Long Avon? Take the Money and Run
On Tuesday I saw a number of comments from big value-type investors who owned Avon shares and were holding out hope that someone will swoop in with a bid greater than $10 billion. But honestly, what cosmetics company wants to run a direct sales force? That's especially so with Avon, given the amount of problems that saddle its sales force.
A quick look at the fourth-quarter results should give any bidder pause. Revenue was down 1%, gross margin fell, and operating profit came in at a paltry $13 million on $3 billion in revenue. Yes, you read that right: $13 million left over on revenue of $3 billion. Let me put it another way: Imagine you were flushing $3 billion in cash down the toilet. The toilet would clog long before you got down to your last $13 million. You'd probably have hundreds of millions leftover -- but not Avon.
Avon has troubles all over the world, but Latin America, has been the worst. Latin American revenue grew just 2%, while operating profit fell 33.6%, as the company was plagued by inventory problems in Brazil, its largest market. You only have to look back a few years to see how far the company has fallen. In 2010, Avon had an operating margin of 13%. It fell to 9.4% in 2011, and then to a microscopic 0.4%.
But the damage isn't limited to Brazil. North America has been no picnic, either. Sales there fell 7% to $596 million. After the company made just $21 million in all of North America last year, operations in the region lost $241 million for all of 2011.
For the year, earnings fell 11.5% to $526 million on $11.3 billion in sales.
While, for other companies, it's tempting to acquire Avon to get into Brazil (38% of revenue), it hasn't been easy to make money in that country. I can't see the other fragrances and cosmetic outfits topping Cody's bid -- all the other cosmetics companies have been very successful selling through retailers.