Natura &Co's Strategic Divestiture of Avon International: A Path to Financial Resilience and Operational Clarity

Natura &Co's decision to divest its Avon International operations marks a pivotal shift in the company's strategy, aiming to streamline its focus on Latin America while addressing years of operational drag. For investors, this move raises critical questions: How will the separation reshape Natura's financial profile? What risks and opportunities lie ahead in a post-divestiture landscape? And what does this mean for long-term shareholder value?

Financial Implications: From Drag to Catalyst

Natura &Co's Q2 2025 earnings report underscored the progress and challenges of this transition. While the company's Latin American operations generated a net income of BRL 445 million and a recurring EBITDA margin of 14.7%, Avon International remains a liability. The unit reported a negative EBITDA of R$40 million in Q1 2025 and a cash burn of R$692 million, driven by underperforming markets and integration costs. By reclassifying Avon International and Avon CARD as “assets held for sale,” Natura has taken a decisive step to eliminate this drag.

The financial benefits of this divestiture are twofold. First, it reduces cash outflows, allowing Natura to allocate capital to higher-margin Latin American operations. Second, it simplifies the balance sheet, with net debt rising to BRL 4.0 billion in Q2 2025 but partially offset by share buybacks and currency appreciation. Analysts project full-year 2025 revenue of $30.61 billion and earnings of $0.30 per share, reflecting confidence in the company's ability to stabilize its core business.

Operational Clarity: Integration and Innovation

The “Wave 2” integration of Natura and Avon brands in Latin America is a cornerstone of the company's strategy. By unifying distribution centers, sales teams, and consultant networks in key markets like Brazil, Mexico, and Argentina, Natura has already improved working capital efficiency and generated BRL 408 million in cash from Latin American operations in H1 2025. This integration is expected to be fully realized by year-end, with recurring EBITDA margins expanding further as implementation costs decline.

However, challenges persist. The Avon brand in Brazil and Hispanic markets continues to underperform, with revenue declines of 12.9% and 13.6% in Q2 2025, respectively. This highlights the need for innovation in product lines, particularly in the makeup segment, where Avon's lack of differentiation has hurt competitiveness. Natura's digitalization efforts, including the Emana Pay platform (up 8.9% YoY in transaction value), offer a partial offset, but sustained growth will require stronger brand revitalization.

Investment Outlook: Risks and Rewards

For investors, the divestiture of Avon International presents both risks and opportunities. On the positive side, the separation is expected to unlock cash flow and reduce volatility, supporting higher dividends and share buybacks. The company's sustainability initiatives—recently earning an “A” rating from CDP for climate and supplier engagement—also enhance long-term resilience.

Yet, risks remain. The sale of Avon International is still in early negotiations, and delays could prolong cash burn. Additionally, macroeconomic headwinds in Latin America, including currency fluctuations and slowing consumer demand, could pressure margins. Analysts' mixed price targets (ranging from $11 to $18) reflect these uncertainties, though the average $13.96 target implies a 29% upside from current levels.

Conclusion: A Strategic Bet on Resilience

Natura &Co's divestiture of Avon International is a bold but necessary move to refocus on its core strengths. While the path to profitability is not without hurdles, the company's progress in Latin America—driven by integration efficiencies and margin expansion—provides a solid foundation. For investors, the key will be monitoring the pace of the Avon sale and the success of brand revitalization efforts.

In a post-divestiture Natura &Co, the emphasis on sustainability, operational discipline, and regional dominance positions the company to deliver long-term value. Those willing to navigate near-term volatility may find compelling opportunities in a business poised for transformation.

Investment Advice: A “Hold” rating is justified given the ongoing execution risks, but investors with a medium-term horizon and a tolerance for volatility may consider accumulating shares at current levels, particularly if the Avon sale progresses smoothly and Latin American margins continue to expand.