Avon’s Resistance To Change Led To Its Downfall

“The rate of change is not going to slow down anytime soon. If anything, competition in most industries will probably speed up even more in the next few decades.”
— John P. Kotter

Change is the magic word that seems to decide success in most industries today, and the beauty industry is no exception. Avon Products (NYSE:AVP) seemed to have learned the lesson too late when only recently it had spoken about plans to expand its digital channel outside the U.S. and make its representatives sell through the social media. Too little, too late? Unfortunately, that’s what we think. 

What Has Happened To Avon?

An over 70% persistent stock price decline over the last year indicates that Avon might be unable to recover from its weak state, after all. In the past, it was rumored that the company has been trying to sell off the whole or a part of its business. However, there didn’t seem to be many takers. Avon has been on a downhill journey since 2011 (its last profitable year) as its direct selling model is losing market share to retail outlets and online shopping. The company appointed a new CEO in 2012, to turn around its situation. Even then, nothing seemed to have worked for the company. Currently, its cash position is dwindling and moreover, the company’s outdated representative based selling model, has been facing constant attrition. Additionally, buyers lack interest in buying products through its door-to-door channel in an age when online shopping is the norm. Consequently, Avon’s direct selling model seems to be meeting its inevitable end. We had previously analyzed the scenarios under which Avon’s Stock Price can experience a significant decline. You can read it here.

                                                     (Source: Google Finance)

In view of the recent developments, we have significantly reduced our Trefis price estimate for Avon by almost 40% to $3.82.

See Our Complete Analysis for Avon Products Here

Restorative Measures?

In Q2 2015, Avon’s online portal, avon.com, demonstrated double digit growth, but it accounts for less than 10% of its total business. Avon was trying to shift more representatives to sell through the digital medium and had spoken about taking more initiatives towards the end of 2015. ^[1]

Currently, Avon is discussing the selling of a part of its business with some private equity firms, including Cerberus Capital Management LP and Platinum Equity LLC, implying that there are no buyers for the entire company. These private equity firms specialize in distressed investing and the bids are expected to begin this week. Avon had been exploring strategic alternatives since April 2015. ^[2] According to a news item in April from the Wall Street Journal, Avon might have been contemplating the sale of its North American business. ^[3] Also, there were rumors of an offer in May, where Private equity firm PTG Capital Partners was alleged to acquire Avon for a value of around $8.16 billion, not including debt. However, it was found to be a bogus offer later on. ^[4]

The deal that the private investors are currently considering is known as a Private Investment in Public Equity (PIPE). This is considered a back up option when a full sale isn’t possible. For example, in 2014, shoemaker Crocs received a $200 million investment from Blackstone Group and hence the private equity firm gained a 13% ownership in the footwear company. ^[5]

If the deals work out, the investments might stabilize Avon’s stock price. Avon’s cash has declined from $961 million from the end of 2014 to $697 million by the end of second quarter of 2015. Its long-term debts have reached $2.2 billion and its bonds have been rated junk by Moody’s. ^[6] Avon’s sales had been under tremendous pressure due to the currency headwinds it faced in most of its geographies of operation (especially in Latin America from where it derives around 50% of its sales). In the first half of 2015, currency headwinds eroded Avon’s earnings by around 18 percentage points.

Three years ago, Avon had warded off acquisition attempts by its rival, Coty. A few months ago, Coty bought a part of P&G’s beauty business roughly valued at $13 billion. This deal more than doubled Coty’s erstwhile market value of around $10.5 billion. ^[7]

According to a rating report by The Street, Avon’s debt-to-equity ratio of 55.23 is significantly higher than the industry average implying that Avon’s debt management is considerably risky at this moment. Avon’s quick ratio stood at 0.60, implying that its current assets may not be sufficient to meet its short-term liquidity needs. The return on equity of the company is significantly lower than its own previous levels as well as the industry average. ^[8]

(Source: Avon Products Rating Reports)

Avon’s Business Model Is Outdated When Compared To Its Peers

A healthy representative base is imperative for the success of Avon’s direct selling model. Avon had close to 6 million representatives after a 4% decline in 2014. ^[9] Avon’s competitors are moving ahead in leaps and bounds through their multiple channels. Revlon recently expanded its fragrance business with acquisitions and it has made a successful entry into the professional segment through its Colomer Group acquisition. (Read about Revlon’s success story here.) L’Oreal had been advancing significantly through its acquisitions, research and development programs, and digital initiatives. It seems that the business of beauty is all about being dynamic and adapting to the changing customer taste. It’s more about the power to cope with change than how big an entity is. Probably that is the reason why a big company like P&G had to sell a part of its beauty business to Coty.

Avon has been increasingly dependent on the representative form of business. This business model is almost on the verge of extinction with the advent of savvy shopping options such as travel retail and omnichannel. Avon has not been fast enough to take the market cues and hence, the sad demise of the over 100-year-old company seems to be looming large.

(Source: avon.com)

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1. Avon’s Q2 2015 Earnings Call Transcript, Seeking Alpha, July 30, 2015 [↩]
2. Walgreens Buys UK Cosmetics Brand from Avon, 24/7 Wall St, July 9, 2015 [↩]
3. Avon exploring sale of North America business: WSJ, Reuters, April 14, 2015 [↩]
4. Did Avon Finally Get an Offer — and Is It Real? (Updated), 24/7 Wall St, May 14, 2015 [↩]
5. Avon Discusses Stake Sale With Private-Equity Firms, Fox Business, September 11, 2015 [↩]
6. Avon Is Said to Be in Talks About Selling a Stake, The New York Times, September 10, 2015 [↩]
7. Avon Discusses Stake Sale With Private-Equity Firms, Fox Business, September 11, 2015 [↩]
8. Avon Products Rating Reports, The Street, September 13, 2015 [↩]
9. Avon’s Q4 2014 Earnings Call Transcript, Seeking Alpha, February 12, 2015 [↩]