Weak profits of late have driven down the shares of Avon Products (AVP) far enough that, based on historical results, they’re looking cheap. Trading above $35 last fall, Avon shares are off sharply and trail the market’s recent performance.
Avon Products Price Stock Chart by YCharts
Though a PE of about 17 isn’t low, it’s low for Avon, which has enjoyed a multiple above 20 for much of the past decade.
Avon Products PE Ratio Stock Chart by YCharts
The dip in price of Avon shares mean its dividend not yields more than 3.3%, and the company has history of jacking up the dividend every year.
Avon Products Dividend Yield Stock Chart by YCharts
So, it seems there’s opportunity for value investors in Avon shares. But, as with so many value plays, Avon’s business is messy: the global company, bringing in $10.9 billion in revenue last year, is conducted through 6.5 million (roughly equal to the population of Arizona) independent sales representatives. That’s a paltry $1,671 in sales each last year, on average. The sales person who recruited each of those representatives gets a cut of the action; and often there’s another layer above that with a hand out.
True, there’s no bricks-and-mortar expense. But other items add up in such a structure. Avon spent $472.7 million to print brochures last year, recouping $291.0 million of that by charging its reps for the sales materials (nervy!). Some of the reps ultimately don’t pay for the cosmetics they ordered, and so there’s bad debt cost of $200 million or so a year. The reps can also return unsold merchandise and that results in about $400 million in returns. And because Avon is constantly introducing new products and packaging, unsold stuff becomes obsolete, with $131.1 million in expenses for that last year. And even with millions of Avon ladies banging on doors and hosting parties, Avon spent $400 million last year on advertising to support its brand.
And Avon employs 42,000 to manufacture all those cosmetics and to ride herd on the sales reps. Little wonder, then, that while Avon’s gross margins are above 60%, when you throw in hefty sales and general and administrative costs, the net income is less than 6% of sales for 2010.
Avon is bigger in Brazil then in the U.S., big, too, in Russia, and trying to become big in China. Tailoring products and sales campaigns for dozens of national markets adds to the company’s complexity. Andrea Jung, the CEO, launched one turnaround after a a slowdown in 2005. Now, it seems, she needs another turnaround, with sales essentially flat the past three years and profit down.
Shares outstanding were reduced nicely during the middle of the past decade, but rising debt and the need to invest in improved operations appear to have kept Avon from using much of its current $2 billion buyback authority.
Avon Products Shares Outstanding Stock Chart by YCharts
So, it’s a great brand with an ugly business behind it. And because it’s currently cheap, YCharts Pro finds the shares attractive. You might, too, if you can believe in Andrea Jung’s ability to get those 6.5 million part-time sales reps to his the bricks – all over the world -- a little harder.
Jeff Bailey is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.
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