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In the Headlines-April 24th, 2015

In The Headlines

Avon Stumbles in its Fight for Survival in a Changing Market

“Ding Dong, Avon calling,” was a familiar sound for decades in the United States, heralding the arrival of an Avon Lady selling beauty products door to door. But according to a recent Wall Street Journal report, that retail model may become a thing of the past in North America as the struggling direct-selling company looks at so-called “strategic alternatives.” These include the 129-year-old New York company possibly selling its business in its home market. An Avon spokeswoman declined to comment on the report, which came one day after Avon announced it is postponing an analyst day with Wall Street experts from May to the fall. During the interim, the company was to have laid out its latest turnaround plan.

Once the largest direct-selling company in the world, Avon has floundered in recent years, particularly in North America. In 2014, Avon’s North America revenue fell 18% to $1.2 billion, crumbling to barely half of its sales in 2007. And more worrying for a company that depends entirely on sales representatives, the number of Avon Ladies selling its products fell 18% at home. Globally, the size of its sales force fell for the fifth straight year.

The Wall Street Journal’s report comes about three years after Avon rejected a $10.7 billion takeover offer from smaller rival Coty Inc. In recent years, Avon’s U.S. business has struggled to adapt its direct selling model to the realities of modern life. Last year, Avon completed the first major overhaul of the avon.com website in 10 years, but it is now contending with nimble e-commerce rivals such as beauty online retailer Birchbox.

Avon’s offerings, generally lower-end, must also compete with vastly improved products at brick-and-mortar retailers such as Target, Walgreens, Kohl’s, and J.C. Penney, which has Sephora boutiques at hundreds of its stores. Some of the pain has come from confusing customers about what it stands for. Just a few years ago, Avon unsuccessfully tried to add higher-end products as well as silver jewelry to its line-up. The move was a total failure.

Efforts under Sheri McCoy—a Johnson & Johnson executive who took the reins in 2012—to fix Avon’s U.S. problems have not worked. Avon has struggled to make its commission structure competitive with that of competitors such as Mary Kay Cosmetics. One major failed initiative was the cancelation of a big software upgrade two years ago that had been designed to make tracking orders and compensation easier for reps.

While many on Wall Street have clamored for Avon to consider exiting the U.S. business altogether to focus on more promising markets such as Brazil, Russia, and Mexico, McCoy said last year that success in Avon’s home market was too important. “To not compete in one of the largest markets in the world doesn’t make sense. It’s the founding country of the brand; there are a lot of roots to the brand.” Going the retail route is not that simple either, given that the company has no systems in place to sell to stores. It is hard to see anything encouraging in Avon’s North American sales, particularly as the business has lost $132 million in the last two years. “Avon needs to do something big. This may be too little, too late,” said Ali Dibadj, a Sanford C. Bernstein analyst. “They’ve been throwing good money after bad for years.” Until last year, Avon could at least find some solace overseas, with promising numbers in some markets. But revenue in Latin America, Europe, and Asia all fell last year.

Three years ago, when Avon urged shareholders to reject Coty’s unsolicited bid, the company’s Board argued that they would get a better return by giving the newly appointed McCoy a chance to fix a company left in a shambles by her predecessor Andrea Jung. But now, the company is in worse shape. Its revenue is down 22% over a 3-year period to $8.8 billion, and the company is struggling to compete with aggressive competitors in places such as Brazil. Investors and analysts say it is hard to argue that McCoy has not had enough time to at least stabilize the ship. “Avon gets more grief from equity analysts than any company we’ve ever followed and it’s no wonder. Management continues to claim they know what’s wrong and how to fix it, yet results continue to languish,” said Carol Levenson, Director of Research, at Gimme Credit, an independent research service on corporate bonds, in a research note.

Iran Stock Fever Grows as a Possible End to Sanctions Looms

A final deal that removes international sanctions against Iran may still be months away, but foreign investors are not waiting to move into the market. London-based money managers including Charlemagne Capital Ltd. and First Frontier Capital Ltd. are putting together sanctions-compliant funds to allow investors to buy Iranian equities ahead of the buzz that they expect a final agreement would generate.

