Truta Oana-Patricia

FEAA, Finance- Banking, 3rd year

 1. General presentation of Avon

1.1 Generalities

Avon Products, Inc, known as Avon, is an American international manufacturer and direct selling company
in beauty, household, and personal care categories. As of 2012, Avon had annual sales of $10.0 billion
worldwide in 2013.
It is the fifth-largest beauty company and second largest direct selling enterprise in the world, with 6.4 million
representatives. Avon Products is a multi-level marketing company. The company's CEO is Sherilyn S.
McCoy, who was appointed to that position in April 2012. The former CEO, Andrea Jung, became the
executive chairman of the board. Recently, Avon has struggled with the global sales falling for 5 straight years
and North American revenues falling 18% in 2014.
1.2 International expansion

Avon sells products in over 100 countries. Brazil is the company's largest market, passing the United States in
2010. Avon entered the Chinese market in 1990. Direct selling was outlawed in China in 1998, which forced
Avon to sell only through physical stores called Beauty Boutiques. The ban was lifted in 2001, and the
company received a license for direct selling in 2006.
88% of Avon's 2013 revenue (around $10 billion) came from overseas markets.

1.3 Mergers and acquisitions

Avon purchased Silpada, a direct seller of silver jewelry, in 2010 for $650 million. In May 2012, perfume
company Coty, Inc. offered $24.75 a share for Avon, which was nearly 20 percent above Avon's stock price at
the time. While Fox Business Network reported that Avon delayed the process and Coty withdrew its
offer, earlier reports said that Avon rejected the bid, stating "At the time, the board concluded, and it still
believes, that Coty's indication of interest is opportunistic and not in the best interest of Avon's shareholders."
 2.Financial performance of Avon

2.1 General financial performance

As of the last financial year, meaning 2014, the chief Executive Officer has declared that she is
committed to ensuring that this iconic beauty brand remains a source of inspiration and
empowerment for women around the globe for decades to come. And that the only way to
continue to accomplish this is to return Avon to sustainable, profitable growth. Although Avons
turnaround journey has taken longer and been more complex than she had originally expected,
she remains confident that we will succeed in their mission of returning Avon to sustainable,
profitable growth, which will create long-term shareholder value.
 2.2 The book value of assets

Consolidated Balance-Sheet for the last 5 years

The value of the assets over the 5 reported financial years decreased. Considering the first year,
which is 2011, the total assets have a value of $7,735.0 mil., whereas, in the first quarter of 2015 in
$4,872.3 mil. Of course, these two values cannot be yet compared because for the second
component the financial year hasnt finished yet. But, it can be said that the value of the total
assets has decreased considerably starting from the year 2013, which had a value of 6,492.3 and
the year 2012, which had a value of 5,496.8.
Moreover, one component of the assets is represented by the tangible assets. In the above
presented balance sheet they are present also at their initial value and at book value. The
compounding elements of the tangible assets are represented by:
Inventories
Cash and cash equivalents
Property, plant and equipment at the net value
Land
Building with their improvements
These tangible assets, represents a portion of the total value of the assets:
Year 2011- 70,528,300/7,735,000= 91%
Year 2012- 67,880,000/ 7,382,500= 92,6%
Year 2013- 967759/6,492,300= 67,08 %
Year 2014- 26,7%
Year 2015-64,8%
Also, another component of the assets is represented by the intangible assets. These assets are solely
presented at their book value, the amortization, being already taken into consideration and computed for each
element. The components of the intangible assets are represented by:
Accounts receivable
Prepaid expenses
Goodwill
Other intangible assets
Year 2011-1684661/7,735,000 =21%
Year 2012- 1909440/7,382,500=26%
Year 2013- 1648100/6,492,300=25%
Year 2014- 1431100/5,496.8= 26%
Year 2015-1334900/4,872.3= 27%

As it can be observed, compared to the intangible assets, the tangible assets, represent a large portion out of
the total value of the assets.

