Avon's turnaround plan does not instill confidence

A rally in struggling cosmetics maker Avon Products Inc's shares fizzled on Friday after analysts questioned the company’s ability to carry out its turnaround plan and sought more details.

Avon outlined plans to spruce up its flagging business at an investor meeting on Thursday, that included cutting $350 million in costs in the next three years, reinvesting in technological capabilities and making better use of social media.

Shares jumped 15 percent on Thursday after Cerberus Capital, who became Avon's top investor in December by taking a 17 percent stake, said at the meeting that Avon was "significantly undervalued" and that it had "zero concerns about liquidity".

Analysts, however, called Avon's plans "age-old", "familiar" and lacking constructive detail.

"We came away from Avon's analyst meeting without gaining confidence in a successful turnaround," B.Riley analyst Linda Bolton Weiser said in a note.      

 Avon’s plans also include seeking alternatives for its China business, which contributes only 1 percent to sales.

"These opportunities are not new, and Avon offered little detail to instill confidence that things will be different this time," Wells Fargo Securities analyst Chris Ferrera wrote.

Shares of the company fell as much as 5 percent on Friday, but were still trading above the life-low of $2.22 it touched on Wednesday.  

Avon, known for its Avon-ladies, mostly reaffirmed its 2015 forecast, but Chief Financial Officer James Scully disappointed analysts by giving minimal guidance on 2016 and shying away from revealing the company's cash flow.

Eight of the 13 brokerages covering Avon recommend holding the stock, while one has a sell rating. They have a median price target of $5, according to Thomson Reuters data.  

Avon trades at 10.04 times forward earnings, compared with a sector median of 20.34, according to Thomson Reuters data.

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Cerberus Capital said it intends to work with Avon "hand in glove" to cut costs, improve its brand positioning and contemporize the business.

"We got the sense...that if people don't deliver, Cerberus will not be shy in replacing them at all levels," Alliance Bernstein analyst Ali Dibadj said, terming Cerberus' involvement as "adult supervision".

Avon has seen sales decline due to a lack of innovation and an inability to stand up to bigger rivals like Estee Lauder Cos Inc and L'Oreal SA.

Concerns have also been raised that the company's direct-selling model is ineffective in the age of social media.

Cerberus, however, said it was confident that the direct-selling business model was not dying.