Shadow of a Doubt
Ding-dong. Avon falling.
Shares of Avon Products Inc. (ticker symbol: AVP) plunged last week after the direct seller of cosmetics, jewelry and gifts warned of a weak fourth quarter, in good part because economic woes in Brazil and Asia are upsetting its sales in those regions.
And Avon isn’t alone. The problems overseas are making investors wary of other big U.S.-based marketers of personal and household products that have a global presence, such as Colgate-Palmolive Co. (CL) and Alberto-Culver Co. (ACV).
Many of the stocks are showing little change from mid-year, after which the economic struggles (and currency devaluations, in some cases) in South America, Asia and other regions have been taking hold.
Looking ahead, “there’s so much uncertainty” about those economies, leading to “general nervousness on the part of investors,” said analyst Carol Warner of Prudential Securities Inc.
“People talk about these problems spreading everywhere in emerging markets, and a lot of these companies are depending on emerging markets for their growth,” she said.
Avon has been among the biggest losers lately. The stock, now at $56.44 a share, dropped 8% in a single session last week after the company said its fourth-quarter profit would not meet Wall Street’s expectations.
Avon Chairman James E. Preston said the problems in Brazil and elsewhere “are not new ones, but they are having a more significant impact on the quarter than we earlier anticipated.”
Avon’s announcement also caught analysts off guard (and annoyed more than one) because the company had given them a bullish presentation only a month earlier. Among other things, Preston had raised Avon’s sales growth targets to between 8% and 10% annually, up from 6% to 8%.
Those targets haven’t changed despite the latest problems overseas, Preston said. But that didn’t stop several analysts from quickly cutting their ratings. Constance Maneaty of Bear Stearns & Co. was among those removing “buy” recommendations.
There’s no question, though, that Avon--whose goods are peddled by about 2.3 million “Avon ladies” and men, including 440,000 in the United States--has become a much stronger company under Preston’s leadership.
In the late 1980s, Avon was in serious trouble after a disastrous diversification effort that saddled the company with debt and made it ripe for a takeover. But Preston and his team streamlined the 111-year-old company, boosted its earnings and expanded into such emerging markets as Eastern Europe and China.
Avon’s net income last year was $318 million on sales of $4.8 billion, a 62% surge in profit from just two years earlier. During the same two years, Avon’s stock doubled in price.
Trouble is, Avon still faces hurdles at home even as it grapples with problems in far-off lands.
Avon is struggling to grow in the mature U.S. market in large part because Avon’s sellers aren’t reaching enough young working women, especially in the big cities--women who have a multitude of competitive products to choose from in all manner of stores. Preston has said Avon must change somehow to capture more of those consumers.
Add it all up and many analysts are urging investors to look at Avon cautiously, at least for now, even though they still like Avon’s long-term prospects. But one, Diana Temple of Salomon Bros., still rates the company a “buy” despite “the caution on Brazil.”
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Meanwhile, shares of Revlon Inc. (REV) aren’t doing any better, and in fact have been on a steady slide since mid-September.
Brenda Lee Landry of Morgan Stanley, Dean Witter, Discover & Co. noted that Revlon announced it’s paring its emphasis on mass-merchandised fragrances to focus more on its core cosmetics lines. (Last year, 58% of total sales were of cosmetics.) That’s a good move long term, she said, but it means Revlon’s fourth-quarter results “will be penalized.”
“That’s what started” the nose dive in Revlon’s stock, and “concern about Brazil certainly added to it,” said Prudential’s Warner, adding that about 6% of Revlon’s sales are generated in Brazil.
Even so, Warner, who sees Revlon’s shift away from fragrances as beneficial, has a “buy” on Revlon. “The fundamentals of their business are still very strong,” she said.
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One of the stronger personal-products stocks is Estee Lauder Cos. (EL), whose brands include Clinique cosmetics. The stock moved sharply higher after the company announced plans last week to buy a smaller, privately held cosmetics maker, Aveda Corp., for $300 million.
In addition, analyst Janet Kloppenburg of BancAmerica Robertson, Stephens & Co. raised her rating on the stock to a “buy.” The stock, at $52.56 a share, has climbed more than 10% over the last week.
Estee Lauder also has a good track record despite operating in volatile foreign markets. The company’s earnings per share have grown a sizzling 26.6% on average over the last five years, double the 13% average for the industry, according to the research firm Market Guide Inc.
Alberto-Culver also ranks high in earnings growth, and its chain of Sally Beauty beauty supply stores has been exceptionally strong. The company’s third-quarter sales rose 5% from a year earlier, and net income jumped 15%, even though the strong U.S. dollar and overseas weakness cut into its foreign results.
That’s why the company--whose brands include VO5 and St. Ives Swiss Formula--is on Goldman, Sachs & Co.’s list of recommended stocks. But other analysts are more neutral toward the company because the stock skyrocketed 162% between mid-1994 and the middle of this year, raising doubts that the stock can continue to post strong gains over the next few months.
Gillette Co. (G) has been on a roller coaster this year, surging in the spring and then slumping in the summer, in part because its Braun electric-shaver business ran into unexpected sales weakness in Europe and Japan. The company has also been buffeted by the strong dollar and the economic tumult overseas. Nevertheless, Gillette’s stock has been rising and now sells at a lofty 36 times its expected 1997 per-share earnings.
And several analysts still view Gillette as a premier stock; last week, Donaldson, Lufkin & Jenrette Securities alerted clients that Gillette remains on its recommended list.
The stock also got a boost after reporting “very impressive” third-quarter results, which included a 15% gain in net income compared with a year earlier, noted Redman & Renshaw analyst Marie de Lucia.
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Times staff writer James F. Peltz can be reached at james.peltz@latimes.com
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Personal Effects
Economic and currency troubles in Latin America, Asia and other regions are causing problems for big U.S.-based sellers of cosmetics and other personal-care products.
A look at some of the major players:
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% chg. EPS growth Ticker Monday from rate last Stock symbol close 6/30 P/E* five years Alberto-Culver ACV $30.81 +10% 22 15.9% Avon Products AVP 56.44 --18 23 10.3 Colgate-Palmolive CL 66.06 +1 27 40.3 Estee Lauder EL 52.56 +2 30 26.6 Gillette G 91.31 --4 36 12.0 Revlon REV 35.31 --35 28 NA
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* Price-to-earnings mutiplr based on analysis consensus estimate of 1997 earnings.
NA: Not applicable; went public in February 1996.
* Sources: Bloomberg News, Market Guide.
