Avon’s future looks bright, report claims

By Simon Pitman

- Last updated on GMT

Related tags International markets Late-2000s recession Economics

Its commission-only workforce, cost-cutting measures, the global nature of the business and a future weakening of the dollar all put Avon in a strong position.

That is the conclusion drawn by a report published yesterday by financial title Barron’s, which led to a sharp rise in the company’s share price on the New York Stock Exchange yesterday.

The report concurs that Avon has been undervalued and underrated by the financial markets and predicts that it is set to ride out the recession and finish up in a stronger position than ever.

The fact that the company has continued to strengthen its workforce during the recession has helped to maintain underlying sales growth without impacting the company’s bottom line, the report highlights.

Cost cutting program ups stakes

Likewise, it also underlined that a cost cutting program first implemented in 2005 had already strengthened its position, while recently announced measures to shed up to 3,000 jobs and save a further $200m would only serve to further strengthen its future position.

Although the company has been singled out for its reliance on international markets, a factor that has been compounded by a strong dollar, the article also stresses that in the future this is likely to turn into a strength.

Zacks analyst Steven Ralston says that as investors move away from the dollar, owing to US government deficits, this will weaken its position against other international currencies.

As an estimated 70 percent of the company’s income is derived from international markets, such an outcome is likely to spell a major reprieve.

Analysts divided over health of Avon

As the economic crisis has unfolded, analysts have been divided over the health of the world’s largest direct sales personal care company.

The divide became more pronounced when the company revealed that fourth quarter sales fell to $2.8bn, compared to $3bn in the corresponding quarter ending 31 December, 2007, while net income increased to $232.4m, up from $128.9m.

Some analysts have chosen to focus on the poor sales performance, suggesting further deterioration in the global economy is likely to exacerbate this situation.

Indeed, only last week, BMO Capital Markets downgraded its 2009 outlook for Avon from ‘Market Perform’ to ‘Underperform’.

BMO cited exposure to the international markets, particularly the Central and Eastern European markets, where the problem of falling sales is being compounded by a strong dollar.

The same week that BMO cut its ratings, the company’s share price fell to below $14.40 a share, to reach a new 52-week low.

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