Avon's Calling on Private Equity to Bail It Out

Sales haven't been pretty for the iconic cosmetics company.

Rich Duprey
Rich Duprey
Dec 11, 2015 at 5:21PM
Consumer Goods

Cosmetics company Avon Products has been experiencing an ugly slide in sales for the past few years, and wants to sell its North American business.

"Ding dong! Avon calling!"

That tag line is one of the best-known sales pitches in history, but the iconic beauty-care-products company behind the motto, Avon Products (NYSE:AVP), is no longer able to ring the bell of growth. Its legions of Avon Ladies find it difficult to match the reach of rivals like Sephora and Ulta Salon. It announced it was seeking out "strategic alternatives" for its North American operations, which is corporate speak for trying to unload the business.

Private equity firm Cerberus Capital has emerged as the prime candidate to buy the division, which generated $230 million for Avon last quarter, but produced a loss of $27.5 million, the only segment to do so. Division sales have fallen for seven years running, and are down 17% year to date, while losses have totaled $47 million so far.

Good-quality, but still-affordable, alternatives have caused Avon to struggle. Sephora, for example, operates a number of stand-alone stores selling makeup and beauty-care products, but can also be found in boutiques inside J.C. Penney (NYSE:JCP) stores. The department-store chain has credited Sephora with helping to energize its turnaround efforts by bringing in customers who then shop elsewhere in its stores.

Macy's (NYSE:M) noticed the returns the cosmetics counter has generated for its rival, and though customers are already forced to run through a gauntlet of beauticians in its cosmetics department, it made its first acquisition in more than a decade earlier this year, purchasing upscale beauty shop and spa operator Bluemercury for $210 million. It will begin selling its proprietary M-61 skincare products nationally, while adding boutiques to select stores.

Beauty and personal-care products have become a game of sharp elbows, and Avon Products isn't the only company looking to exit the North American market. Photo: Macnetize.com.

Cosmetics has always been a cutthroat competitive business, but it's increasingly seen as a way to boost sales, and more non-traditional competitors are entering the market. Fast-fashion leader H&M, for example, recently announced it was expanding into beauty care rather than open another clothing line.

That tough environment is behind the reason Procter & Gamble (NYSE:PG) is also calling it quits in cosmetics. This spring, it said it wanted to sell the business, even though it represented a quarter of the consumer products company's revenues and profits. In its fiscal first quarter that ended in September, P&G said beauty-care net sales tumbled 12% on a 7% drop in volume as competition increased.  

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But getting out of the business won't be so easy for Avon Products. Hedge fund Barington Capital owns about 3% of the beauty-care company's stock, and it is opposed to selling the division, particularly at the company's low valuation. It accuses Cerberus of trying to obtain the company at "fire sale" prices.

Earlier this month, it sent a letter to Avon calling for it to "promptly implement a restructuring plan" to cut costs and change management, a course that, even if it got it to a multiple commensurate with direct peers like Swiss cosmetics company Oriflame, Brazil's Natura Cosmeticos, or even Tupperware, would see its stock trade at approximately $14.50 per share, or 289% above where it was before the news of the potential sale broke. Not that Barington is opposed to a sale -- but only if it's done at a fair price, and with a new management team installed.

It's clear that Avon Products is in need of an extreme makeover, and exiting its money-losing North American business seems like the easiest way out. But with P/E firms ready to fight over the value that the business commands, it could be a sale that turns ugly fast.