Avon's mascara is running; it has lipstick smeared on its teeth; its nail polish is, frankly, a disaster. Could there really be a beauty under there?
Nothing in the third-quarter numbers published by the direct-sales cosmetics company on Thursday indicated that turnaround efforts are taking hold. Sales excluding currency impact were up by 1 per cent, but operating profit, even after restructurings and impairments are put aside, fell nastily in every region. North America is making operating losses as a sales force reorganization grinds on there. Sales at Avon's small China operation, also undergoing a reboot, dropped by a third. The dividend was cut by three-quarters, even more than expected.
Yet on Thursday the shares rose a bit on the report. That has a lot to do with low expectations. It may also have helped that the company set some long-term targets. Three years from now, it aims to increase its sales in the mid-single-digits and to have cut enough costs to secure double-digit operating margins (as against 6.5 per cent during the past 12 months).
Suppose, in three years, Avon's sales are only 5 per cent higher than they are today, and operating margin has hit 11 per cent (lower than the level achieved as recently as 2010). Holding all else equal, the company would then be earning about $1.70 per share, almost twice what it made in the last year and implying a prospective price-to-earnings ratio of less than 10.
That is not preposterously cheap, but is certainly intriguing – especially for investors keen on Latin America, where Avon generates nearly half of its sales and where it is still growing nicely in local currency. And now that the dividend has been cut, the company may actually generate a bit of cash next year, that it can invest in its makeover. You don't have to dim the lights too much to see Avon's attractions.