Avon Products, Inc. (AVP)

Avon Products is a global manufacturer and marketer of beauty products and accessories. The company’s product line includes cosmetics, fragrance and toiletries, jewelry, watches, apparel, gifts and decorative candles. With operations spread across 62 countries including US, the sales are made to the ultimate consumer mainly through a combination of direct selling by about 5.1 million independent Avon representatives.

Avon is the largest player in the $100 billion global direct selling industry. While direct selling has increased at a rapid rate of 24% between 2001 and 2005, the $240 billion global cosmetics and toiletries market has grown at a slower rate, in the mid-single digits. It faces competition not just from other direct sellers but also makers of personal care items that sell through the retail and internet channels.

The company is currently in the middle of restructuring its organization by shunning off unprofitable and low volume products and is looking forward to resolve distribution inefficiencies. The total cost of restructuring initiatives is expected to be $500 million which will help it save over $300 million every year. While operating margins have started forming an uptrend, the early results of this turnaround operation can be seen in the form of total sales advancing 9% for third quarter in 2006, with notable strength from a 10% advance in beauty and a 16% jump in skin-care sales. Latin American sales grew an impressive 12% while China has shown an increase of 8%. However, mature markets of North America and Europe still need a dose of revival.

Having said that, the company expects to grow its top line in excess of 10% during 2007 and 2008 by reviving the US and European sales and aggressively increasing direct selling activities in the buoyant Latin American and Chinese markets. An accelerated growth strategy in direct selling coupled with focused approach in reviving key product ranges makes Avon Products a likely outperformer