What Would Be Better For Avon Products, Inc. (NYSE:AVP): Overhaul Or Sale of North American Unit?

Avon Products, Inc. (NYSE:AVP) which is considering a sale of its North American operations, should think of giving the unit a makeover. Ali Dibadj of Sanford C. Bernstein & Co. said that the company is evaluating options for the North American unit including a sale. However, the problem is that the division is losing money. It is making huge loss and the company is unlikely to get an attractive deal. It won’t be easy for the company to find buyers.

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The details

The analyst said that shifting away from the direct-selling plan toward distributing or licensing the North American brand for sale at big retailers such as Wal-Mart Stores, Inc. (NYSE:WMT) instead may offer more upside. Avon could reduce its commission and manufacturing costs, and the division could become profitable again. He added that to monetize the North American operations, the best option is to license the brand out. If the company can sell it and there is a buyer, then it would be a great deal. However, the chances of finding a lucrative deal are dismal.

The model

The direct selling model has reduced its charm in the United States as specialty beauty shops have grown in popularity. The cosmetics company Avon has struggled to innovate at a faster pace compared to its peers. It even failed to keep new representatives. The analysts believe that if the company follows a retail route it can be more accretive to Avon’s FY2015 earnings. It is expected to be 11.8% accretive compared to 6.7% accretion by sale of the unit. Selling the North America unit is not necessarily a game changer.

The challenges

Remaking the North American unit would have its own set of challenges. The first one will be the requirement of capital that Avon doesn’t necessarily have. The company recorded cash of $960 million at the end of December.

About the Author

Sally joined the US Markets Daily News Team in April 2011 as a Multimedia Journalist.

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