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Avon Products, Inc. (AVP): Will Admitting a Mistake Help This Specialty Retailer Improve?

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Avon Products, Inc. (NYSE:AVP)Avon Products, Inc. (NYSE:AVP) is selling its Silpada jewelry business. The company’s revenue has been at a virtual standstill for around five years, with earnings heading lower and lower. Taking the loss on the jewelry business is a good step, but more is needed.

A good story

Avon Products, Inc. (NYSE:AVP) is one of America’s great stories. The direct selling model grew quickly in this country and then expanded overseas. Today, Avon has operations in more than 100 countries, with North American sales making up just 15% of the top line in 2012.

Direct selling is a wonderful model for expanding overseas. It doesn’t require significant investment by the company or the sales agent, and, thus, can expand quickly. That’s particularly true in emerging markets, where the company’s representatives likely don’t have the money to invest in expensive business ideas and have limited access to capital. Avon Products, Inc. (NYSE:AVP) gives them an outlet for their entrepreneurial drive.

The growth potential in emerging markets is huge. Tupperware Brands Corporation (NYSE:TUP), a direct seller of plasticware, kitchenware, and beauty supplies, is projecting the global middle class to expand from 1.8 billion people today to 3.2 billion people by 2020. Emerging markets will account for virtually all of that growth. Avon Products, Inc. (NYSE:AVP), then, should be hitting on all cylinders.

Not living the dream

Unfortunately, Avon Products, Inc. (NYSE:AVP) has been in neutral at best. The company’s bottom line has dipped into the red as its corporate efforts haven’t resonated with its sales force or customers. The 2010 purchase of Silpada, for example, was supposed to add value, but has only hurt performance and muddied the brand. Avon Products, Inc. (NYSE:AVP) has written off almost the entire cost in about two years and is now selling Silpada back to its founders at a steep discount.

The company knows it has problems, however, and the Silpada sale is one step toward fixing them. The list of issues management highlights includes: “Lost sight of who we are and who we serve, Significant talent and leadership gaps, Poor execution and strategic missteps, Lost external focus, and Financial health eroded.”

Fixing things

Selling Silpada will help refocus the company on core brands. The cash salvaged from the investment will go toward shoring up the balance sheet, as will the saving from a dividend cut. Meanwhile, the company is working to streamline its operations and integrate more technology into its business. These are all good steps, but more time is needed for them to take hold.

Investors meanwhile, have largely cheered the company’s efforts, sending the shares up around 30% since the start of the year. That’s too far, too fast for a company that last saw a year over year sales increase during the 2011 holiday season. The top line fell between 20011 and 2012 and is essentially at 2008 levels, the middle year of the deep 2007 to 2009 recession.

A better option

Investors that like the direct selling model in emerging markets should look at Tupperware Brands Corporation (NYSE:TUP). Around 60% of the top line comes from emerging markets and sales have been on a steady climb for a decade. The only notable anomaly was a less than 2% sales decline at the tail end of the recession in 2009. Sales were flat between 2011 and 2012, but a weak third quarter in 2012 was largely to blame. Sales have improved since that point.

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