Avon Shows Sign of Stabilization

Adjusted fourth-quarter profits surpass expectations.

Since her arrival in April, Avon Products Inc. chief executive officer Sheri McCoy has worked to wring out costs, and the strategy seems to have put the company on more solid ground.

This story first appeared in the February 13, 2013 issue of WWD.  Subscribe Today.

“We have early signs of stabilization in some key markets, a strong management team in place and a disciplined approach to cost and cash management,” McCoy told analysts during the company’s earnings call on Tuesday. “We have a lot of work to do, and as we move forward into 2013 there are likely to be a few bumps along the way. But with that said, I’m confident that we’re in a good position to continue making progress toward our goals.”

In the fourth quarter, the company’s net loss attributable to Avon widened to $162.2 million, or 37 cents a diluted share, compared with a loss of $400,000, or nil on a per-share basis, in the year-ago period. The quarter ended Dec. 31 included a restructuring charge of $58 million related to Avon’s cost-cutting plan, which has included trimming head count by about 1,500, closing several distribution centers and exiting both South Korea and Vietnam.

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Adjusted earnings of 37 cents a share came in 10 cents better than the 27 cents analysts projected.

The company’s total revenue in the quarter declined 1.3 percent to $3 billion, from $3.04 billion, but ticked up 1 percent in constant dollars.

The results sent Avon’s shares up 20.3 percent to $20.79 on Tuesday.

Avon Beauty sales declined 2 percent, or gained 1 percent in constant dollars. On a reported basis, fragrance was flat, color and personal care declined 1 percent and skin care declined 5 percent.

The company’s U.S. business remained a drag on earnings. Total revenue in North America decreased 12 percent to $516.2 million, driven by a decline in active representatives and the Silpada jewelry business, which declined 18 percent. Avon said it is exploring “strategic alternatives” for Silpada, which the company acquired in 2010 for $650 million. Silpada generated $155 million in sales in 2012, according to Avon.

Kimberly Ross, Avon’s executive vice president and chief financial officer, acknowledged that North America “remains challenging,” noting that new products and holiday offerings failed to resonate with consumers. “We need to improve our marketing and merchandising execution.” She later added, “This is a complex business and it will take time to fix, but we are committed to taking whatever steps are necessary to return the U.S. market to health.”

McCoy said the company aims to “slow the decline” in the U.S. and make it less of a drag on earnings while continuing to shift its focus to developing markets. Asked by an analyst if Avon would consider exiting the U.S., McCoy said Avon is focused on “optimizing our geographies and understanding the role that each of the geographies plays” and then investing behind faster-growing markets.

Across Avon’s remaining regions, sales for the quarter in Latin America gained 2 percent to $1.33 billion; sales in Europe, the Middle East and Africa increased 1 percent to $905.8 million, and in Asia-Pacific, sales declined 3 percent to $246.6 million. Avon continues to struggle in China — with revenue sliding 23 percent — where the bulk of its business is done through a beauty-boutique-selling model.

During the call, McCoy was asked to also defend the direct-selling model in Asia. She responded, “Asia is certainly a very important region.” Citing macro factors such as population growth, she added, “We have an opportunity to do a lot more there. If you look at competition, there are a number of very successful direct sellers, and direct selling makes sense and works there.…Certainly I have my sights on Asia-Pacific. Right now we’re stabilizing some of our other key markets.”

For the year, the net loss attributable to Avon was $42.5 million, or 10 cents a diluted share, compared with a gain of $513.6 million, or $1.18, in the prior year. Total revenue declined 5.1 percent to $10.72 billion, compared with $11.29 billion.

Ross said, “Looking forward to 2013, we remain focused on driving sales, operating profit and cash flow improvement. We are managing to a very conservative level of sales growth, and we are putting measures in place to drive the necessary sustainable recovery, but we aren’t going to get ahead of ourselves until we witness clear signs of sustainable improvement in key markets.”