2.3 The book value of liabilities

CONSOLIDATED BALANCE SHEET FOR THE LAST 5 YEARS

Considering the total amount of liability within the Avon Company it can be said that, during the 5
consecutive reported years, the book value of the companys total liabilities decreased.
Comparing the first reported year, which is 2011, having a total value of liabilities of $6,149,800 with the
last year, which is 2014,Q1, having a total value of 4,859,600, it can be said that the amount in liabilities
of the company decreased in a big amount.
2.4 The book value of equity

CONSOLIDATED BALANCE-SHEET FOR THE LAST 5 YEARS

Determining the book value of equity through the substractive method:
Book value of equity= Total book value of assets- Total book value of equity
Book value of equity2011= 7,735,000 - 6,149,800 =7728850,2
Book value of equity2012= 7,382,500- 6,149,200 =1233300
Book value of equity2013= 6,492,300- 5,364,800= 1127500
Book value of equity2014=5,496,800-5,191,500=305300
Book value of equity2015=4,872,300- 4,859,600=12700

The book value of equity is also considered the book value of the company and it shows the value, at one
moment of time, of stockholders investment in the business.
For the first year the company had a very high value, meaning that the company during 2011 was extremly
valuable but, during the last 4 years the book value of the equity decreased drastically, making the company to
become underevaluated. This fact may have happened due to the fact that the company may have suffered
from a loss of confidence from the stockholder, who refussed from various reasons to invest in the company
or many other reasons.
 2.5 The book value of shares

The book value of shares measuresthe value of common stock based on the information reflected in the
balance sheet. As the common stock definition states, it represent the type of ownership interest in any
corporation. In our case, the common stock represents the title of the general ledger account which is
credited when a corporation issue new share of common stock.
The general formula for determining the value of common stock is:

BVPS= * 100;

In the Avon company case, the formula is applied as follows:

BVPS2011= *100 = 4126450

BVPS2012= *100 = 672830

BVPS2013= *100 = 59530

BVPS2014= *100 =162739

BVPS2015= *100 = 6762,5

Considering the results above, the value of the common stock was at its peak in 2011 when its value was $
4126450. But, the next 4 years the value of the common stock decreased having the lowest value in 2014, of
162739; the year 2015 is not considered due to the fact that it doesnt reflect the value of the common stock
for a whole year, only for a quarter.
It can be said that this effect of decrease in common stock may have occurred due to the fact that the
stockholders of the company may have decided to lower their issuance of stock due to reasons like: lack of
credibility on the financial markets, the company may have had financial issues, etc.
 3.Financial Ratios of the company

There can be used many financial ratios in order to determine the value of Avon but the ones presented above
are considered to be the most relevant in terms of valuation:

3.1 Market-to-book ratio

It represents a financial ratio that is used to compare a book value of a company to its current market value.
 3.2 Dividend per-share ratio
The DPS represents the amount of dividend that a company pays per share of common stock. In other
words, the dividend per-share ratio represents the sum of the declared dividend for every share issued. It
represent the total dividends paid out over an entire year, which are then divided by the number of
outstanding ordinary shares issued. The formula for dividend-per share is as follows:

DPS =

The values of the total annual dividends can be found in the cash flow statement, from the cash
flow from financing activities section of the Avon Company:
Cash Flows from Financing Activities 2015 2014 2013 2012 2011

Cash dividends (26.2) (110.2) (106.8) (329.3) (403.4)

Debt, net (maturities of three months or less) (6.3) (28.8) (1.2) (710.5) 635.7

Proceeds from debt NA 70.0 1,488.2 735.8 88.9

Repayment of debt (2.9) (140.2) (1,942.7) (138.3) (614.6)

Interest rate swap termination NA 0 88.1 43.6 0

Net proceeds from exercise of stock options 0 0.2 15.9 6.2 16.8

Excess tax benefit realized from share-based compensation NA NA NA NA (0.2)

Repurchase of common stock (1.9) (9.8) (9.4) (8.8) (7.7)

