February 12, 2013 11:33 pm

Avon: cosmetic enhancements

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Asian and US businesses remain in need of a makeover leaving new chief plenty to do

Sheri McCoy has arrived. A better than expected fourth-quarter report, highlighted by impressive cost cutting, drove Avon’s shares up by a fifth on Tuesday. This marks the end of a thankless eight-month slog since Ms McCoy took over from her long-serving but widely criticised predecessor, Andrea Jung, as chief executive. She inherited a struggling company that had just received, and rejected, a $24.75-a-share offer from rival Coty; Tuesday’s jump at last restores the shares to the pre-bid level of $21.

The share jump, however, leaves Avon with a demanding valuation. At 23 times expected earnings for this year, it trades in line with Estée Lauder and L’Oréal.

Even if estimates rise after the strong earnings report, the rating looks rich, given that the company has a distinctly split personality. On the plus side, Latin America and Europe, Middle East and Africa account for about three-quarters of group revenue. Together they raised sales 5 per cent organically and delivered 12 per cent operating margins in the quarter – in line with Avon’s goals for 2016.

Then there are the Asian and US businesses, which remain in need of a makeover. Avon has just abandoned South Korea and Vietnam. Avon won’t abandon China, but China is threatening to abandon Avon: sales were down a quarter as Avon shifts from selling through its direct salesforce to a traditional retail model. The US may be even more troubled; revenue, sales reps and volumes were all down in the low double digits. Things are bad enough in the US that Avon may have to repatriate foreign cash, despite the associated tax hit.

With its businesses in the world’s biggest markets adrift, the turnround at Avon is just beginning – whatever the stock price may say. Ms McCoy has plenty left to do.

Email the Lex team in confidence at lex@ft.com

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