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Avon’s (AVP) Open Up Strategy on Track, EMEA Segment Hurts

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Avon Products, Inc. AVP witnesses solid momentum in the bottom line backed by the execution of its ‘Open Up Avon’ strategy. This strategy emphasizes on reviving the company’s direct selling business model, renovating the brand, enhancing e-commerce and other capabilities to aid a performance-driven transformation. Also, its focus on e-commerce expansion by improving digital tools is encouraging. Further, it also remains committed to accomplish the financial targets for 2021.

However, we cannot ignore the soft trends in the EMEA segment due to challenges in Russia and a declining beauty market. This, along with other factors, has hurt the company’s top line. Moreover, adverse foreign currency rates have been hurting top-line performance over the past few quarters. The company’s revenues lagged the estimates in nine of the last 12 quarters mainly due to adverse currency impacts and decline in Representatives. Second-quarter 2019 also marked the company’s third straight sales miss.

Factors Aiding Growth

Avon is on track with the "Open Up Avon" strategy, which is aiding its bottom line performance. As part of the plan, the company expects to improve operating efficiency, slash inventory levels and reduce portfolio complexity by certain restructuring efforts, including 25% decrease in Stock Keeping Units (SKUs), 15% reduction in inventory levels and 10% job cuts. These job cuts are estimated to fetch Avon annualized pre-tax savings of nearly $97 million by 2019 end. All these efforts are likely to help it simplify operations and generate higher cost savings.

With regard to Avon’s financial targets for 2021, it 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. Investments in the digital & IT infrastructure initiatives also include reinforcing the company’s balance sheet, where its cash-generating abilities must exceed the investment plans. Through this strategy, it expects to achieve revenue growth of low-single-digits and margin expansion of low-double-digits by 2021.

Additionally, the company is capitalizing on the growth opportunities in the fast-growing e-commerce realm, hence making this platform a major growth driver. Further, it remains committed to improving digital tools and e-commerce channel for bolstering Average Representatives sales.

The company’s new Avon ON app, which is an end-to-end solution to aid the Representatives, is currently available in 18 markets. In fact, this app is a 100% mobile tool, incorporating all the services in one suitable place to simplify and expand Representatives’ business. Further, ‘My Avon store’ is now accessible across 27 markets, while digital Avon brochure is now available in all markets. Backed by all these initiatives, the company has been steadily expanding the percentage of sales through the online channel. In fact, Avon targets doubling e-commerce sales in 2019.

Further, the company’s growth efforts place it well for competition with peers like e.l.f. Beauty ELF, Coty COTY and Estee Lauder EL, in the cosmetics space.

Near-Term Headwinds

As already stated, Avon displayed a dismal sales trend in the last few quarters due to impacts of adverse currency and decline in Representatives across segments. Notably, second-quarter 2019 marked the company’s third straight sales miss. Although it remains focused on revenue growth management, visible growth in the top line is unlikely in the near term.

Moreover, the company’s EMEA segment has been displaying soft trends due to significant challenges in Russia, a declining beauty market with increased competition and weaker sales leader engagement. Second-quarter 2019 revenues in EMEA dropped 15% year over year and 8% in constant currency. This was mostly due to significant softening in Russia.

Notably, Russia's beauty market is highly competitive, particularly in direct selling. In the reported quarter, constant-dollar revenues in Russia fell 12%. Currently, the company is focused on reviving business in Russia through increased training, upgrading brochures, product innovations, deploying direct delivery to customers and expanding the digital business. However, we expect the operations in Russia to take some time to stabilize and return to growth.

Nevertheless, we expect all aforementioned growth drivers to offset minor hurdles and help Avon sustain the solid momentum in its bottom line.

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