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Avon Stock Gains 42% on Open Up Initiative & Other Efforts

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Avon Products, Inc.’s recent activities to drive productivity, improve brand relevance and enhance digital capabilities bode well. Moreover, the company has been gaining investors’ confidence, owing to the smooth progress of the "Open Up” strategy and the commitment to accomplish long-term financial targets.

Shares of the leading beauty company have gained 41.7% in the past six months compared with the industry’s 10.8% rally. Let’s delve deeper.

Factors Driving the Stock

"Open Up Avon" strategy focuses on improving portfolio, simplifying the business and reducing costs to improve operating efficiency. Management expects to slash inventory levels and reduce portfolio complexity by certain restructuring efforts. Restructuring actions include a 25% decrease in Stock Keeping Units (SKUs), a 15% reduction in inventory levels and 10% job cuts. Further, job cuts are estimated to fetch Avon annualized pre-tax savings of nearly $97 million by 2019 end.

At the end of third-quarter 2019, the company reduced headcount by 15% and aggressively reduced costs as part of the “Fuel for Growth” program. As a result, Avon achieved cost savings of $71 million in the third quarter. In the first nine months of 2019, its savings improved 80% from the year-ago period.


Moreover, the company has been witnessing higher Representative sales and an improvement in price/mix despite weak top-line performance. In the reported quarter, Average Representative sales in constant dollars from reportable segments improved 4%, and price/mix rose 9%, driven by growth in all reportable segments. The company remains focused on driving pricing and productivity improvements across all areas of the business to become financially sound and deliver sustainable growth.

Synergies from the “Open Up” strategy and adjusted operating margin expansion have been aiding the Zacks Rank #3 (Hold) company’s bottom-line results. Adjusted operating margin expanded 300 basis points (bps) in the third quarter, driven by higher gross margin, increased savings across multiple cost lines and improved price/mix due to pricing efforts. Notably, this marked the third straight quarter of adjusted operating margin growth. Year-to-date, operating margin expanded 170 bps.

Avon has been improving digital tools and brand’s access to the e-commerce site to bolster Average Representative sales. Moreover, the company has been expanding online capabilities like the Avon On app and My Avon e-commerce store. Avon On app, which is an end-to-end solution to simplify and expand Representatives’ business, incorporates all services in one suitable place. All these initiatives are expected to double the digital business of Avon in 2019.

While the aforesaid factors bode well, the company has been displaying soft performance at its EMEA segment, thanks to the soft business in Russia, stiff competition and weaker sales leader engagement. Nevertheless, management is focused on reviving the business in Russia through increased training, upgrading brochures, optimizing portfolio, innovating products and expanding the digital business.

Avon expects to achieve revenue growth in low-single digits and margin expansion in low-double digits by 2021. Moreover, 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, management expects to invest roughly $300 million toward commercial, digital & IT infrastructure projects.

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