In a recession, direct sellers tend to bear up well compared to other manufacturers and Avon is well positioned to conform to these expectations, according to Barclays Capital analyst Lauren R. Lieberman.
“Compared to Avon, we think Estee Lauder and its prestige beauty peers are at a structural competitive disadvantage that should translate into relative financial underperformance until at least a few quarters into an economic recovery,” Lieberman wrote in a client note.
Resilience of business model
Lieberman said Avon’s direct-selling model is highly resilient to economic troughs because success relies more on the quality and size of its sales force than consumer spending power.
As the economy contracts and unemployment rises, Avon offers people “a compelling opportunity to generate extra cash”, said Lieberman.
However, the assumption that the ranks will therefore swell with determined and skilful salespeople quickly enough to boost sales in the coming months was questioned by BMO Capital Markets analyst Connie Maneaty.
Time delay before new recruits benefits sales
Maneaty said it took time to attract and train new recruits. “We think a benefit from them isn't likely until at least the second half (of the year),” wrote the analyst in a note to investors.
In the meantime, Avon is likely to suffer on account of the stronger US dollar because between 75 percent and 80 percent of its sales are made internationally, added Maneaty.
On the other hand, Lieberman said Avon is well prepared for any economic storms because of the cost savings the company achieved in its turnaround plan.
In the third quarter results, published at the end of October, the benefits of restructuring filtered through to the bottom line as Avon posted a 60 percent increase in net profits to $222.6m.
Avon is due to publish its fourth quarter results on Tuesday February 4.