New Avon CEO Sets Plan for Turnaround

Leading her first earnings call, Sheri McCoy sketched out her to-do list against a backdrop of an 81.6 percent dive in first-quarter profits to $26.5 million.

If Sheri McCoy didn’t know she had an uphill battle at Avon Products Inc. before Tuesday, she sure knows it now.

This story first appeared in the May 2, 2012 issue of WWD.  Subscribe Today.

Leading her first earnings call as the beleaguered beauty company’s chief executive officer, McCoy sketched out her to-do list against a backdrop of an 81.6 percent dive in first-quarter profits to $26.5 million.

A mere seven days into her post, McCoy said her immediate agenda includes a global tour through key markets — including the U.S., Brazil, China, Mexico and Russia — from now through mid-June, an internal assessment of the skills and capabilities of the organization, and a review of the company’s operating model.

“I am taking a fresh look at every aspect of the business, and stabilizing the business is my first and most urgent objective,” said McCoy, who joined Avon on April 23 after 30 years at Johnson & Johnson.

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“My approach is disciplined. I will understand and realistically frame the situation, develop a short list of five or six key priorities on which we are going to focus, put in place clear metrics and accountability, be clear about expectations and deliverables and, importantly, get the organization working together toward achieving these priorities.” McCoy said she expects to give more details about her strategic vision during the company’s second-quarter earnings call this August. “I am confident that Avon’s future can be as meaningful and successful as its past.”

The firm’s issues — ranging from executional misses to a shrinking representative base to a putative bid by Coty Inc.— now rest on McCoy’s shoulders, and those of executive vice president and chief financial officer Kimberly Ross, who joined Avon last fall. Ross forewarned analysts of a tough second quarter, as well.

With McCoy’s predecessor Andrea Jung — now Avon’s executive chairman — absent from the call, the tone was subdued. Analysts’ terse questions in previous calls were replaced by the occasional “welcome.”

McCoy came across as “thoughtful, calm and respectful,” said Sanford C. Bernstein & Co. analyst Ali Dibadj. “She’s thinking about the right stuff.” Referring to both McCoy and Ross, he added, “They have no ownership of the past. It was refreshing to hear that they wanted to fix things.”

However, Dibadj and several other analysts cautioned it will take time for McCoy and Ross — both newcomers to the direct-selling business — to learn the particularities of the selling channel.

Javier Escalante, executive director at Consumer Edge Research, questioned the merits of current Avon executives mentoring McCoy and Ross, given the pace at which Avon’s business is deteriorating. He noted that Avon’s current operating margin of 3.8 percent — a 15-year low — has dropped from 9 percent in the fourth quarter and falls well below the 14 percent target Avon provided as recently as September. Avon’s poor performance could encourage Coty Inc., which has made its interest in acquiring the direct seller very public, to stick around as well. Escalante said Avon’s first-quarter results give Coty better negotiating leverage than it had a month ago.

And larger questions still remain about how Avon will fix its business and provide the investment needed to jump-start growth, particularly with low-single-digit operating margins.

“Visibility is still lacking,” said Stifel Nicolaus & Co. analyst Mark Astrachan. “I want to see signs of the company getting better, and with Avon’s performance in the U.S. and Brazil getting worse, problems still remain. There’s no magic wand to wave over the problems here.”

In a research note sent Tuesday, Astrachan wrote, “The amount of reinvestment in the quarter to drive minimal sales growth is notable and could indicate costs required to return the company to long-term growth are more than previously anticipated. Direct selling is a momentum business and volumes and representatives declined 1 percent year-over-year, and 2 percent year-over-year, respectively.”

During Avon’s first quarter, net income attributable to Avon for the three months ended March 31 was $26.5 million, or 6 cents a diluted share, from $143.6 million, or 33 cents a share, in the year-ago quarter.

Total revenue in the quarter declined 2 percent to $2.58 billion, compared to $2.63 billion in the prior-year period. In constant dollars, revenue ticked up 1 percent. Total units declined by 1 percent and price-product mix increased 2 percent during the quarter. Active representatives were down 2 percent.

Shares of Avon dropped 8 percent to close at $19.87 on Tuesday on the New York Stock Exchange.