Natura Riskless Return Faces Threat on Expansion Abroad

Natura Riskless Return Faces Expansion Threat
Natura’s expansion comes as Avon, the world’s biggest door-to-door cosmetics seller, exits some international markets and cuts jobs. Photographer: Scott Eells/Bloomberg

Natura Cosmeticos SA, Brazil’s largest maker of beauty products, is expanding abroad after its focus on the domestic market helped deliver the best risk-adjusted return on the benchmark index.

The company, whose door-to-door business model mirrors Avon Products Inc., agreed last week to buy 65 percent of Australia’s Aesop for A$68 million ($70.5 million). The acquisition of Aesop, which has brick-and-mortar stores from New York to Tokyo, marks a shift in Natura’s strategy of fueling growth through a network of 1.5 million consultants peddling products from home or work.

The tactic helped Natura post a return of 2.56 percent when adjusted for volatility this year before today, the BLOOMBERG RISKLESS RETURN RANKING shows. That was the best gain on Brazil’s benchmark Bovespa index, followed by consumer-health products manufacturer Hypermarcas SA with an adjusted gain of 2.39 percent and water utility Cia. Saneamento Basico do Estado de Sao Paulo with an adjusted gain of 2.46 percent.

“As long as they don’t get distracted from what is their core market of Brazil I think they can dabble in some other territories, but certainly that is something that bears monitoring,” said Wendy Trevisani, portfolio manager of Thornburg International Value Fund, which has $28 billion under management including about 18.8 million Natura shares. “While growth in Brazil will remain strong, that growth isn’t something that will continue forever.”

Avon Cuts

Natura’s expansion comes as Avon, the world’s biggest door-to-door cosmetics seller, exits some international markets and cuts jobs. New York-based Avon said in a Dec. 11 statement it aims to save $400 million by the end of 2015 through cost-cutting measures that include eliminating about 1,500 jobs globally and pulling out of South Korea and Vietnam.

The press office for Natura declined to comment. Avon didn’t respond to e-mail and telephone requests from Bloomberg.

The Brazilian maker of shampoos, sun-blocks and makeup trades at 28 times estimated 2013 earnings, compared with 17 for Avon, as Natura’s sales growth has outpaced its bigger rival every year since 2007. Natura gets 88 percent of its sales from Brazil, while Avon gets about 50 percent from Latin America, data compiled by Bloomberg show.

Unemployment near a record low and rising incomes will likely fuel further revenue gains for the company, Clodoir Vieira, an economist at brokerage Souza Barros, said in a telephone interview from Sao Paulo. Brazil’s economy is set to grow 3.5 percent in 2013, up from 1 percent this year, according to the median of 30 economists in a Bloomberg survey conducted Dec. 14-18.

GDP Growth

“Next year, GDP growth should improve, which really favors these low-value products that don’t require credit and are based more on a family’s income” said Vieira, whose housekeeper sells Natura products, earning a commission of as much as 30 percent.

Natura, which bills itself as environmentally friendly because its packaging is biodegradable and can be reused, is seeking to build a “truly global brand,” Chief Executive Officer Alessandro Carlucci said in a Dec. 20 regulatory filing.

The stock rose 1.6 percent to 58.93 reais at 4:34 p.m. in Sao Paulo trading, bringing its year-to-date gain to 62 percent, compared with 7.4 percent for the Bovespa. Natura’s 30-day historic volatility, a measure of price swings, climbed to 16 from this year’s low of 12.8 on Dec. 4.

‘Expansion Spree’

“Investors may fear that Natura again is embarking on an international expansion spree that distracts management from the opportunities in Latin America,” Juliana Rozenbaum, an analyst at Itau Corretores de Valores SA who rates the stock the equivalent of a hold, wrote in a Dec. 20 report. Natura previously tried to break into the market in Miami.

“The fact that Aesop runs flagship stores could also raise questions about Natura’s willingness to learn about retail operations and whether this would eventually be needed in Brazil -- which we don’t believe to be the case,” she said.

The company’s cash from operations and low debt are a “very big strength,” said Trevisani, the portfolio manager at Thornburg.

“It’s a great little company,” she said. “It’s been an amazing investment for us in light of what’s been a very volatile market in Brazil.”

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