Avon Products Inc. is cutting back and Investors heartily approve.
Shares of Avon jumped 7.8 percent to $2.62 at market close after the company said at an investor day that it would reduce costs by $350 million over the next three years and explore alternatives for its China business. The company’s stock remains well below its one-year high of $9.15 on April 14.
“In 2016, the focus will be on reducing costs,” Avon chief financial officer James Scully said. He pegged currency headwinds as one of the main problems plaguing the company during the presentation.
Private equity firm Cerberus Capital Management, which is taking over Avon North America, plans to work with Avon to rationalize the company’s supply chain, modernize its business processes and make decisive strategic choices. Cerberus agreed to pay $170 million for an 80.1 percent stake in the North America unit in December, plus invest $435 million for 16.6 percent of Avon’s preferred stock. The firm is considering up to $90 million in cost cuts, including job reductions, for the North America unit, Cerberus senior managing director Steven Mayer said.
Avon’s $350 million in cost savings breaks down into $150 million from the company’s operating model and $200 million from the supply chain, Scully said. Avon expects $600 million in cash generation related to cost reduction efforts over the next three years, according to Scully. Of that, the beauty company expects to realize 40 percent each in years one and two and 20 percent in year three on a run-rate basis. In addition to cutting back, Avon said it’s going to invest $150 million in social selling, plus $200 million in information technology and service model evolution. The company still intends to pay down $250 million in debt in 2016, Scully told investors.
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Avon has struggled in China, the second-largest beauty market in the world, which makes up 1 percent of the business. Chief executive officer Sheri McCoy said that while Avon sees the value in China, the company does not see “going it alone” the way it is currently structured. The business is also evaluating other under-performing markets.
Some markets – like Turkey – are seeing growth. That segment has developed a shoppable mobile application, the Avon Magic Mirror app, which allows users to digitally try on different makeup looks and then purchase products. “I think this app will help us to boost customer transactions,” said Angela Cretu, Avon group vice president for Africa and the Middle East and general manager for Turkey. The app goes live in April, and from there will be available for other Avon segments to pick up, according to Cretu.
Avon expects to report about revenues of about $6 billion for 2015, in line with its most recent outlook. Full-year results will be revealed on Feb. 11. The company has not yet issued guidance for 2016, and Scully said Avon will “keep people posted.”