While there is the possibility that the preliminary pact Iran carved out with global powers does not lead to a full-fledged deal, the money managers are in essence saying they would rather run the risk of arriving too early than miss a rally in Tehran’s $110 billion equity market. Relief from economic sanctions may triple growth by removing barriers to the nation’s oil exports and ending the isolation of its banks from the global financial system, according to Dominic Bokor-Ingram, a portfolio adviser at Charlemagne. “We want to make sure our portfolio is exposed to companies that take advantage of that economic growth,” Bokor-Ingram said. “We hope to have a product in the next few weeks.”

The benchmark index of Tehran-listed stocks has gained 3.6% this month as negotiators agreed to seek a final deal by June 30. The rebound comes after a 17% slump in the 12 months through March as the talks stalled repeatedly, undermining confidence that President Hassan Rouhani could end decade-long sanctions. Even amid the standoff, the gauge jumped 300% in dollar terms in the five years through 2013.

Charlemagne projects that Iran’s economy could grow between 6% and 8% without the burden of sanctions, compared with estimates of between 1% and 3% in 2014. The company is betting that faster growth will augment businesses serving domestic demand. Templeton Emerging Markets Group Chairman Mark Mobius said in an interview that the “thriving” stock market in Tehran offers many opportunities, including consumer stocks. Total SA, Europe’s biggest refiner, said it is willing to resume operations in Iran if diplomacy succeeds.

Obstacles remain on the path toward ending sanctions on Iran in return for curbs on its nuclear program. U.S. and Iranian officials have bickered over the framework for further discussions, and Iran’s Supreme Leader Ayatollah Ali Khamenei signaled the possibility of extending the June deadline. Skeptics among U.S. lawmakers insist that Congress must review any final plan. Any excitement about Iran is “premature,” Hans-Henrik Skov, who manages $135 million in frontier markets at Coeli Asset Management, wrote in an e-mail from Copenhagen. “There are so many moving parts,” Skov said. “So many different interests from the U.S., Iran, Saudi Arabia and Russia are involved that I honestly do not believe any money managers really have a clue what is going on. Forecasting stuff like this is impossible in my world.”

While First Frontier and Charlemagne declined to detail their fund strategy to comply with sanctions, they said they are tying up with local companies to reduce risks. First Frontier is partnering with Agah Group in Tehran to set up a fund with a basket of 23 stocks. The London brokerage is waiting for regulatory approvals to start the fund, which will exceed $10 million. “We’ve worked quite hard and for quite some time to figure out how to make it completely compliant,” Nicholas Banszky, chairman of First Frontier, said. “We had to exclude stocks that are essentially sanctioned.” The fund may invest in companies such as Iran Khodro Industrial Group, Mellat Bank and National Iranian Copper Industries, according to Alexei Yazikov, head of research at First Frontier in London. Charlemagne is betting on banks, telecommunications companies and cement makers. The company, with $2.3 billion under management in emerging markets, is working with Tehran-based Turquoise Partners to co-manage a $70 million fund. “Everything we do, whether it’s before or after sanctions are lifted, will be sanctions-compliant,” Charlemagne’s Bokor-Ingram said. “We want to be ready as soon as sanctions are lifted and not start the process then.”

For investors who are still on the sidelines, low valuations of Iranian stocks may be tempting. The main index in Tehran trades at about 5.5 times earnings, according to Agah’s statement on its website. That compares with a multiple of 11.2 for the MSCI Frontier Markets Index. “We are keeping a close watch,” Rami Sidani, the head of frontier markets at Schroders Investment Management Ltd. said by e-mail from Dubai on April 9. “It’s definitely a market that could be very interesting for us. However, we need full clarity on the sanctions to move forward.”

1. http://for.tn/1OgB25H – Fortune
2. http://bloom.bg/1NMntjs – Bloomberg

The Good News Is . . .

• Sentiment among the nation’s home builders rose four points in April to a level of 56, according to the National Association of Home Builders (NAHB) /Wells Fargo Housing Market Index. The Index measures builder perceptions of current single family homes sales, sales expectations for the next six months, and it rates buyer traffic. The component measuring future sales rose five points to its highest level of the year. Sales expectations in the next six months jumped five points to 64, and the index measuring buyer traffic rose four points to 41. Any number over 50 indicates that more builders view conditions as good.

