A Closer Look At Avon’s Global Operations, And What’s In It For Natura

Avon (NYSE: AVP) issued a press release yesterday announcing its intention to merge with the Brazilian corporation, Natura Cosmetics S.A. Natura has made an all-stock offer of 0.30 Natura Holding share (Natura and Avon combined entity) for each Avon common stock. Avon shares have rallied more than 25% since news of a potential merger leaked early Wednesday morning, while Natura has also seen a sizable increase in its share price. You can view our interactive dashboard on A Closer Look At Avon’s Global Operations, And What’s In It For Natura? to observe Avon’s revenue trends across geographies and see more of our Consumer Discretionary Sector data here.

How has Avon fared in the last decade?

Avon Products, Inc was founded by David H. McConnel in 1886 as a direct selling company specializing in personal beauty products. It is the second largest multi-level marketing company in the world (after Amway) with nearly 5 million sales representatives globally according to its most recent regulatory filings. In 2015, Avon sold its North American segment to affiliates of Cerberus Capital Management due to sustained losses from its U.S., Canada and Puerto Rico operations. Since then, the company has been operating in four regions globally: Europe, Middle East & Africa (EMEA); South Latin America; North Latin America; and Asia Pacific.

Avon’s revenues have been declining continuously over the last decade, from $10 billion in 2008 to $5.5 billion in 2018. The revenue declines can be attributed to improved availability of affordable beauty products, the rise of e-commerce, and an outdated marketing model.

How are Avon’s revenues distributed geographically?

• Latin America contributes over 50% of Avon’s total revenues and its share has remained considerably stable in the last four years. Revenues for the region declined by a sharp 11% to $1.9 billion in 2018 (excluding the favorable impact of Brazil’s IPI tax release). The contribution by the two sub-segments, South Latin America and North Latin America were 39% and 15% in 2018, respectively. The South Latin America sub-segment largely includes operations in Brazil and Argentina, which have been witnessing challenging macro-economic conditions and lower consumer demand. The North Latin America segment comprises of Avon’s Mexico operations, where revenues have declined due to quality issues in the Fashion & Home category as well as due to the impact of the Puebla earthquake. Overall the region has witnessed a mid single-digit reduction in active sales personnel over recent years, which has resulted in a similar revenue decline. Notably, the operating margin for this region has been the lowest at 8-10% since the North America segment was spun-off in 2015.
• Europe, Middle East & Africa is the second largest segment and contributes 38% of the total revenues. The segment’s revenues declined by a 2% to $2.09 billion in 2018, resulting from lower consumption in Russia, field issues in the U.K., and the economic downturn in South Africa. The active sales personnel declined a low-single-digit rate and resulted in a high-single-digit reduction of units sold over the last two years. The operating margin for the region has been in a 14-15% range since 2015 and is the highest amongst all geographies.
• Asia Pacific segment contributes the least to the top line – being responsible for less than 10% of total revenues. Notably, revenues for this division observed a sharp 20%-decline in 2016 as a result of a reduction in active sales representatives across the region. This resulted in Avon exiting Thailand in 2017, and New Zealand and Australia in 2018. The segment’s revenues came in at $470 million in 2018 with an operating margin of 9%. Profits have been falling for the region primarily due to supply chain-related costs and increased advertising expenses.

Interestingly, comparing the performance of Avon’s geographical segments with industry leader L’Oreal, reveals a contradiction as L’Oreal’s Latin America segment observed a sharp decline of 8.6% in 2018 while the Asia Pacific region observed a strong growth of 20%. With Avon’s presence being focused in declining markets, and with its fortunes dwindling in high-growth markets, our first impression is that the acquisition will very likely be a burden on Natura’s balance sheet.

Stay tuned for our detailed valuation dashboard of Avon and Natura as a combined entity in the coming days.

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