WWD.com/beauty-industry-news/financial/avon-profits-slide-6129056/
government-trade
government-trade

New Avon CEO Sees Net Slide 70%

Beauty sales fall 9 percent.

NEW YORK — Sheri McCoy spent her first 100 days at Avon Products Inc. working to uncover Avon’s most pressing issues across the globe. But her toughest days may lie ahead.

McCoy, who joined Avon as its chief executive officer in April, struck a frank tone in presenting the company’s challenges to Wall Street analysts during an earnings call on Wednesday. She had little choice: Avon’s second-quarter net income slid 70 percent to $62.7 million, or 14 cents a diluted share, compared with $208.7 million, or 47 cents a share, in the year-ago period. Total revenue for the three months ended June 30 declined 9.4 percent to $2.59 billion, compared with $2.86 billion in the year-earlier period, as Avon lost traction with its representative base. The number of active representatives declined 3 percent in the quarter. The company’s beauty business also felt the pinch of a smaller sales force: Sales in the category declined 9 percent, or were flat in constant dollars. “Avon’s second-quarter financial results are not good and they reflect the challenges we are working to address,” McCoy said.

RELATED STORY: Sherilyn McCoy Faces Challenges at Avon >>

The results sent shares down 1.2 percent to close at $15.30 on the New York Stock Exchange on Wednesday.

McCoy acknowledged that her assessment of the business is not complete and that fixing Avon will require multiple solutions. “It will take time, but we can fix this. I am confident that we can return Avon to growth,” she said.

To that end, McCoy outlined five key priorities designed to fix the business:

• Stabilize top-line growth, which includes optimizing the product portfolio by delivering the right product in the right market with a focus on the mid- and lower-value tier; reenergizing marketing with better brochures and representative tools, and improving the earnings opportunity for reps based on the sales leadership model.

• Improve income with a more effective cost structure and cash generation, and a more critical eye on spending, but an increased investment in IT to replace outdated systems.

• Invest in employees and build a culture of accountability — to that end, all four regional presidents now report to McCoy and meet with her on a monthly basis.

• Focus on technology to simplify selling for representatives and to better connect with consumers through a multiyear investment plan, which is under way.

• Build a strategic roadmap to define Avon’s future.

Referring to the final point, McCoy said Avon’s immediate priority is stabilizing the business, and that a new strategy would come later, although she did not elaborate on timing.

“Avon doesn’t need yet another new strategy. We need to focus on the core of Avon’s business, representative consumers and our people,” said McCoy.

The absence of an overhauled strategy prompted analysts to press for more dramatic action — with some questioning the viability of the direct-selling channel all together.

Sanford C. Bernstein & Co. analyst Ali Dibadj told McCoy, “It does feel like you’re kind of sticking your finger in the hole of the Titanic.” He added there are several core issues that Avon had yet to address that “can’t be dealt with by stopping the leak.” He named “the eroding channel” as one of them.

McCoy was forced to defend the direct-selling business model several times during the call. In each instance, she noted the $150 billion global direct-selling market’s growth rate is in the midsingle digits.

“It still is a very relevant and attractive business model, stronger in certain markets than other markets, that’s a given. But as we look at the opportunity to leverage the field base that we have around the globe, I see this as an important opportunity to get our products in the hands of millions and millions of consumers,” said McCoy. “Certainly there are things that we need to do internally to make sure that we’re competitive in that space and that’s what we’re focused on today.”

Avon’s increased emphasis on the value tier also rankled some analysts, who have been suggesting that Avon take a page from competitor Nu Skin Enterprises Inc. and move its offering upmarket.

“We’ve heard it before and it really hasn’t worked,” Stifel Nicolaus analyst Mark Astrachan told McCoy, referring to Avon’s increased emphasis on value products. McCoy responded by clarifying that Avon will pursue a multitiered price strategy, and said value products pull customers to the brand and help representatives make the initial sale. After that, the rep can push more premium offerings across skin care and in fashion and home, said McCoy. But her comments on pricing left some unconvinced.

“Selling cheaper products, knowing that your reps and direct-selling distributors in general can handle only a small client base, is only going to undermine their own compensation,” Javier Escalante, executive director at Consumer Edge Research, told McCoy.

Following the call, Astrachan told WWD, “Ultimately the consumer will trade up in this category. If you’re not offering a premium priced product, ultimately you’ll be left behind.”

Avon also is working to move past the ongoing investigation by the U.S. Securities and Exchange Commission related to allegations that Avon executives bribed officials in China and potentially other countries as well. The company said Wednesday it is in discussions with the SEC and the Department of Justice in the hopes of reaching a settlement, but cautioned, “There can be no assurance that a settlement will be reached or, if a settlement is reached, the timing of any such settlement or that the terms of any such settlement would not have a material adverse effect on us.”

One analyst, who requested anonymity, described McCoy’s approach to stabilizing the business as “steady as she goes.”

“It didn’t seem dramatic enough,” he added.

That may well be what McCoy intended. She told analysts, “We see this as an evolutionary process. And so our plan is really to continue to work against the five priorities that I’ve outlined and update you on a regular basis.”

Following the call, McCoy hosted a lunch for a number of analysts who follow the company. One analyst, who described McCoy as personable, is taking a wait-and-see approach in regard to her command of the business. The analyst said, “At this point, there is still a ton of work to be done. It will take time.”