• Delta Airlines, Inc., one of the world’s global air carriers, reported earnings of $0.45 per share, an increase of 36.4% over year-ago earnings of $0.33. The firm’s earnings topped the consensus estimate of analysts by $0.01. The company reported revenues of $9.4 billion, an increase of 5.3%. Management attributed the company’s results to lower fuel prices and higher passenger volumes.

• The Finnish telecommunications company Nokia said on Wednesday that it had agreed to an all-stock deal to acquire Alcatel-Lucent worth $16.6 billion. The combined company is expected to become the world’s second-largest telecom equipment manufacturer, behind Ericsson of Sweden, with global revenues totaling $27 billion. The companies are betting that, by joining forces, they can better compete against Chinese and European rivals bidding to provide telecom hardware and software to the world’s largest carriers, including AT&T and Verizon in the United States, Vodafone and Orange in Europe, and SoftBank in Japan.

1. http://bit.ly/1PQ5Ldr – NAHB
2. http://www.cnbc.com/id/18080780/ – CNBC
3. http://bit.ly/1ywQkSr – Delta Airlines, Inc.
4. http://nyti.ms/1cxbUvR – NY Times Dealbook

Planning Tips

Tips for Calculating the Real Cost of a Vacation Cruise

When it comes to taking a cruise, your spending does not end when you have booked the trip. Lots of cruise-related expenses have the potential to ruin your budget, from the flight to your embarkation point to drinks on the cruise to shore excursions. So-called add-on expenses can equal or exceed the cost of your cruise if you are not careful. Below are some tips to help keep your cruise spending under control.

Book your own flight – Most cruises offer a complete package including airfare to and from your home city. While such a package offers the convenience of not having to book your own flight or worry about how to get from the airport to the cruise ship, that convenience comes at a cost. Cruise lines buy their airfare packages in bulk from the airlines a year in advance so the price you get through the cruise line does not vary throughout the year like normal airline pricing does. Sometimes the prices are lower than the open market, but for someone keeping a good eye on airfares and checking the discount sites, it will generally be higher.

Check up on shore excursions – Many travelers look forward to the variety of exotic ports of call on a cruise and generally turn to the shore excursions sponsored by the cruise companies. But by doing some homework before you leave, you can figure out exactly what you want to do when you are in port and book your own shore excursions for considerably less by cutting out the middleman, i.e., the cruise line. Many travel agents offer reports on the ports of call that highlight the various attractions and the best way to get around. Many travel guides also provide excellent suggestions. This kind of information gives you the insider knowledge to make potentially wiser decisions. Once you have figured out what you want to do, you can contact the vendors listed in a travel book or port report and make direct arrangements yourself, either by phone or on the Web.

Avoid using shipboard photographers – Shipboard photographers will snap your photo when you board and frequently throughout the voyage. Usually you have to buy a package of photos, rather than just one, so the cost can add up. Take a camera and shoot your own pictures. If you want photos of your group, friendly co-passengers will usually oblige.

Do not prepay tips – Tipping is an expense that can really add up. Passengers are expected to tip both their cabin attendant and assistant cabin attendant and regular waiter and assistant waiter daily. Recommended rates vary according to the cruise line, but $3.50 a day is generally expected for the cabin attendant and $2.50 a day for the waiter. Some cruise lines allow you to prepay your tips on your shipboard account, which removes the hassle, but it does not give you the opportunity to reward outstanding service or penalize poor service.

Call home in port – Using the Internet or phone while on board a ship can be very expensive, so save your calls or e-mails for when you are in port. Find an Internet cafe when you get off the ship and check in that way. You can also buy prepaid phone cards so that you can make calls in port as well.

1. http://aol.it/1NMo0Sv – Gadlin.com
2. http://bit.ly/1ziofJ2 – AARP
3. http://bit.ly/1CPPbQN – Bankrate
4. http://bit.ly/1DJR4DI – CruiseLegend.com
5. http://bit.ly/1DJR5aR – CruiseCritic.com

Please don’t hesitate to give us a call if you need help with any component of your financial planning.

In the Headlines-May 1st, 2015
In the Headlines-April 17th, 2015

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