Financial Analysis for Avon Products

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Financial Management
Spring 2010

Project: Financial Analysis for Avon Products Inc

Student: Ninoska Trejos

April 17, 2010
1. Background

1.1 Company Description

Avon Products Inc (AVP), founded by David H. McConnell, is a leading global beauty company, with $10 billion in annual revenue; it commenced operations in 1886 and incorporated in the State of New York on January 27, 1916. The company’s stocks are traded in the New York Stock Exchange (NYSE). Its products fall into three product categories: Beauty, Fashion and Home. Beauty consists of color cosmetics, fragrances, skin care and personal care. Fashion consists of fashion jewelry, watches, apparel, footwear and accessories. Avon conducts its business in the highly competitive beauty industry and competes against other consumer packaged goods (“CPG”) and direct-selling companies to create manufacture and market beauty and non-beauty-related products.

The company’s reportable segments are based on geographic operations in six regions: Latin America; North America; Central & Eastern Europe; Western Europe, Middle East & Africa; Asia Pacific; and China. They presently have sales operations in 65 countries and territories, including the U.S., and distribute its products in 40 more. Unlike most of its competitors, which sell their products through third party retail establishments (i.e. drug stores, department stores), Avon primarily sells its products to the ultimate consumer through the direct-selling channel. In this case, sales are made to the ultimate consumer principally through direct selling by approximately 6.2 million active independent Representatives. Representatives are independent contractors and not Avon’s employees. Avon products are traded in the U.S. and selected other markets; they also market their products through consumer websites ( in the U.S.). These sites provide a purchasing opportunity to consumers who choose not to purchase through a representative.

Avon faces competition from various products and product lines both domestically and internationally. The beauty and beauty related products industry is highly competitive and the number of competitors and degree of competition that they face in this industry varies widely from country to country. Worldwide, they compete against products sold to consumers by other direct selling and direct-sales companies (Mary Kay Inc, L’OREAL CO, REVLON INC) and through the Internet, and against products sold through the mass market and prestige retail channels. In March 2010, the Company acquired Liz Earle Beauty Co. Limited

Avon has had three recent two-for-one stock splits: in May 1996, August 1998 and May 2004. Prior to that, Avon had not split its stock in 26 years. In October 2007, Avon’s Board of Directors authorized the repurchase of $2 billion of the company's common stock over a five-year period upon the completion of the then-current share repurchase programs. Avon has had a share repurchase program since 19941.

1.2 Risk Factors

Investors have to consider each of the following risks associated with an investment in Avon’s publicly traded securities and all of the other information in its 2009 Annual Report:

* Avon’s ability to conduct business, particularly in international markets, may be affected by political, legal, tax and regulatory risks. The company is subject to financial risks related to its international operations, including exposure to foreign currency fluctuations. Avon operates globally, through operations in various locations around the world, and derives approximately 80% of our consolidated revenue from its operations outside of the U.S. Because of this, movements in exchange rates may have a significant impact on its earnings, cash flow and financial position. There can be no assurance that foreign currency fluctuations will not have a material adverse effect on its business, results of operations and financial condition.

* A...
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