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Will Avon's Open Up Strategy Aid Representative Growth?

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Avon Products, Inc. (AVP - Free Report) is smoothly progressing with the "Open Up Avon" strategy. Backed by this initiative, the company aims to revive the growth momentum. This strategy mainly focuses on reviving its direct selling business model, renovating the brand, enhancing e-commerce and other capabilities to aid a performance-driven transformation.

The plan revolves around improving operating efficiency, slashing inventory levels and reducing portfolio complexity by certain restructuring efforts. Restructuring actions will include a 25% decrease in Stock Keeping Units (SKUs), a 15% reduction in inventory levels and nearly 10% job cuts. These jobs cuts are estimated to fetch Avon annualized pre-tax savings of nearly $97 million by 2019 end.

All these efforts are likely to help the company simplify operations and generate higher cost savings. In 2018, this "Open Up Avon" strategy aided the company to accomplished cost savings of roughly $40 million.

Concerns

While the "Open Up Avon" strategy bodes well, the company has been grappling with soft Representatives growth for quite some time now. This remains a major concern for the company.

In fourth-quarter 2018, Active and Ending Representatives fell 6% and 8%, respectively, with decline in both the Representatives across most segments. This has also impacted the company’s top line, which lagged estimates in seven of the past 10 quarters. In fact, Avon has a dismal top- and bottom-line surprise trend. The company delivered negative earnings surprise in 11 of the last 14 quarters, including the last reported quarter. Apart from missing earnings and sales estimates, both the metrics fell year over year in the fourth quarter.

While gross margin contracted 140 basis points (bps) in the fourth quarter, operating margin fell 420 bps on higher cost of investments in Representative, sales leader and field expenses. Increased advertising and transportation costs along with sales deleverage and adverse foreign currency translations were other deterrents. Avon’s revenues in the fourth quarter included a 12% negative impact from foreign currency mainly due to sharp currency declines in Argentina and Turkey. Additionally, volatility in Brazil negatively impacted the results.

Furthermore, unfavorable currency hurt quarterly adjusted operating profit by 150 bps and adjusted earnings by 5 cents per share. Management expects the foreign currency impacts to be similar in early 2019.

Price Performance

Despite soft Representatives growth and dismal surprise trend, shares of Avon have surged 41.5% in the past three months. This Zacks Rank #3 (Hold) stock has also outperformed the industry’s 28.8% rally and the S&P 500 index’s 9.6% gain in the same time period.


 

Stock momentum can be attributed to the solid execution of the "Open Up Avon" Strategy. Management remains committed to attain its long-term financial targets, courtesy of this initiative. By 2021, the company 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, Avon expects to invest roughly $300 million toward commercial, digital & IT infrastructure projects. Through this strategy, it anticipates achieving low-single digits revenue growth and low double-digits margin expansion by 2021.

These apart, Avon’s focus on capitalizing growth opportunities in the fast-growing e-commerce realm is encouraging. In 2018, the company registered online sales growth of 56%. Moreover, its e-commerce business in skin and fragrance started off well. Going ahead, Avon is well poised to pace up the deployment of e-commerce and mobile capabilities across its business.

Bottom Line

While the aforementioned initiatives appear encouraging, soft Representatives growth cannot be ignored. We expect the company’s growth endeavors to revive its Representatives growth in the future.

Want Better-Ranked Stocks in the Same Space? Count on These

The Estee Lauder Companies Inc. (EL - Free Report) delivered positive earnings surprise in each of the trailing four quarters, the average being 11.7%. Also, the company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Medifast, Inc. (MED - Free Report) is also a Zacks Rank #1 stock, which delivered average positive earnings surprise of 10.5% in the last four quarters.

Revlon, Inc. (REV - Free Report) has an expected long-term earnings growth rate of 6% and a Zacks Rank #2 (Buy).

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