Avon's Makeover Will Take Time

Investors are cheering today, but will they be patient?

Time For a Beauty Boost

Source: Bloomberg

Investors are cheering Avon's latest road map to recovery. But they should gird themselves for a long journey.

Avon shares rose by 14 percent on Thursday, after executives at its 2016 Investor Day talked up plans to turn around its struggling business. It will have help from Cerberus, the private equity firm that last month bought the bulk of Avon's North American business and a 17 percent stake in the parent company. The deal is expected to close this spring.

The direct-selling beauty brand promised to cut costs, boost revenue and modernize its technology, products, marketing, and shipping processes. That all sounds good to investors who have watched Avon fumble away an $11 billion takeover offer from Coty in 2012, followed by an 88 percent drop in shares over the next three years. 

The last time Avon generated positive year-over-year revenue growth was back in 2011. It has struggled to curb bloated costs and stem an exodus of sales representatives.

Sales Slide

Change in Avon's year-over-year revenue

Source: Bloomberg

The company has made similar promises before. This time they are anchored by a private equity shop known as a tough cost-cutter capable of setting distressed companies on a path to profitability. A handful of new board members and new executives could also shake things up.  

Running the North American business as a private company offers little accountability in the form of quarterly results or analyst transparency. But it does allow for bolder choices and more aggressive risk taking. It provides the opportunity to plunge much-needed money into operational improvements without fear of what that will mean for the stock price. For heaven's sake, many of the company's six million sales representatives are still expected to sell products using paper pamphlets rather than the snazzy iPad app and mobile ordering the company now envisions.

Despite these advantages, the hard part starts now. Cerberus senior managing director Steven Mayer took pains to temper expectations and emphasize that Avon is a long-term project that could take at least five years to return to "competitive operating margins." 

In the short term, he said he expects revenue at the North American business to decline. Once Avon can cut costs, then it will be able to reinvest the savings back into the company in the form of better products and marketing. But that will take time. Even the end game Cerberus envisions calls for Avon's North American business to stabilize at a lower revenue level than today, Mayer said Thursday. 

With Cerberus arguably more focused on running the North American business than the international segment -- the part of Avon that was actually doing okay -- and the CEO of the parent company still in place despite years of underperformance, concerns remain over whether the publicly-held parent company will become an afterthought. 

Avon has two years until its next debt hurdle -- $500 million in debt will mature in 2018 -- and the company intends to reduce some of its debt with proceeds from the Cerberus deal, notes Bloomberg Intelligence analyst Noel Hebert. At the very least, Avon has bought itself some time. The question is how long before investors' patience runs out. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shelly Banjo in New York at sbanjo@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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