Net cash used by financing activities (37.3) (218.8) (467.9) (401.3) (284.5)
The dividend per share ratio for the Avon Company can be computed as follows:
DPS2011 = = 2,15 %

DPS2012 = = 1,74 %

DPS2013 = = 0,56 %

DPS2014 = =0,58 %

DPS2015 = =0,13 %

As the dividends represent a form of profit distribution to the shareholder it can be said that for the Avon
Company, the period with the highest growth was in the year 2011, with the value 2,15 % paid out as dividend
from the common stock. But, as it can be seen, the next 4 years the value of the dividend per share decreased.
This can mean that the company may face financial issues and the investors decided to sell their shares, this
consequently leading to a drop of the market value of the company.
 3.3 Dividend payout ratio
The dividend payout ratio represents the percentage of earnings that is paid out as dividends to investors.
Dividend Pay-out Ratio represents investment formula to measure corporations' dividend policy.
The formula is as follows:

DVPR =

DVPR2011 = = 0,036 %

This percentage indicates the fact the company has dividend pay-out ration between 0 and 1, meaning that for
the year 2011, the company, out of all the total earnings, it pays dividends having a percentage of 0,036% and
the rest of the total earnings are reinvested in the company.

DVPR2012= = 0,031 %

This percentage indicates the fact the company has dividend pay-out ration between 0 and 1, meaning that for
the year 2012, the company, out of all the total earnings, it pays dividends having a percentage of 0,031 %
out of the total earnings, which is lower with 0,05% lower than the one from 2015. It can be said that this
difference is not very relevant, thus, the company maintain, basically the same state regarding the dividend
policy.
DVPR2013= = 0,010 %

This percentage indicates the fact the company has dividend pay-out ration between 0 and 1, meaning that for
the year 2013, the company, out of all the total earnings, it pays dividends having a percentage of 0,010 %,
which is much lower than the one from 2012, meaning that the company has decided to increase the amount
of money in the company, and consequently, lower the dividends to the shareholders.

DVPR2014= = 0,012 %
This percentage indicates the fact the company has dividend pay-out ration between 0 and 1, meaning that for
the year 2014, the company, out of all the total earnings, it pays dividends having a percentage of 0,10%,
which is higher with 0,02% more bigger than the one from 2013. It can be said that this difference is not very
relevant, meaning that, the company maintained its dividend policy of lower dividends to shareholders and
more money in the company.

DVPR2015 = = 0,014 %

This percentage indicates the fact the company has a dividend pay-out ration between 0 and 1, meaning that
for the year 2015, the company, out of all the total earnings, it pays dividends having a percentage of 0,014%,
which is much lower than the one from 2014. But for this year, it must be considered also the fact that the
financial data presented are only for the first quarter of the year 2015, thus, they can be considered incomplete
and not relevant for this ratio.
3.4 Return on equity
The return on equity ratio shoes how profitable is the company using the equity, which represent money
raised from the shareholders. In other words, it show how much does the company generate profit by using
the money invested by the shareholders. A high return shows that the company is making very profitable
investments, leading to higher stock prices. The formula is as follows:

ROE =

ROE2011 = = 14,41%

ROE2012 = = 84,3 %

ROE2013 = = 86 %

ROE2014 = = 28 %
 ROE2015 = = 13,87 %

In Avon company case, the ROE for the year 2011 is small, with a value of 14.41 %, meaning that the
company did not make very much use of the money from the shareholders. But, in the year 2012 and 2013,
the company had extremely high ROE, for 2012 of 84,3 % and for 2013 of 86%, which means that the
investors decided to invest more into the company, generating a very high profit and, consequently to higher
stock prices.
However for the next two years, namely 2014 and 2015, the ROE decreased drastically, having the values of
28 % for 2014 and 13,87 % for 2015. This may have happened due to the fact that the investor decided not to
invest more in the company, thus making the company to generate less profit from the available resources.