Avon: The Real McCoy?

07/25/2014 8:00 am EST


George Putnam

Editor, The Turnaround Letter

Our latest turnaround idea traces its roots back to a traveling book salesman in the late 19th century, observes George Putnam, editor of The Turnaround Letter.

Avon Products (AVP), the world’s largest direct seller of beauty products, has never fully recovered from the 2008-09 recession.

It brought in a new CEO in 2012. Sheri McCoy, who joined Avon after a distinguished career at Johnson & Johnson (JNJ), has strengthened the management team and launched a three-year plan to rekindle growth. 

The company had been under a cloud because of bribery charges in China. McCoy recently settled the charges related to the bribery scandal, which eliminates a very expensive distraction for the company.

McCoy has a strong global brand to work with. She is focused on strengthening the direct sales force, realigning the product line and cutting costs.  Internationally, she is devoting resources to profitable markets such as Latin America and exiting weaker ones such as South Korea, Vietnam, and Ireland.

To revitalize North American sales, which have been lagging for some time, McCoy brought in Pablo Munoz, who came from a successful stint building up the direct sales force at Tupperware. 

Under the leadership of McCoy and Munoz, Avon is improving the recruitment and management of sales people and improving their support.  This includes streamlining the product line, improving sales materials, and making better use of technology.

On the cost cutting front, McCoy has a goal of $400 million in expense reductions over three years.  The company has achieved about a third of the target to date, and it just announced a further headcount reduction of 600 positions.

Avon is well positioned in some of the fastest growing markets in the world.  Approximately 75% of its sales come from emerging economies.

If McCoy’s plans succeed, there is a lot of upside in Avon’s earnings and stock price. If the turnaround lags, Avon could be an acquisition target from either a competitor or a private equity group. 

Two years ago, perfume maker Coty unsuccessfully bid $24.75 for Avon with backing from Warren Buffett among others. While Avon’s turnaround still has a way to go, we think it is on the right track under CEO McCoy, and we recommend buying Avon stock up to $20.

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