PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
At New York City-based Avon Products, executives have been contemplating a lot more than new shades of makeup. With one of the largest exposures to Latin America among U.S. consumer-products companies, Avon also has been focused on the plummeting currencies of Brazil and Argentina.
Roughly a third of Avon's sales come from Latin America. Meanwhile, the Brazilian real has continued to fall against the U.S. dollar, even after the recent announcement of a $30 billion International Monetary Fund loan package to the country. The real is down roughly 20% in the last year, while the Argentine peso is off 70%.
So far, Avon (AVP
) hasn't taken the heavy hit to earnings one might expect. It's sticking by earlier guidance to analysts that its earnings-per-share will reach $2.30 -- which would be a 10% gain from 2001, when it earned $2.09, or $500.5 million, on revenues of $5.9 billion. If recent second-quarter results are any indication, Avon is on track. In July, it reported earnings up a healthy 12% from the same quarter last year -- to $154.9 million, or 64 cents per share -- on revenues that were 3% higher, to $1.51 billion.
HEDGING ITS BETS. Avon's share price continues to hold its own -- and rightfully so, many analysts say. Before the IMF announcement on Aug. 8, the stock was trading at $45. It got a pop from the IMF bailout news and ended Aug. 8 around $48, where it remains. That's off 16% from its 52-week high of $57.10 hit in May but still a strong performance given the potential negatives the company faces.
The optimism about Avon stems partly from its deft use of currency hedging to avoid taking a major hit in Latin America. "You can't manage the risk down to zero," Susan Kropf, Avon's president and chief operating officer, recently told BusinessWeek Online. "But our experience, particularly in Latin America, is a tribute to being able to offset the risks."
Avon has been selling in international markets since the 1950s and today does business in 56 different currencies. It even has its own currency board to oversee hedging strategies. This year's earnings guidance "assumes quite a bit of negative currency translation in the second half," notes Linda Bolton Weiser, an analyst with Fahnestock & Co. But for now, she and other analysts believe Avon can make its numbers in 2002.
SWELLING RANKS. One reason for this optimism is that Avon continues to expand its core business of selling beauty products through an army of direct-sales people -- the famous "Avon ladies." This business accounts for some 60% of sales (with the balance coming from jewelry, gifts, and other items) and will benefit from Avon's expanded direct-sales force, which in 2001 increased by 10%, to 3.5 million worldwide.
In recent years, Avon also has cleaned up its pile of regional brands and focused on winning products. Its Wellness line of cosmetics for the health-conscious, its anti-aging Anew skin-care treatment, and its hair-care products are doing well.
Kropf also sees a major growth opportunity in Avon's plans to launch a brand of teen-focused beauty products in the U.S. in the second half of 2003. The initiative, which will include young direct-sales representatives, will be Avon's first major foray into the potentially lucrative, yet dicey, teen market. Kropf calls it "the next generation" for Avon, which is usually associated with working and married women.
TRICKY COURSE. At the same time, Avon continues to expand geographically. "This is the wind in their back," says William Steele, an analyst who covers Avon for Banc of America Securities and has a strong buy recommendation on the stock. The direct-sales philosophy -- and recognizable Avon brand -- has translated well into new global markets in Central and Eastern Europe, Russia, and China. "These markets have been real growth engines for us," Kropf says.
The entrepreneurial spirit among Chinese women, for example, has proven to fit well with Avon's sales-rep model. The same is true for Latin America's family-oriented culture -- which Kropf calls "a dream environment for a direct selling."
For all of Avon's positives, though, it's far from a cheap investment. At around $48, it's trading at nearly 21 times the Street's average EPS estimate of $2.31 for 2002 -- on the high end of Avon's historical multiple. Indeed, on Aug. 16 Sanford Bernstein analyst Jim Gingrich downgraded Avon and two other consumer-products companies, Procter & Gamble (PG
) and Kimberly-Clark (KMB
), citing their high stock valuations and weakening fundamentals.
It's a clear message that Avon will have to continue to maneuver smartly through currency crises and a slowing U.S. economy if it wants to maintain its allure with investors. But for many analysts, the outlook is rosy.
Wee covers financial markets for BusinessWeek Online in New York Edited by Thane Peterson
Get BusinessWeek directly on your desktop with our RSS feeds.
Add BusinessWeek news to your Web site with our headline feed.
Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.
To subscribe online to BusinessWeek magazine, please click here.
Copyright 2002, by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
