Is Avon a Lost Cause?

After the company reported revenue and earnings that fell shy of analysts' expectations, shares of Avon fell hard. Now, with the company's shares trading near their 52-week lows, is the business an attractive prospect or should investors write it off as a lost cause?

May 7, 2014 at 9:00AM

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Source: Avon

After the company reported revenue and earnings that fell shy of analysts' expectations on May 1, shares of Avon Products (NYSE:AVP) fell 10% to close at $13.72 after briefly touching a new 52-week low. Now, with the company's shares trading at a 44% discount from their 52-week high, is an investment in Avon a no-brainer or should the Foolish investor look to Nu Skin Enterprises (NYSE:NUS) or Herbalife (NYSE:HLF) for out-sized profits?

Avon's not calling!
For the quarter, Avon reported revenue of $2.18 billion. On top of coming in just short of the $2.20 billion that Mr. Market had anticipated, the company's revenue represented an 11% drop from $2.46 billion in the year-ago quarter. In its release, the company attributed its revenue decline to a 4% drop in active representatives. The company also sold fewer units and this also contributed to the revenue decline. This negatively affected the company's top line by 6% but it was partially offset by a 3% gain resulting from a higher price mix.

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Source: Avon

From a profitability perspective, Avon did even worse. During the quarter, Avon reported earnings per share of -$0.38, significantly worse than its $0.03 loss in the first quarter of fiscal 2014. After adjusting for foreign currency effects coming from Venezuela, Avon's earnings per share still fell remarkably short of the $0.21 that analysts had expected at $0.12 per share.

Avon's revenue looks concerning!
While Avon's poor quarter may seem shocking, investors probably shouldn't be too surprised. Over the past three years, Avon's financial situation has deteriorated notably. Between 2011 and 2013, the company saw its revenue drop 12% from $11.29 billion to $9.96 billion. The main driver behind this shortfall was an aggregate 11% fall stemming from foreign currency fluctuations, but a slight reduction in active representatives and a decline in units sold also played roles in the company's problems.

AVP Revenue (Annual) Chart

AVP Revenue (Annual) data by YCharts

During the same three-year period, both Herbalife and Nu Skin fared far better. Between 2011 and 2013, Herbalife's revenue climbed 40% from $3.45 billion to $4.83 billion. This increase in revenue can be chalked up to a significant increase in the operation of DMOs (the company's code-word for Clubs and other social settings geared toward its products) and increased member engagement.

While Herbalife's revenue growth comfortably surpassed Avon's metrics, the best revenue generator over this time-frame has been Nu Skin. Over the past three years, Nu Skin's revenue soared 82% from $1.74 billion to $3.18 billion. According to the company's annual report, its rise in sales over this period mostly stemmed from a 309% rise in revenue in its Greater China region as the company's products, especially limited-edition ones like ageLOC TR90, gained a big following.

Avon's bottom line is even worse!
In terms of revenue, there's no disputing that Nu Skin did the best during this period while Avon performed the worst, but what about when investors look at each company's profitability? Following suit, we find that Avon still maintained its record of poor performance in the face of changing consumer preferences and increased competition.

Between 2011 and 2013, the company's bottom line shrank from a net profit of $513.6 million to a net loss of $56.4 million. In addition to the negative effect of falling sales, rising costs hit the business as management was unable to scale costs down at the rate that revenue fell. As a result, Avon's cost of goods sold increased from 36.7% of sales to 37.9% and the company reported a pretty big jump in its selling, general, and administrative expenses as they rose from 53.4% of sales to 57.4%.

In contrast, both Herbalife and Nu Skin saw their bottom lines improve. Over this three-year period, Herbalife's net income rose 27% from $415 million to $527.5 million. The company's revenue growth partially drove this increase but it was partially offset by selling, general, and administrative expenses rising from 31.1% of sales to 33.8%.

AVP Net Income (Annual) Chart

AVP Net Income (Annual) data by YCharts

The disparity seen here primarily resulted from increased expenses related to the company's development in China, higher salaries, and expenses stemming from the company paying for a reaudit of its financials as well as the legal fees it incurred to defend itself against activist hedge fund manager Bill Ackman. In 2012, Ackman accused management of running a giant pyramid scheme under the guise of multi-level marketing.

Once again, Nu Skin took the cake. Between 2011 and 2013, the company saw its net income skyrocket 138% from $153.3 million to $364.9 million. This mostly resulted from revenue growth but it also stemmed from improvement in the company's cost structure. Unlike Herbalife, which had significant legal costs, Nu Skin was able to decrease its cost of goods sold from 18.5% of sales to 15.9% and its selling, general, and administrative expenses from 68.1% of sales to 66.6%.

Foolish takeaway
Based on the data provided, it's not hard to tell why shares of Avon fell so hard. Not only did the company fail to please investors, its metrics show the continuation of three years of poor results that have likely left more than a few investors wondering why they even own stakes in the business. Moving forward, it will be interesting to see how Avon fares, but Nu Skin looks to be a more promising prospect.

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Daniel Jones has no position in any stocks mentioned. The Motley Fool has the following options: long January 2016 $57 calls on Herbalife. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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