Second-quarter results at Avon Products Inc. certainly weren’t its best, but there are indications of improvement, with the North American market possibly returning to profitability in 2015.
The company posted results for the period ended June 30 that saw a 40.4 percent decline in net income to $19 million, or 4 cents a diluted share, from $31.9 million, or 7 cents, a year ago. Total revenues fell 12.8 percent to $2.18 billion from $2.51 billion, which included a net sales drop of 13.3 percent to $2.14 billion from $2.47 billion.
Sheri McCoy, chief executive officer, in a conference call to Wall Street analysts, said, “We also continue to be negatively impacted by economic headwinds in several key markets. From a geographic perspective, North America, while declining in revenue, is making good progress on cost management and landed where we expected. [Europe, Middle East and Africa] performed slightly better than we anticipated, and Latin America was below our expectations. While we anticipated soft performance in Mexico, Brazil came in lower than we expected.”
She also noted the company’s actions, as previously stated, to reduce corporate overhead costs. “Along with the cost reductions, we’ve taken complexity out of the system and clarified roles and responsibilities across the market, regional and global corporate teams. Having this clarity simplifies how we work together. It will also help us to ensure that cost doesn’t creep back into the system,” the ceo said.
She reminded analysts that the company has said previously that the first half was expected to be challenging and, looking ahead, said, “As we move to the second half, we expect to show improved performance. This is based on our expectation for continued progress and representative engagement, particularly in a few key markets like Russia and Mexico.”
McCoy also spent time discussing the approach the firm has taken in evaluating its performance in the U.K., one of its top markets. That includes analyzing whether the right management team is in place; execution of strategy such as activation of new customers and retention, and the ability to provide the field staff with the appropriate information and/or devices to connect with consumers. She said the company has been “systematically addressing” these areas across its top 12 markets, which represent 80 percent of its revenue.
The analysis of the U.K. operation started in late 2012, when the business there was declining midsingle digits. Changing the management team was one fix, and they needed about two quarters to “diagnose this situation,” McCoy said. After determining the causes of certain performance issues, and then putting together a strategic plan — one part focused primarily on execution, which included face-to-face contact followed by phone and SMS contact, while another component called for improving data flow to the sales representatives in the field — early results show a 12 percent increase of those contacted after placing their first order, who then place a second order, while those contacted after placing a third order are more likely to place a fourth order.
In addition to improving execution in its top markets in field management and marketing, McCoy said the company has “improved our product offerings across our base business for strengthening new product introductions in our core categories, fragrance, color and skin care.”
She also noted that the U.S. market remains an important region for Avon. “It’s a large and important beauty market. We see a number of our direct-selling competitors doing well in this market and while there is a long road ahead to get this business back to where it needs to be, in 2015, I anticipate that the North American business will return to profitability and no longer be dilutive to Avon’s operating margin.”
The ceo also acknowledged that the “U.S. is starting from a far more challenged position. And so, it will take time as we fix the things most critical to our representatives. We now have a terrific management team in place, a team who has strong direct-selling capabilities, excellent leadership skills and also team members who bring in external perspectives.”
McCoy concluded by noting that the U.S. issues were deeper than thought and there’s been a greater influx of macro issues. “We still think these are the right goals and they are doable by 2016, but the degree of difficulty is greater today than when we set the goals in late 2012. We will know a lot more about how we are tracking against our goals over the next six months as we improve execution in our key markets and drive improved representative engagement. We will also have deeper insights into our progress in North America, which will also have an impact on the timing of reaching our goals. We will be in a better place as we close out the year to provide more information on how we are tracking,” she said.
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