Avon Products vs. Tupperware in addressing the new paradigm.
Through the halfway mark in the fourth quarter, publicly traded Direct Selling stocks continued to outperform the broader market and consumer index averages so far in 2018. The Lane Research Direct Selling Index, which comprises the stocks of the six publicly traded direct selling companies we follow that are listed in the U.S., Herbalife Nutrition (HLF), Medifast (MED), Nu Skin Enterprises (NUS), Tupperware Brands (TUP), USANA Health Sciences (USNA) and London-based Avon Products (AVP), is up on average nearly +30 percent year to date compared to modest gains so far this year in the S&P 500 following the October sell-off. The Consumer Cyclical ETF (XLY) is up about +8 percent and the Consumer Staple ETF (XLP) is down modestly this year so far.
The key reasons for the strong outperformance have been:
YEAR-OVER-YEAR ORGANIC SALES GROWTH LAST 7 QUARTERS
- on balance business has been substantially better than expected at the beginning of the year, so many of the companies have been delivering results ahead of Wall Street expectations.
- multiples on the stocks have expanded following the covering of a large short position in industry bellwether Herbalife Nutrition early in the year.
As the chart illustrates, organic sales growth for the Group continued to accelerate as 2018 progressed. The Group Averages, which are sharply but not solely influenced by the dramatic performance of Optavia this year, have accelerated from posting +10 percent growth on average in the 2017 Q4 to +11 percent in the 2018 Q1, +18 percent in the Q2 and then +25 percent in the Q3. Along with the strong performance at Optavia we have also seen accelerating growth at Herbalife, Nu Skin and Usana as 2018 progressed as well.
Clearly the newer, more wellness-based companies are in the sweet spot of direct selling at present versus the older, more traditional brands like Avon Products and Tupperware. However, age of concept and product categories are not the sole definers behind the success of the former mentioned companies, in our view. We believe it is no coincidence that these companies are also the ones that have spent heavily behind new product development, including a complete rebranding at Optavia, and in technology to advance social selling and the ease with which their respective representatives can manage their businesses and more efficiently market to their customers.
Privately held Rodan + Fields was on the leading edge of this movement at the end of the last decade, and has built a $1.5B skin care business in the U.S. in a short period of time. That is a bigger presence in the U.S. of any of the publicly traded direct selling companies we follow, which have been around for a lot longer. And oh, by the way, according to a recent company press release, Euromonitor has ranked Rodan + Fields as the #1 skin care brand in the U.S. among all distribution channels, with the company projecting continued double-digit growth for the next 5 years.
How are Avon and Tupperware Addressing the New Paradigm?
So, as 2019 unfolds, what are Avon and Tupperware going to do to keep from being left behind? Below are 5 commonalities and 5 differences in their situations as we see it:
KEY COMMONALITIES
- NEW CEOs. Jan Zijderveld took over as CEO of Avon in February and Tricia Stitzel became CEO of Tupperware in May.
- The new CEOs have brought in new lieutenants. Among new Avon leadership appointed this year are regional heads for markets that account for >50 percent of its business, while Tupperware has new Group Presidents in 3 of its 5 main divisions, which account for over 80 percent if its sales.
- Increased focus on technology and social selling. Tupperware is rolling out enhanced mobile applications for on-line and off-line ordering, including catalogs that can be shared with social media. Avon is launching My Avon Store and My Avon Office, and rolling out e-brochures to help reps manage their sales process and business management.
- Cost reduction programs. Avon has just come off a sweeping 3-year cost savings program and recently announced another program of additional savings while Tupperware is most of the way through a much more modest cost savings program announced early last year.
- Liquidity to finance growth initiatives. Both Avon and Tupperware have ample cash and borrowing capacity to begin to implement their respective growth initiatives. Additionally, the fourth quarter is the largest cash generator seasonally for each company, so they should be in a good financial position to hit the ground running in 2019.
KEY DIFFERENCES
- Starting at the top, new management at Avon are outsiders. While at Tupperware they are insiders. Avon has recruited talent with senior level experience at other direct selling concepts such as Herbalife, Natura and Nu Skin as it looks to rebuild its direct selling chops after having abandoned many of them over the years. Tupperware’s recent management moves have been with existing talent, indicative of a much deeper bench from which to draw.
- Avon has been in a state of decline for the better part of 10 years. While growth at Tupperware has stalled only in the past 1-2 years. In 2010, Avon had 6.5 million representatives, which has declined to about 6 million today while globally, people participating in direct selling went from approximately 80 million in 2010 to over 100 million today. While not quite keeping pace with the broader direct selling market, Tupperware has continued to consistently grow its sales force, increasing to 3.1 million sellers today from 2.6 million in 2010.
- The magnitude of the initiatives for Avon are much larger. Initiatives will take longer to implement than at Tupperware. Avon’s initiatives include hundreds of millions of dollars in spending behind its brand, representatives, category competitiveness and various technology initiatives between 2019-2021. It could be years before investors see the fruits of what has begun to be implemented. The initiatives at Tupperware are much more modest, mostly around technology advancements to develop ecommerce capabilities and enhance the ability of its sales force to manage and grow its business.
- Tupperware generates ample free cash flow. Tupperware’s free cash flow pays a generous dividend and is still able to self-fund its growth initiatives. While Avon is relying on generating an additional $400MM in cost savings from the business over the next 3 years on top of the $350MM realized in the past 3 years to self-fund its growth initiatives.
Bottom line, from where we sit Avon looks like a real fixer-upper after many years of neglect. We like what new management has done early in the process, but it’s a tall task to execute on all the initiatives management has outlined, while self-funding the efforts by taking costs out of the existing infrastructure. And, as management outlined at its Investor Day in September, it will take time. Conversely, we view Tupperware as more of a remodel coming off a very successful 10+ year run of positive organic sales growth from 2006 to 2017. Injecting new energy with the new management team may be all the catalyst it needs to get back on a growth track. Meanwhile, existing cash flows should be ample to finance the investments and still pay a healthy dividend while investors wait for growth to resume, which could come as soon as this year.
However, Avon recently received a big vote of confidence from the investment community as legendary value investor Bill Miller recently took a very large stake in the company. Sometimes it pays to be the discerning eye looking beyond curb appeal.
Douglas M. Lane, CFA—is a securities analyst with more than 20 years of experience covering companies that employ a direct to consumer business model. He leads a boutique equity research firm, Lane Research, focusing on those companies. He can be reached at doug@laneres.com.
