Avon (AVP) Surges 59% in 6 Months: Will Momentum Sustain?

Avon Products, Inc. AVP is gaining momentum on the back of the execution of its ‘Open Up Avon’ strategy. This strategy emphasizes on reviving the company’s direct selling business model, renovating the brand, enhancing e-commerce and other capabilities to aid a performance-driven transformation. Also, Avon focus on e-commerce expansion by improving digital tools is encouraging. Further, the company remains committed to accomplish the financial targets for 2021.

Backed by these tailwinds, shares of the company have surged 59% in the past six months, comfortably outperforming the industry’s 21.6% rally. The stock has also outperformed the Consumer Staples sector and the S&P 500 Index that advanced 8.5% and 5.2%, respectively. Further, this Zacks Rank #3 (Hold) stock is hovering close to its 52-week high of $4.47. With a long-term earnings growth rate of 7.5%, Avon is positioned to attain new highs. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let’s delve deeper into the factors that have been driving the company’s performance.

Factors Narrating Avon’s Growth Potential

Avon is on track with the "Open Up Avon" strategy, which is aiding its bottom-line performance. As part of the plan, the company expects to improve operating efficiency, slash inventory levels and reduce portfolio complexity by certain restructuring efforts, including 25% decrease in Stock Keeping Units (SKUs), 15% reduction in inventory levels and 10% job cuts. These job cuts are estimated to fetch Avon annualized pre-tax savings of nearly $97 million by 2019 end. All these efforts are likely to help it simplify operations and generate higher cost savings.

Also, the company is capitalizing on the growth opportunities in the fast-growing e-commerce realm, hence making this platform a major growth driver. It remains committed to improving digital tools and e-commerce channel for bolstering Average Representatives sales.

The company’s new Avon ON app, which is an end-to-end solution to aid the Representatives, is currently available in 18 markets. In fact, this app is a 100% mobile tool, incorporating all the services in one suitable place to simplify and expand Representatives’ business. Further, ‘My Avon store’ is now accessible across 27 markets, while digital Avon brochure is now available in all markets. Backed by all these initiatives, the company has been steadily expanding the percentage of sales through the online channel. In fact, Avon targets doubling e-commerce sales in 2019.

Apart from these, the company is on track with its financial targets for 2021. It intends to generate total cost savings of $400 million by expanding manufacturing and distribution, outsourcing efficiencies, zero-based redesigning of back office functions, reducing certain facilities and managing revenue, interest and tax. In addition, management expects to invest roughly $300 million toward commercial, digital & IT infrastructure projects. Investments in the digital & IT infrastructure initiatives also include reinforcing the company’s balance sheet, where its cash-generating abilities must exceed the investment plans. Through this strategy, it expects to achieve revenue growth of low single digits and margin expansion of low double digits by 2021.

Further, the company’s growth efforts place it well for competition with peers like e.l.f. Beauty ELF, Coty COTY and Estee Lauder EL, in the cosmetics space.

Hurdles on the Way

The company’s EMEA segment has been displaying soft trends due to significant challenges in Russia, a declining beauty market with increased competition and weaker sales leader engagement. Second-quarter 2019 revenues in EMEA dropped 15% year over year and 8% in constant currency. This was mostly due to significantly soft trends in Russia.

Notably, Russia's beauty market is highly competitive, particularly in direct selling. In the reported quarter, constant-dollar revenues in Russia fell 12%. Currently, the company is focused on reviving business in Russia through increased training, upgrading brochures, product innovations, deploying direct delivery to customers and expanding the digital business. However, we expect the operations in Russia to take some time to stabilize and return to growth.

Nevertheless, we expect all aforementioned growth drivers to offset minor hurdles and continue to sustain momentum.

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