Wall Street analysts are concerned about Avon Products Inc.’s strategy to fix its many different geographic markets.
The beauty company routinely corrects operations in one market — usually one of its larger ones — then turns to a different region to spruce up operations there. But while it’s off fixing the next market, things frequently start deteriorating again in the initial region, one analyst noted on Avon’s earnings call Thursday, referring to the phenomenon as Avon’s “whack-a-mole” strategy.
For example, the Brazil business is showing signs of improvement. There, Avon has “refocused on the basics,” and numbers have gotten less bad. Brazil sales were down 2.4 percent in the quarter, executives said. But now that Brazil is on the mend, the company needs to devote attention to Russia, a market that did not adapt well to the sweeping changes implemented by chief executive officer Jan Zijderveld and his team.
Challenges in Russia aren’t unique to the region, executives said on Thursday’s call. Avon will focus driving productivity to increase representative earnings, switch up sales leader incentives and implement a school to teach representatives how to be microinfluencers.
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“In terms of ‘whack-a-mole,’ in terms of one up, one down, the good news is that Mexico, which was probably early or in terms of the rebooting and the new strategy, is holding up and doing well and we’re refining the model,” Zijderveld said. “We continue to really work on rebooting direct selling, strengthening our brands and building a more digital company. That is now happening in Brazil, exactly the same fundamentals are being put in place in terms of service, more effective training, driving productivity up, driving value up, digitizing the business, getting better talent, and you start to see results. We had a misstep in Russia and we’re fixing it. We’ve got a SWAT team on the ground, we’re appointing new people, and we’re working on the fundamentals.”
Declines in sales representatives in Russia and Brazil continued in the quarter, dipping by 9 percent. Avon posted nearly $1.2 billion in sales for the first quarter, a 14 percent decline from the prior-year period. The business posted a net loss of $33.5 million for the quarter. Diluted loss per share was 9 cents, down 3 cents from the prior-year period.
Net sales in the quarter were down across all regions except Asia-Pacific, which posted a 3 percent gain. Europe, the Middle East and Africa posted a 19 percent drop, to $458.7 million; South Latin America declined 17 percent to $414.7 million, and North Latin America decreased 1 percent to $192.7 million. Those numbers were affected by currency fluctuations — in constant currency, only EMEA declined.
Avon is continuing with its turnaround plans, Zijderveld said on the call, focusing on things like cash and increased pricing for innovations. In the past, Avon sometimes would innovate new products and then sell them at lower prices, and he’s trying to ensure that is no longer the case. “When we innovate, we have an ability to price,” Zijderveld said.
“Pricing was a bright spot, but is overshadowed by continued instability at the rep level,” wrote RBC analyst Nik Modi in a research note.
The cash focus is in order to fund the company’s restructuring plan, executives said. The business recently sold its Chinese manufacturing facilities to an LG Household & Health Care subsidiary, The Face Shop, for $46 million. Avon will also reap $24.9 million in proceeds from selling its 19.9 percent stake in New Avon to LG, which has agreed to buy the business from Cerberus Capital Management for $125 million.
“We’ve had a very good relationship with LG,” Zijderveld said, noting that LG owns the rights to Avon in Japan. “We’re looking at working together in a more structural way,” he added.
He declined to update analysts on talks with Natura, which had been looking into buying both parts of the Avon business. “There’s no updates,” he said.
“Overall, Avon continues to be challenged, reflecting share loss and lessening consumer relevance in many markets. We believe considerable reinvestment is needed and continue to find the company’s plan to reduce costs and reinvest to be encouraging. That said, any improvement is likely to be gradual,” wrote Stifel analyst Mark Astrachan.
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