chart below to see the impact of
various total sales representatives trends on Avon Products'
However, there are two potential factors that could limit upside
from this affect. As Avon Products only generates about 22% of its
sales from the US, an increase in US sales representatives could
have a muted impact on profitability. Further, an increase in the
number of sales representatives could generate an offsetting impact
on sales per representative, another key metric of Avon's
You can see our detailed
$37 Trefis price estimate for Avon Products' stock