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Bear of the Day: Avon Products (AVP)

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Today’s “Bull of the Day” detailed the successes of a clothing manufacturer and retailer that is not only surviving but thriving in the digital age, by selling products with huge consumer demand, strong brand cache and an innovative strategy.

The “Bear of the Day” today is headed in the opposite direction.

Founded in 1886 as the “California Perfume Company,” Avon Products (AVP - Free Report) has been selling fragrances and beauty products through independent representatives for over 130 years.

For decades, the “Avon Lady,” as the company’s independent representatives were commonly known, was a ubiquitous presence in American neighborhoods and homes, selling wares that were quite popular and not readily available through other channels.

Avon was also the beneficiary of some unintended good luck when it was discovered in the 1970’s that its “Skin So Soft” line of moisturizing cosmetics also functioned as excellent – and pleasant smelling – insect repellent.

During the golden years for Avon, its multi-level marketing structure was very effective and many of the company’s representatives earned a healthy living selling fairly unique and in-demand products.

Times have changed however, and while Avon boasts more than 6 million independent sales representatives – second only to the undisputed MLM king, Amway – many of them sell only a miniscule amount of product to family and friends (who presumably would be buying similar products somewhere anyway.)

As is common in Multi-Level Marketing enterprises, Avon representatives commonly complain that the only way to make significant profit in the program is by recruiting new reps rather than actually selling product.

Claims that the company is a “pyramid scheme” are completely untrue – Avon sells actual physical products and its business practices are entirely legitimate – but the model does have obvious limitations as there is a finite number of people who are willing to become representatives.

Due to enormous competition in the health/wellness and beauty products industries, revenues and earnings at Avon have been steadily declining for several years. Whereas once Avon held near-monopoly power over the markets for cosmetics, customers now have countless options for similar products at every price-point, from deeply discounted cosmetics sold at grocery and drug stores all the way to very high-end options that boast about the quality of their raw materials, the ethics of their manufacturing and testing practices and most recently, even cannabidiol (CBD) extracts in their products.

Though earnings have been consistently disappointing and estimates have been declining – resulting in a Zacks Rank #5 (Strong Sell) - Avon shares are up over 85% so far in 2019, due mostly to rumors (that have been confirmed by Avon on its investor relations website) that the company is in talks to be acquired by Brazilian cosmetics giant Natura.

Investing in a company that is performing well on its own and therefore might be a takeover candidate is a fundamentally sound idea. Investing in a company who’s only hope is a buyout is simply gambling.

With a current market price under $3/share and a potential deal on the horizon, it doesn’t make much sense to be short Avon – there’s too little to gain and too much to lose.

For a long position in the Cosmetics industry however, Estee Lauder (EL - Free Report) , a Zacks rank #1 (Strong Buy) or Revlon (REV - Free Report) , a Zacks Rank #2 (Buy) are much sounder investments.

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Avon Products, Inc. (AVP) - free report >>