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Avon Stock Price Drops 5.8%

Avon Products Inc. suffered a one-two punch in the first quarter, delivered by its weak U.S. business and the impact of a stronger dollar.

Avon Products Inc. suffered a one-two punch in the first quarter, delivered by its weak U.S. business and the impact of a stronger dollar.

The direct-selling company reported lower losses for the quarter, although sales fell sharply, sending its stock down nearly 6 percent to close at $8.17.

For the three months ended March 31, the net loss attributable to Avon was $147.3 million, or 33 cents a diluted share, compared with $168.3 million, or 38 cents a share in the prior-year quarter.

Total revenue slid 18 percent to $1.79 billion from $2.18 billion, while gaining 1 percent at constant currency.

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Avon chief executive officer Sheri McCoy fended off speculation that the company may sell its North American business by declaring the topic off-limits at the start of the company’s earnings call on Thursday morning.

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“Like all companies, our board and senior management reviews Avon’s business strategy on a regular basis,” McCoy told Wall Street analysts. “Our goal has been and continues to be to drive sustainable, profitable growth while creating value for our shareholders and opportunity for our representatives. We will not be saying any more on this topic on the call today.”

Nevertheless, talk of Avon’s next move continues to build. Consumer Edge Research analyst Javier Escalante said potential strategic moves, such as divesting the U.S. business, could come with a change in management. He wrote in a research note on Wednesday that the upcoming return of former Avon veteran Susan Kropf to the board could foreshadow a ceo change at the company, in which McCoy departs and Kropf serves as interim ceo. In his view, Avon may opt to sell the U.S. brand rights, which he estimates could fetch about $500 million, with a potential buyer recasting Avon as a retail brand — and doing away with sales representatives.

McCoy, for her part, is fighting to show the brand remains relevant in the direct-selling channel. During the call on Thursday, she unveiled a brand-repositioning strategy dubbed “Beauty for a Purpose.” Avon will begin to introduce the tag line to its six million global representatives on Friday.

“While the brand strength and relevance are in different places in various markets, we have the opportunity to reinvigorate the brand, and that’s what we’re setting out to do. Avon is an authentically purpose-driven company, which provides a very compelling story for today’s consumers worldwide. We intend to tap into that sentiment as we strengthen our bond with current consumers and introduce a new generation of consumers to a brand we know they will love,” said McCoy.

She added Avon will use the positioning as a framework to define its purpose, which she detailed as to tell the story of the firm’s beauty products, to communicate Avon’s earning opportunity, which allows millions of women around the world to build self-reliance and a network effect of empowered women.

Avon continues to struggle to grow its base of active representatives. In the quarter, the number of active representatives fell 1 percent, but that marked an improvement over prior quarters.

“A big focus of our 2015 plan is improving the representative experience to drive active representative growth,” said McCoy. “Overall, we saw sequential improvement this quarter versus prior quarters. Two-thirds of our top 12 markets delivered growth in this critical area, where last year, fewer than half were in growth mode. I’m particularly pleased with the trends we’re seeing in Russia, South Africa, Turkey, Poland, Mexico and the Philippines.”

Analysts avoided talk of a potential sale during the earnings call, but many lobbed questions about Avon’s weak U.S. business.

“It doesn’t seem like the turnaround is really working,” Deutsche Bank analyst William Schmitz told Avon. “Is the problem the product portfolio.…How much time will that take to fix and turn around?”

McCoy responded that the company has been working to get the number of active representatives growing again, and added that advertising behind the company’s repositioning efforts will highlight product, as well.

“It’s important to talk about our product…because that’s one of the assets we have. Terrific product,” said McCoy.

To do that, she said Avon will continue to shift its media mix away from TV in favor of digital and social media efforts.

“I’m well aware of the unique set of challenges we face in the U.S. and share your concerns with how long it is taking to get this business back on track,” said McCoy. “As I’ve said many times before, we’ve made good progress in a number of areas, particularly around cost management. And we continue to work to improve representative engagement. That being said, we have not yet been able to crack the code on the active representative issue in the United States. As ceo, it’s my job to balance the need of all stakeholders, including our shareholders and our representatives. We will continue to monitor progress and evaluate the best path forward for this business. The team is working aggressively to return to profitability and improving our active representatives remains priority number one. I continue to believe that we can build value for our shareholders, and ideally, enhance opportunities for representatives in the U.S.”

In early 2014, McCoy declared that fixing Avon’s beleaguered North American business was the company’s number-one priority. At the Consumer Analyst Group of New York Conference in Boca Raton, Fla., in February 2014, Pablo Muñoz, the firm’s senior vice president and president of North America, laid out the problems facing North America, citing a shrinking pool of representatives, a crowded and difficult-to-navigate product brochure and a bloated cost structure. His plan — which at the time he said would take hold in 12 to 18 months — aimed to fix those issues with a spate of initiatives, ranging from recruitment and incentives to trimming the product assortment and number of pages in Avon’s brochure.

Avon’s first-quarter results indicate there is plenty of work still to do.

The company’s revenue in North America declined 18 percent to $242.1 million, or slid 17 percent in constant currency. Revenue also declined across the remaining regions. In reported currency, in Latin America revenue declined 22 percent to $836.6 million; in Europe, Middle East and Africa, it decreased 16 percent to $550.7 million, and in Asia-Pacific it was down 1 percent to $164.6 million.

Sales of beauty products in the quarter declined 17 percent to $1.29 billion, while ticking up 3 percent in constant currency. Skin care fell 17 percent to $532.7 million; fragrance declined 18 percent to $423.2 million, and color cosmetics decreased 16 percent to $336.5 million. At constant currency, sales in all categories rose, with skin care up 1 percent, fragrance up 7 percent and color up 2 percent.

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