Avon upgraded, Liz Earle sold: The start of a turnaround?

A reversal of Avon's fortunes may be underway

Zacks Investment Research has upgraded Avon Products from a Sell rating to a Hold rating. Though the list of negatives – reduced margins in key markets, volatile currency squalls and pressure on rep numbers – press on the beauty direct seller from all sides, Zacks says it is more positive on Avon’s long term cost moves, adding that “it remains focused on implementing strategic measures to boost the top line and improve working capital, in an attempt to revive its performance.” However Avon’s share price of just $6 is close to a 12-month low, and well short of 2008 numbers, when its shares were worth close to $45.

Avon’s fundamentals were recently given a hard look following a bogus bid for the company. “In our view, any outfit looking to buy Avon would have to consider the $500-$1bn in spending required to fix the business, which will likely take 3 years at a minimum,” said RBC Capital Markets after examining the (fake) offer. RBC maintains its Sector Perform rating on Avon. However there remains hope that Avon can improve its market share performance in Latin America - particularly Brazil, its largest market - and increase overall margins.

Last month, credit agency Standard & Poor demoted Avon's corporate credit rating from ‘BB’ to ‘B+’. “As the company continues to right size its cost base,” said S&P, “its sales also continue to decline at greater-than-anticipated rates.” In the last quarter, Avon Products revenues were cut by 18% to $1.8bn thanks to depressed North American sales. Prospects were better, however, across Europe, Africa and the Middle East.

Zacks was joined in its upgrade by analysts at Vetr, who hoisted Avon from a Buy to Strong Buy rating. Before going to press, Avon announced it was selling botanics UK skincare brand Liz Earle to Walgreens Boots Alliance for £140m in a move signalling more growth-by-acquisition for boss Stefano Pessina. More drugstore buys are likely to be in Pessina’s acquisition plans.

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