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Avon’s Q3 Disappoints

Cost cutting is part of the plan to help the direct seller achieve mid-single-digit revenue growth over the next three years.

Sheri McCoy, Avon Products Inc.’s chief executive officer, faces an uphill battle.

In the third quarter, net income attributable to Avon slid 80.7 percent to $31.6 million, or 7 cents a diluted share, from $164.2 million, or 38 cents a share, from the year-ago period. Avon’s total revenue for the three-month period ended Sept. 30 declined 7.7 percent to $2.55 billion, or down 1 percent in local currency.

But the ceo promised to tackle the company’s challenges with a slow and steady approach. “We know what the problems are and they are solvable,” McCoy told analysts during the company’s earnings call Thursday, adding the firm’s third-quarter results “remain disappointing.”

Many Wall Street analysts have grown impatient with the direct seller, and had hoped McCoy would present her grand plan to fix the beleaguered company.

“I recognize you would like me to present a magic bullet of a quick fix, but our business is complex. As I’ve said in our earlier calls, the challenge that Avon is facing developed over time — not overnight — and the solutions will take time as well,” said McCoy.

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McCoy, who took over as ceo in April, said, “Six months in, I don’t have all the answers yet.”

She told analysts the company’s goal is to “achieve midsingle-digit revenue growth and a low-double-digit operating margin over the next three years.”

McCoy explained that those projections are achievable in part because the global beauty industry is projected to grow 6 percent annually, with much of the growth “expected to come from developing markets where Avon has a strong presence.” In addition, global direct selling has been growing at 4 to 5 percent, due to both advice from friends and word of mouth, the two attributes of the Avon business model, McCoy said.

McCoy also pointed out that in the past, the company’s “cost growth exceeded our revenue growth. This will not happen again. Cost is something that we can and will control. We’ve already instilled increased clarity and discipline in the 2013 budget process.”

Her plan includes restoring the field health of its representative system, delivering compelling product and cost cutting. McCoy said the company plans to cut at least $400 million in costs over the next three years. The company also said Thursday it reduced its quarterly dividend to 6 cents a share, from 23 cents a share, as part of its capital structure review.

“It may seem like a very basic approach but in my experience getting the fundamentals right is a very good place to start,” said McCoy. She emphasized the importance of putting representatives and consumers back at the center of the business and execute against both push and pull marketing. “Avon’s growth depends on our representatives’ success.”

Beauty sales during the quarter declined 9 percent, with fragrance sales down 7 percent, color and skin care down 11 percent and personal care down 9 percent. McCoy aims to reverse these downward trends, telling analysts, “We can and will be competitive in each of our core categories.” She called color cosmetics a “must-win category” and said Avon will strengthen its offering across all its price tiers, from value to premium. Fragrance, she noted, is Avon’s largest beauty category, and the company has prioritized its efforts in the Latin American region. Avon’s skin-care business has “underperformed for years,” said McCoy. The plan there includes stopping product cannibalization, improving marketing and striking the right value proposition.