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Can Avon's (AVP) Makeover Strategies Transform the Stock?

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Declining top and bottom lines are not something new for the beauty products company, Avon Products Inc. . This Zacks Rank #3 (Hold) stock has been struggling for quite some time now with repeated dismal quarterly performances and a highly leveraged balance sheet. The Avon stock has lost about 37% in the past one year and is down nearly 5% year to date.

To counter the dismal trends, the company is sparing no effort. As a step towards turn around, the company announced a transformation plan in Jan 2016 that seeks to lower costs and attain its long-term revenue and margin targets. As a first step towards the execution of the plan, Avon completed the separation of its North American business in Mar 2016.

With the Transformation Plan underway, Avon envisions generating roughly $350 million worth of pre-tax annualized cost savings after three years. Also, the company expects this plan to help it attain its long-term goal of delivering low double-digit operating margin and constant-dollar revenue growth in the mid-single digits.

Additionally, in Mar 2016, the company announced a change to its operating model that is likely to lead to more cost savings. The plan includes streamlining of corporate infrastructure, headquarters shift to the U.K., and eliminating about 1,700 filled and 800 open positions. These actions are likely to help save nearly $50 million of $70 million targeted cost savings anticipated in 2016, while the remaining $20 million of savings in 2016 are expected to come from supply chain and sourcing initiatives.

Further, Avon is on the right track with its target of enhancing Active Representatives’ growth, with strength seen in most of its top markets in the first quarter, anticipating 1%-2% growth in 2016.

While the company’s strategic plans bring with it a ray of hope, we cannot forget the problems at Avon and believe that this cannot be turned around over night.

Avon posted third straight quarter of dismal results as first-quarter 2016 loss per share of $0.07 reflected a marked deterioration from earnings of $0.03 per share in the year-ago quarter. Earnings also lagged the Zacks Consensus Estimate. Concurrently, the company’s sales plunged year over year. Results were mainly impaired by adverse currency fluctuations, apart from being affected by Liz Earle’s sale and unfavorable taxes in Brazil.

Further, the company expects results in 2016 to be continually hurt by currency headwinds. All these factors pose concerns about Avon’s future performance, thereby leading the Zacks Consensus Estimate to trend downward in the last 30 days.

Nonetheless, we believe the makeover plans stated above will help Avon to streamline operations by focusing more on high-priority markets and activities, and in turn enhance its efficiency.

Stocks to Consider

A better-ranked stock in the same industry is Nu Skin Enterprises Inc. (NUS - Free Report) , which sports a Zacks Rank #1 (Strong Buy). Other favorably placed stocks in the related industry include Cabela’s Inc. and ULTA Salon, Cosmetics & Fragrance Inc. (ULTA - Free Report) , each carrying a Zacks Rank #2.

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