Global Beauty at Avon

Avon Products (NYSE: AVP  ) bills itself as the "world's largest direct seller" of beauty products, and its global reach is undisputed -- 76% of its first-quarter sales stemmed from outside North America. Sales trends are proving quite strong overseas as well, and though overall profitability has fallen in recent years, the company's restructuring efforts look to be paying off.

International sales really took off in Latin America this quarter, rising 32% (or 19% when excluding the effects of a weak dollar on reported results). China grew almost as fast at 29%; there, "Active Representatives" (individuals who sell Avon products to friends, family, and others) expanded an impressive 99% as the company returned to a direct model after receiving government approval to do so.

As a result, operating profits in China more than tripled to 15.5% of sales. Profits in Europe, Asia, and Latin America all grew nicely, with the only fall in North America, which also experienced a 6% drop in sales. Management attributed the domestic weakness to the impact of a weak economy and some problems with filling orders, but expects second-quarter trends to improve. Overall, consolidated operating income improved an attractive 25% on solid cost controls, and Avon continued on its multiyear restructuring program to try and boost net margins back into the double digits; they last hit these levels in 2005.

Avon should have no problem expanding margins if global top-line growth continues at its current clip. The business model is also sound, and it's especially compelling overseas, since Avon can use a direct sales force to compete with the beauty divisions of personal-product titans such as Procter & Gamble (NYSE: PG  ) and Unilever (NYSE: UL  ) , which have spent many years building unrivaled global distribution networks. This keeps Avon's overhead low and also helps it compete against purer competitors such as Revlon (NYSE: REV  ) and Elizabeth Arden (Nasdaq: RDEN  ) .

As much as I like Avon as a business and am impressed by its recent operational improvements, I find its valuation slightly unattractive. The forward P/E is just less than 19, which seems pricey for a company that doesn't have itself completely put together. Until it boosts profits and cash flow to match the levels of a few years ago, I'll remain on the investment sidelines.

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