Avon (AVP) Gains 59% in 6 Months: Will the Momentum Continue?

Avon Products, Inc. AVP is gaining momentum with the execution of its “Open Up Avon” strategy. This strategy emphasizes revitalizing the company’s direct selling model, renewing the brand, enhancing e-commerce and other capabilities to support a results-driven transformation. Additionally, Avon’s focus on e-commerce expansion through enhanced digital tools is encouraging. Additionally, the company remains committed to achieving its 2021 financial goals.

Thanks to these positive tailwinds, the company’s shares have surged 59% over the past six months, well outpacing the industry’s gain of 21.6%. The company’s stock also outperformed the Consumer Staples sector and the S&P 500 index, which rose 8.5% and 5.2%, respectively. Moreover, shares of this Zacks Rank #3 (Hold) company are hovering near a 52-week high of $4.47. With a long-term earnings growth rate of 7.5%, Avon is on track to reach new highs. You can see complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let’s take a closer look at the factors influencing company performance.

Factors describing Avon’s growth potential

Avon is well on its way to executing its “Open Up Avon” strategy, which is helping to drive financial results. As part of the plan, the company expects to improve operational efficiency, reduce inventory levels and reduce portfolio complexity through several restructuring actions, including a 25% reduction in stock keeping units (SKUs), a 15% reduction in inventory levels and a 10% reduction in headcount. These headcount reductions are expected to result in annual pre-tax savings for Avon of nearly $97 million by the end of 2019. All of these actions are expected to help it simplify operations and generate greater cost savings.

The company is also taking advantage of growth opportunities in the rapidly growing e-commerce industry, making this platform a key growth engine. It remains committed to improving its digital tools and e-commerce channel to increase sales among Average Representatives.

Avon ON’s new app, a comprehensive solution to help Representatives, is now available in 18 markets. In fact, this application is a 100% mobile tool, bringing together all services in one convenient place to simplify and expand the activities of Representatives. Moreover, ‘My Avon Store’ is now available in 27 markets and the Avon digital brochure is now available in all markets. Thanks to all these initiatives, the company systematically increases the share of sales through the online channel. In fact, Avon plans to double its e-commerce sales in 2019.

Additionally, the company is on track to achieve its financial goals for 2021. It aims to generate total savings of $400 million through manufacturing and distribution expansion, capacity outsourcing, redesigning back-office functions from scratch, reducing certain facilities and managing revenue, interest and tax. In addition, management expects to invest approximately $300 million in commercial, digital and IT infrastructure projects. Investments in digital and IT infrastructure initiatives also include strengthening a company’s balance sheet, where its cash-generating capacity must exceed investment plans. With this strategy, it expects to achieve low-single-digit revenue growth and low-double-digit margin growth by 2021.

Moreover, the company’s growth efforts put it well in competition with competitors such as elf Beauty ELF, Coty COTY, and Estee Lauder EL in the beauty industry.

Obstacles on the way

The company’s EMEA segment showed soft trends due to significant challenges in Russia, a declining cosmetics market with increased competition and weaker commitment from sales leaders. Revenue in the second quarter of 2019 in the EMEA region decreased by 15% year-on-year and by 8% in constant currency. This was mainly due to significantly soft trends in Russia.

It is worth noting that the cosmetics market in Russia is very competitive, especially in direct sales. In the reported quarter, revenue in constant dollars in Russia decreased by 12%. The company is currently focused on reviving the business in Russia by increasing training, improving brochures, product innovations, implementing direct delivery to customers and expanding digital activities. However, we expect that the Russian operations will need some time to stabilize and return to growth.

Nevertheless, we expect all the above-mentioned growth drivers to offset the minor headwinds and maintain the momentum.

Looking for stocks with explosive growth potential?

Zacks just released a special report on the growing investment opportunities in the legal marijuana space.

Fueled by new referenda and legislation, the industry is expected to skyrocket in 2021 from an already robust $6.7 billion to $20.2 billion. First-time investors can make a lot of money, but you have to be ready to act and know where to look.

See what marijuana deals we have our eyes on >>

Want the latest recommendations from Zacks Investment Research? Today you can download the top 7 stocks for the next 30 days. Click to get this free report