Avon Products Inc. got a shellacking from Wall Street analysts Tuesday after the company reported that fourth-quarter profits fell 14.8 percent as sales slowed in Russia and Brazil, two of the company’s key growth markets.
Investors also took umbrage, sending the company’s stock down 88 cents, or 3 percent, to $28.47.
Chairman and chief executive officer Andrea Jung blamed poor execution for weaker-than-expected performance and said Avon is squarely focused on restoring growth in these geographies and improving operating margin in 2011. The company aims to deliver operating margin expansion on the path to the mid-teens by 2013, and has retooled its annual and long-term executive compensation to reflect that goal. Excluding adjustments related to its business in Venezuela, operating margin last year fell to 13.1 percent of sales from 14.1 percent in 2009.
Delving into the issues by country, Jung said in Brazil a government ordered e-invoicing change, imposed in June, coupled with Avon’s aging technology systems in the country created order delays and product outages. Jung said Avon is accelerating a large number of system modifications and upgrades to fix the problem. According to Avon’s fiscal 2009 report, last year Brazil accounted for 17.5 percent of the company’s revenue. Avon did not break out sales for Russia.
In Russia, Jung said the company’s field of active representatives declined and a new tax rule for entrepreneurs siphoned off earnings for first-year sales leaders. To help deal with the issue, Avon will shift dollars somewhat away from advertising toward initiatives to increase the firm’s Representative Value Proposition, or earnings potential for sales representatives.
“Our issues were executional rather than structural challenges, and they drove the majority of our second-half performance deceleration in Brazil and Russia,” said Jung on a morning conference call Tuesday.
Unconvinced, an analyst asked, “It’s great that your problems aren’t structural, but if they’re all execution, then shouldn’t there be a bunch of people who lose their jobs over such awful execution?”
Jung responded, “Clearly operational rigor on the ground is a huge priority for the company. And I’ve got to make sure we’ve got the right organizational structure, which may be different than it has been, and to make sure we have the top talent and the sales in the right positions to deliver and execute this year, and when I have something to announce I certainly will.”
Another analyst suggested management’s hands-off style was to blame.
“What’s still really unclear to me is just how as managers you remained so incredibly far from the everyday operations of your business,” said the analyst, referring to Avon’s troubles in Russia. “Can you tell me how are you getting it so wrong in a market that is so big and so important? This problem did not pop up this quarter.”
Several other analysts pressed the company on why management continues to assert that Avon’s business fundamentals remain solid. One asked, “Do you guys really believe that?”
Again forced to play defense, Jung responded, “The strategies to invest in the brand, invest in the channel, the pricing structure of the brand, I think those continue to be the right direction for the company. We have executional issues.…We’re not happy about them, but I think that’s separate from having the wrong strategy.”
For the fourth quarter ended Dec. 31, Avon’s net income was $229.5 million, or 53 cents a diluted share, compared with $269.4 million, or 62 cents a share, in the prior-year period. Adjusted earnings totaled 59 cents a share, which was below analysts’ estimates of 67 cents a share, according to Yahoo Finance.
Total revenue ticked up 1.3 percent to $3.18 billion from $3.13 billion a year earlier. Revenues in constant dollars gained 5 percent, while total units declined 2 percent. The number of new active representatives was flat.
Beauty sales in the quarter declined 1 percent, dragged down by skin care, which slid 12 percent.
In addition to Russia and Brazil, the company’s sales in China were challenged. In the quarter, revenue in China declined 45 percent, to $55 million, over the prior-year period as Avon continued its transition from a hybrid model of sales boutiques and sales representatives to one that focuses solely on direct selling. Units sold were down 44 percent, and active representatives were down 68 percent. However, China reported operating profit of $4 million compared with a loss of $3 million in the year-ago period. Jung said Avon expects China to be profitable in 2012.
For the full year, net income declined 3.1 percent to $606.3 million, or $1.39 a diluted share, from $625.8 million, or $1.45 a share, in the prior year. Revenue decreased 6.4 percent to $10.86 billion from $10.21 billion.
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