Collect Over 10.5% Yield-to-Maturity with Avon Products, Bonds Mature March 2023

  • A 62% increase in operating profit
  • The company’s average order was up 6%
  • Operating margin was up 160 basis points over last year’s Q2

This week, Durig Capital takes a look at a 130-year old company, whose name is synonymous with direct selling. Avon Products is now a global manufacturer and distributor of a wide range of beauty products. The company’s recently posted its most recent quarterly results.  Some of the highlights include:

  • A 62% increase in operating profit.

  • The company’s average order was up 6%.

  • Operating margin was up 160 basis points over last year’s Q2. 

The company has introduced new initiatives to digitize its business via social media as well as to begin reinvesting in its representatives, providing state-of-the art training and updating its representative compensation plans. Additionally, the company recently completed the early redemption of its 2019 bonds, which is a great sign for bondholders. Avon has taken on new management in key positions to drive the revitalization of its brand. Results for Q2 were incremental, but show the determination of management to redefine this brand. Avon’s 2023 bonds, couponed at 7.0%, with a current yield-to-maturity of over 10.5%, provides investors with excellent diversification into a consumer / retail brand and are an ideal addition to Durig Capital’s Fixed Income 2 (FX2) Managed Income Portfolio, the most recent performance of which is shown below.



Highlights from Q2

Avon recently released its results for the three months ending June 30, 2018. The company is starting to see some encouraging trends as it continues to focus on representative growth as well as digital initiatives.

  • Operating Profit was up 62% for the quarter to $53.0 million, due in part to a 9.4% decrease in selling, general and administrative expenses over last year.

  • Operating Margin was up 160 basis points in the quarter, to 3.9%, while adjusted operating margin was up 60 basis points to 5.7% in Q2.

  • Average order in constant dollars increased 6% in Q2 over the same period last year.

In Q2, Avon also successfully completed the early redemption of its 2019 bonds which reduced its debt and improved its balance sheet. Finally, three of the company’s top five markets showed incremental growth in Q2 – Mexico, Argentina, and the Philippines.


(Source: Avon Investor Presentation – Q2 2018)

About the Issuer

In 1886, 32 years before women in the U.K. earned the right to vote, Avon’s founder, David H. McConnell, helped give them the chance to earn an independent income. From a small New York City office, McConnell mixed the company’s first fragrances himself, and recruited a team of women to be Sales Representatives. It was an inspired idea: women had a passion for his products and loved networking with other women, so it turned out to be a brilliant business model, which works just as well today. Today, Avon is the company that for 130 years has proudly stood for beauty, innovation, optimism and, above all, for women. Avon products include well-recognized and beloved brands such as ANEW, Avon Color, Avon Care, Skin-So-Soft, and Advance Techniques sold through approximately 6 million active independent Avon Sales Representatives.

Cosmetic Industry Trends

Globally, the cosmetic industry was worth USD $532.4 billion in 2017. By 2023, this is expected to grow to $805.6 billion, growing at a compound annual growth rate of 7.14% between 2018 and 2023.  The cosmetic industry is one sector globally which is mostly impervious to ups and downs. Overall sales may be affected in the case of an economic downturn, but generally sales of cosmetics retain a certain value overall. This is due to the growing usage of products by women and increasingly, men as well. Other major drivers globally are the declining fertility and mortality rates, which has resulted in an increasingly aged population. These aging men and women have a strong desire to retain a youthful appearance and this has nurtured the cosmetics industry worldwide. Rapidly aging demographics has created a robust demand for anti-aging products in order to prevent wrinkles, age spots, dry skin, and uneven skin tone, creating room for new cosmetics.

Market research firm NPD Group cited five trends driving the beauty market in 2018. These trends included social media and online beauty shopping. The firm refers to social media as the “biggest driver in makeup” thanks to social sharing. And online beauty shopping has seen double-digit growth since the firm began tracking it.  Avon is capitalizing on both social media and the ease of online shopping to spark growth in its sales.


New Initiatives to Revitalize the Brand

At its core, Avon is a direct-selling business. It makes sense then, that the company has a new, laser focus on boosting the growth of its sales representatives, as well as providing significant improvements in servicing these representatives. During April this year, Avon managers made 25,000 calls to its representatives to get feedback and gauge representative satisfaction. In conjunction with the feedback the company received, it has initiated several programs designed to assist it representatives in building their businesses. These include the following:

  • Distinct training programs and compensation programs that differentiate between full time and part time representatives – Avon’s new Global Training Academy, which will deliver training within each country, aims to train a half million of the company’s representatives by year’s end. In addition, Avon has designed new compensation plans that also differentiate between full-time and part-time representatives, giving full-time representatives better margins, different incentives and different tools to grow their business.

