Avon Products Inc.’s restructuring is running ahead of schedule.
While net sales were down 2 percent for the beauty company’s third quarter, to $1.4 billion, the company has saved $80 million of the $350 million it has planned to save over the next few years as part of its transformation plan. Avon has also reduced debt as part of the effort. The company’s shares traded down about 2.5 percent to $6.25 in midday trading.
For 2016, Avon had a $70 million savings goal related to the transformation plan, plus $20 million to make up from the separation of the company’s North America business, which it sold to Cerberus Capital Management earlier this year.
In terms of “improving financial resilience” — another key part of Avon’s transformation plan — the company has reduced debt by $235 million of the $250 million reduction goal for 2016, it said.
“We think Avon’s results this morning were likely more than good enough to move shares higher, with operating margin expansion far higher than the street had modeled…cost savings initiatives coming in ahead of schedule…and a free cash flow target that was raised to be at least $75 [million] to $100 [million],” Barclays analyst Lauren Lieberman wrote in a note. “Taken together, we believe sales momentum and visibility continue to improve, which relative to still muted investor expectations is likely to result in out-performance relative to current levels,” said Stifel analyst Mark Astrachan in a note.
Avon plans to cut $200 million in supply chain costs and $150 million in other costs through its transformation plan, which was unveiled in January. The saved funds will be used for investment in growth initiatives, including media, social selling and information technology systems to modernize the business, Avon said. In terms of debt, the company has issued $500 million in secured notes due August 2022, a $301 million tender of near-term public notes, and reduced debt of foreign subsidiaries by $33 million.
In October, Avon repurchased $163 million of debt and issued notices of prepayment on $238 million worth of notes due in March and July 2018. Because of those moves, the company has no long-term debt due until March 2019.
“We are well under way with the execution of our sourcing and supply chain initiatives, and we completed the key 2016 actions of our operating model work,” said Avon chief executive officer Sheri McCoy on the company’s earnings call Thursday. “So, [the] organization is aligned and engaged in our new way of working. The corporate headquarter move is well under way, we’ve opened a small corporate office in Chiswick Park, in West London.”
In terms of 2017, Avon plans to focus on reinvesting some of its savings in the business. So far, the company has made some investments in Brazil, McCoy said on the call. “We increased investment and branded marketing, brand marketing and advertising in Brazil, and we’ve planned similar investments in a few key markets for 2017,” she said.
Brazil, part of Avon’s South Latin America segment, was up 14 percent for the quarter, the company said. Mexico was down 5 percent.
South Latin America posted $594.8 million in net sales for the quarter, up 4 percent from the prior-year period. Europe, the Middle East and Africa posted $476.4 million in revenue, down 4 percent, in part due to decreases in Russia. There, an increase in active Avon representatives was offset by lower average order. In the U.K. revenues dipped 14 percent, the company said.
North Latin America had a 6 percent decline to $196.8 million in sales for the quarter, while Asia-Pacific dipped 9 percent, to $132.8 million.
Avon’s net operating profit was $112 million for the quarter, up $67 million. Diluted earnings per share were 7 cents.
Beauty products made up more than $1 billion in Avon’s sales for the quarter. Skin care had $397.3 million in sales, down 2 percent; fragrance had $373.6 million in sales, down 1 percent, and color had $244 million in sales, down 2 percent. Avon’s fashion segment posted $202.2 million in sales, a 6 percent drop, while its home segment posted $150.4 million, a 2 percent dip. In fragrance, Sophía Vergara’s scent did well in Mexico, McCoy said.