Markets
Aging Gracefully at Avon
To Wall Street, the leading direct seller of beauty products is itself a thing of beauty.
By J. Alex Tarquinio
From Kiplinger's Personal Finance magazine, September 2004
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Avon Products was struggling when Andrea Jung became chief executive officer in late 1999 at the age of 39. Sales had been sluggish for years, and disappointing earnings that November had sliced Avon's shares in half. In the era of the Internet and the working woman, the Avon Lady seemed on the verge of irrelevance. Jung, the Toronto-born daughter of Chinese immigrants, cut costs and began focusing on international opportunities. The result: Sales this year will be 50% higher than 1999 levels, and earnings will have more than doubled. The stock, at $46, is up fourfold since Jung took over.
To enable Avon to age gracefully, Jung is also recruiting younger Americans to sell cosmetics door-to-door. On her watch, the average age of U.S. sales reps has fallen from 43 to 38. This is important because Avon, which was founded in 1886, needs younger reps to encourage a new generation of customers, who tend to mirror the sales force. To reinforce the trend, last year Avon launched a new product line, called Mark, to attract younger women. Its sales are puny for a company with annual revenues approaching $8 billion, but that's not the point. "We don't need Mark to hit our earnings targets," says Jung. She says the new cosmetics line will make Avon more meaningful to younger women.
Expansion abroad
Now Jung wants to expand Avon's reach into developing markets. The company already derives two-thirds of its sales from more than 130 countries outside the U.S. In 2003, sales in Russia grew 70%, to $241 million, and Avon expects to post $400 million this year. But China could be Avon's biggest opportunity, says Jung. Although China passed a law in 1998 banning all direct selling, Avon has prospered by marketing through 7,000 beauty boutiques and store counters. Jung's goal is to reach sales of $400 million in China by 2007, up from $157 million in 2003, and she foresees annual sales of $1 billion within the next ten to 20 years.
A job as an Avon Lady is especially appealing in developing nations, says analyst Andrew Shore of Deutsche Bank Securities, because many of those countries have male-dominated cultures, and a position with Avon "is a way for women to become independent." Direct selling, Shore adds, is "the single best business model. If a rep doesn't sell, she doesn't get paid."
On the other side of the ledger, Jung has cut costs by reducing the number of raw-material suppliers and shifting production from smaller plants to larger ones. Avon has also shifted some manufacturing from higher-cost nations, such as Great Britain, to lower-cost countries, such as Poland. And Avon has encouraged its reps to use the Internet to enter orders online. In addition, Jung hopes to trim Avon's effective tax rate from 35% to 31% by 2005, mostly by investing more foreign profits overseas to reduce its U.S. tax liability.
Getting pricey
Lately, investors have been calling on Avon's shares. Aided by a 33% dividend boost announced in February, the stock (symbol AVP) jumped nearly 40% in the first six and a half months of 2004 and now sells at a lofty 27 times 2004 profit forecasts. That's nearly twice the estimated three- to five-year earnings growth rate of 14% annually. The stock recently yielded 1.2%.
Still, many analysts remain upbeat. Morgan Stanley, which initiated coverage in July with an "overweight" rating, set a 12-month price target of $54. Analyst Andrew Shore has a $51 target over the next year. "Avon's growth is accelerating," he says. "Every other company in the personal-care industry is just trying to stabilize."
Research: Joan Goldwasser