MOODY'S UPGRADES AVON CAPITAL CORPORATION'S LONG-TERM DEBT RATING TO Baa1
New York, 09-25-96 -- Moody's Investors Service upgraded Avon Capital Corporation's rating for senior unsecured debt that is guaranteed by Avon Products, Inc. to Baa1 from Baa2. The upgrade reflects Avon's consistent profitability and cash flow generation, its valuable global distribution network for a wide variety of beauty and related products, and the company's growth potential in developing markets, as well as the company's shareholder value enhancement programs and the risks associated with its diversification into fashion and accessories. Avon Capital Corporation's Prime-2 rating for guaranteed commercial paper was not on review and was confirmed. This rating action concludes the rating review initiated on May 2, 1996.
Moody's cited the stability and geographical diversity of Avon's profits and cash flows as a key strength. The company's global presence is strengthened by its extensive distribution network of local sales representatives that sell directly to consumers. While about half of Avon's sales are derived from the mature U.S. and European markets, where sales growth in the company's traditional CFT (Cosmetics, Fragrances and Toiletries) products is limited, the company has undertaken initiatives to increase sales in these markets. Such initiatives include image enhancement programs, the introduction of new product lines, such as jewelry and apparel, the expansion of distribution channels as well as easing of customer access to the company's products through direct mail. While the new product lines tend to carry lower margins than the company's traditional CFT products, effects of such lower margins on the company's profitability should be offset by Avon's streamlining efforts and its increasing sales in new markets. Nevertheless, and in addition to the lower-margin nature of the jewelry and fashion products, sales of such fashion-related products are exposed to more volatility than Avon's traditional CFT lines. Also, Avon's strong consumer brand awareness in cosmetics could face stronger competitive challenges in the company's new areas of focus due to the presence of major players in the fashion-oriented markets.
Avon's strong global presence allows it to benefit from the growth in the customer base resulting from the increasing disposable income for consumers in emerging markets. Avon's distribution system in new markets, which mostly relies on a network of independent sales representatives, allows the company to overcome distribution hurdles represented by the still developing infrastructure in many of these markets. In addition, Avon's focus on the introduction of new global brands should also allow it to leverage its research and development and marketing costs, while strengthening its global brand image.
Avon's debt levels, adjusted for off balance sheet financings, remain moderate relative to its strong cash flow from operations. However, substantial share buybacks in recent years have caused Avon to be a significant net user of cash.
The current rating level incorporates the likelihood that share repurchases will remain an important part of the company's strategy for enhancing shareholder returns, even though, near-term, Avon may need to use a significant amount of cash to grow its business. However, continued strengthening of the company's global franchise and further improvement in its cash generation, together with a restrained use of cash in enhancing shareholders' returns and a continued focus on cost controls, could over time result in a further upward adjustment of Avon's ratings.
Avon Products, Inc., based in New York City, is the parent company of Avon Capital Corporation and the guarantor of its debt. With a worldwide independent direct salesforce of about 2 million sales representatives, Avon is the world's leading direct seller of beauty related products and fashion jewelry. The company also markets, through its existing distribution network, an extensive line of gifts and collectibles.
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