Beijing, China

Activist investor Barington Capital Group has found its latest target: Avon Products Inc.

The hedge fund made its disclosure Thursday after the beauty company posted second-quarter results earlier in the day, and its chief executive officer Sheri McCoy said it would hold onto its China business. Avon last year said it was conducting a strategic review of its China subsidiary.

At the heart of the activist’s attack is the call for Avon’s board to “immediately begin a search” for a new ceo. Joining Barington in the activist fight is NuOrion Partners AG.

According to Barington, McCoy over the last five years as ceo has “overseen a tremendous destruction of shareholder value.” It noted that Avon’s stock price has fallen by more than 80 percent since she was named ceo, to under $3.65 from $22.69 in April 2012. Barington also said earnings per share were $1.20 in 2011, the year before McCoy was appointed ceo, to Wall Street’s current consensus estimate of 32 cents for 2017.

Barington recalled that it reached out to the Avon board in a letter dated Dec. 3, 2015, expressing belief that with the right leadership in place, the beauty firm can recover its position as a leading global beauty brand. In that letter, Barington said the direct-selling business model known for the tag line “Avon Calling” still resonates with consumers. It was pushing back then for a change in senior leadership. Sources told WWD at the time that the push included a search for a new ceo to replace McCoy. Barington at the time said the beauty firm needed senior management with expertise in four key areas: beauty; direct-selling; emerging markets, and operational restructuring. NuOrion Partners also had sided with Barington when the December 2015 letter was sent.

Barington acknowledged Thursday that Avon has taken steps to improve its operations, but added that “we believe that efforts need to be dramatically intensified under new leadership.”

Barington concluded, “Based on today’s substantial stock price decline, in spite of positive 2017 guidance, we believe that most shareholders would agree.”

It could not be immediately learned how much a stake the activists hold in Avon. Shares of Avon Products dropped 22.2 percent to close at $3.62 in Big Board trading.

Of all the activists on the prowl for targets, Barington is one of the more successful — and experienced — in the retail and apparel space. Led by ceo James A. Mitarotonda, the firm has taken positions at Dillard’s and The Jones Group, where it has helped implement some changes. It also has invested in Nautica, Warnaco, Steven Madden, Harry Winston and The Children’s Place. But last year it took on an unsuccessful campaign against Chico’s FAS Inc.

A spokeswoman for Avon at press time said she didn’t yet have a comment on the position taken by Barington.

As for Avon, McCoy on Thursday outlined the reasons the beauty group has decided to hold onto its China subsidiary.

“China will remain in the Avon portfolio as we believe this puts us in a stronger position,” McCoy said. Avon announced last year that it was conducting a strategic review of the China business. The company spun off its North America business to Cerberus Capital Management in 2016.

Avon started rolling out e-commerce operations in China in the back half of 2016, McCoy said. In China, the company’s business operates differently than in other markets, with Avon representatives operating boutique stores. There are about 2,000 shops, McCoy said.

That segment isn’t in Avon’s top 15 markets — which are the ones the company generally focuses on — and will be operated at a “break-even” level, McCoy said. “We don’t plan on putting a ton of money behind it,” she added.

McCoy spoke to analysts after Avon released its second-quarter financial results.

Avon’s $36.5 million loss narrowed significantly from the prior-year period, when it was $165.9 million. Avon posted a 1 percent sales gain to almost $1.3 billion for the quarter, up from $1.28. Avon also said it is on track to achieve $230 million in cost savings, in line with its transformation plan.

“Avon anticipates $230 [million] of productivity savings in 2017, or incremental savings of $110 [million] compared to 2016, with a meaningful portion reinvested to improve sales growth. 2017 expectations imply meaningful improvement of fundamentals through the year, and we believe investors are likely to remain skeptical pending increased visibility and consistency of results,” wrote Stifel analyst Mark Astrachan in a note.

For the quarter, active representatives declined 3 percent, declining in all geographies except northern Latin America. Average order increased 2 percent, offset by declines in Europe the Middle East and Africa.

For the full year, Avon projects constant-dollar revenue growth in the low-single digits and operating margin expansion of between 100 and 140 basis points.

“We believe Avon continues to lose share and consumer relevance in a number of key markets, increasing the difficulty in achieving a sustainable improvement in sales growth and operating margin, particularly given the potential need for meaningful reinvestment, in our view,” Astrachan wrote.

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