  • Digitizing the Business via Social Media – Avon recently launched a fully digitized, mobile-enabled e-interactive brochure which allows representatives to connect quickly and effectively with their customers. The representative can share the brochure via social media platforms, where the customer can then open the brochure on a mobile device, shop and add products to a basket, then send this back to the representative where a new order is created. The buying experience is seamless, easy and convenient. Upon its launch, the e-brochure received more than 500,000 visitors with positive feedback from across Avon’s sales network.

Avon has also put into place new management and created new positions to help the company accelerate its transformation to a digital beauty brand. Jan Zijderveld, Avon’s relatively new CEO, is committed to building a “new, modern and relevant Avon that is both high-touch and high-tech.” In addition, Avon created a new position, chief digital and information technology officer, and has hired Benedetto Conversano to help Avon develop a new digital strategy while standardizing technology delivery across the company.

 Interest Coverage and Liquidity

 Interest coverage is of paramount importance to bondholders as it indicates a company’s ability to service its existing debt. For its most recent quarter (three months ending June 30, 2018), Avon had operating income of $53.0 million and interest expense of $34.5 million, for an interest coverage ratio 1.5x. The company also has excellent liquidity levels, with $443.9 million in cash as of June 30, 2018.



The risk for bondholders is tied to whether Avon can grow its representative base (and therefore revenues) as well as successfully complete its digital transformation. The company stated it will continue to focus on representative recruitment in the second half of the year. The new global training academy will help focus the company’s efforts by training its new and existing representatives in the best ways to grow their businesses. And the company’s first digital tool, its e-brochure, has already had more than 500,000 views. For bondholders, these developments, along with the company’s very healthy cash levels and its early redemption of its 2019 bonds, appear to indicate that Avon is headed in the right direction.


In Q2, Avon experienced a drop in revenues due to a trucker’s strike in Brazil. Currently, the South American nation accounts for almost a quarter of the company’s sales.  The strike resulted in lower sales, slower cash collection, higher inventory levels and loss of representatives. While the company is already repairing the damage from the strike, any other similar challenges in the company’s key markets could significantly affect the company’s revenues.


In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments.  Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.



Summary and Conclusion


Avon has a long and distinguished history. The company, which grew on the representative’s ability to work as much or as little as she desired, is now evolving to a more professional salesforce, with training and tools and richer compensation programs to entice representatives to make this more of a career and not a side job. Management has put in place a team to digitize the way they do business and has had a solid start with its newly designed e-brochure. Representatives are being encouraged to use social media to reach their customers and leverage their efforts. The results are beginning to show, albeit in incremental amounts. In consideration of these efforts, Avon’s 2023 bonds, which currently have a yield-to-maturity of over 10.5%, make an ideal addition to Durig Capital’s Fixed Income 2 (FX2) Managed Income Portfolio, the most recent performance of which is shown above.

Issuer: Avon Products

Ticker: NYSE:AVP

Coupon: 7.0%

Ratings: B3 / B

Maturity: 03/15/2023

Pays: Semi-Annually

Price:  87.64

Yield to Maturity: ~10.52%



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About Durig Capital


Durig Capital provides investors with a specialized, transparent fiduciary service at a very low cost. Our FX2 (Discretionary Management) Portfolio over time has greatly outperformed our FX1 (Non-discretionary) Portfolio, giving significantly higher (at times double) the returns of FX1. Our professional service enables access to a broad spectrum of bond, high yields, and lower price points that are often found in less efficient markets, but not evidenced in many bond services.

Durig Capital and certain clients may hold positions in Avon’s March 2023 bonds.


We track thousands of bond issues and their underlying fundamentals for months, sometimes years, before finding any that achieve or surpass the targeted criteria we have found to be successful.  Our main priority is to provide the best opportunities for our clients.  Our bond reviews are first distributed to our clients, then published on our website and our free email newsletter, and lastly on the Internet and distributed to thousands of prospective clients and competitive firms. Bond selections may not be published if they have very limited availability or liquidity, or viewed as not being in the best interests of our clients. When high yielding bonds with improving fundamentals are acquired at lower costs, Durig Capital believes that investors will appreciate earning higher incomes with our superior high income, low cost, fiduciary services.


Please note that all yield and price indications are shown from the time of our research.  Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports.  We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.




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