Activist investor Barington Capital Group thinks Avon Products Inc. is significantly undervalued, and that the direct-selling business model known for the tagline “Avon Calling” still resonates with consumers.
That’s the gist of why Barington intends to nominate a slate of “highly qualified director candidates” for the beauty firm’s 2016 annual meeting, as well as work with the board to “help recruit new senior leadership to execute our plan to unlock Avon’s full potential,” Barington said in a letter Thursday to Douglas R. Conant, chairman of Avon’s board.
Sources told WWD Friday that the recruitment of new senior leadership includes a search for a new chief executive officer to replace incumbent Sheri McCoy.
In its letter, Barington said that Avon doesn’t require new capital, but rather a senior management team with expertise in four key areas: beauty; direct-selling; emerging markets, and operational restructuring. A new team also could reorganize the management structure so more emphasis is placed on local market decision-making.
Avon on Friday said: “Our board of directors and management team regularly review a wide range of options regarding our business and operations and take into account the view of Avon shareholders. We remain focused on taking strategic actions to drive sustainable, profitable growth, address changing and challenging industry dynamics, create opportunity for our representatives and enhance value for all Avon shareholders. This includes the actions we have taken and continue to take to drive improved performance in the North American business.”
Whether the group led by Barington is successful with its plan could depend on if the reported talks between Avon and Cerberus for the beauty firm’s North American business actually come to fruition.
Shares of Avon on Friday rose 5.8 percent to close at $4.22 a day after reports that the beauty firm was in talks to sell its North American business operation to the private equity firm.
Barington’s letter, which it publicly disclosed late Thursday night, said that it has joined forces with NuOrion Partners AG, as well as other unidentified investors. Together they own a stake that is “more than 3 percent of the outstanding shares of Avon Products Inc.”
Barington has been involved in a number of activist positions, including Dillard’s, Warnaco, The Jones Group, Harry Winston, Steven Madden and Nautica. NuOrion is a private investment firm that focuses on investments in so-called “undervalued corporate fallen angels.”
NuOrion doesn’t do active fundraising for investment funds, preferring instead to fund each transaction it undertakes through special-purpose vehicles backed by ultrahigh-net-worth families as investors. Guy Phillips, who founded the firm in 2014, was an adviser to beauty care and direct-marketing businesses while he was global head of the consumer products and retail group at UBS.
Sources told WWD that they believe Barington began its due diligence on Avon over a year ago, independent of the review by NuOrion, with the two subsequently deciding to combine their investor efforts. An individual familiar with the matter said, “Barington had requested meetings with Avon’s management multiple times and had not been successful in gaining an audience. That prompted them to make their letter public.”
That letter said the implementation of Barington’s restructuring plan would eliminate wasteful and unproductive expenses that would result in annual savings of $500 million to $700 million. That would translate into 90 cents of earnings per share, on a pro forma basis, based just on the initial impact of cost-cutting and stabilizing revenues. EPS at 90 cents could have shares of Avon trading at $14.50, a 289 percent gain on Thursday’s closing price of $3.73, the letter said.
That letter also cautioned against any sale of the North American business. But the fact that the warning also applied to a “dilutive sale of an equity stake on unfavorable terms to shareholders” left open the door that the activist group would be amenable to a sale if the price and terms were right.
Avon’s woes have drawn attention to the door-to-door direct sales channel — one that has many wondering about the viability of the business model. That model still does about $7 billion in annual revenues for Avon, although it is a much healthier business in the emerging markets — Brazil is Avon’s largest market — than in a developed market such as the U.S. Even so, direct marketers in the U.S. such as Mary Kay and Alticor don’t seem to be plagued by the same issues facing Avon.
Cabi, one of the largest direct-sale women’s apparel businesses in the U.S., entered the Canadian market this summer. One of Cabi’s advantages is its retention rate. Michael C. Salvator, senior managing director and chief financial officer at J.H. Whitney, whose firm is a Cabi investor, said, “Once stylists get past their fifth season, [Cabi] rarely lost them so they stay forever.” Many stylists begin at Cabi as part-timers and then become full-time consultants, earning annual net incomes that could reach $30,000 for a workweek that’s between 9 to 30 hours. On average, they host 17 shows in five months.
That raises the question of why Avon seems to have a hard time in either retention or recruitment of its sales reps. Industry sources have criticized the beauty company for not providing enough support to its sales team, and the income levels that are generated are said to be insufficient even on a supplemental basis. It also raises the question of why Cerberus would want to acquire Avon’s North American arm — and what it might do with it if it does.
Sources who have taken a close look at Avon suggest that perhaps direct selling should be broadened to other channels, particularly in developed markets, such as the U.S.