Avon Products Inc.’s shares fell nearly 22 percent Thursday after the beauty firm reported a third-quarter net loss and decline in sales as it continued to struggle in key markets.
This story first appeared in the November 1, 2013 issue of WWD. Subscribe Today.
The impact was worsened by the company’s disclosure that a potential settlement of the ongoing Foreign Corrupt Practices Act investigation, related to bribery allegations in China, could cost significantly more than Avon’s earlier offer to the U.S. Department of Justice and the Securities and Exchange Commission of $12 million, which was rejected in June.
Investors were rattled, sending the Avon’s stock price down more than 23 percent at several points on Thursday. Shares closed at $17.50, down 21.9 percent.
The results fell below analysts’ expectations — and Avon’s.
“It was a tough quarter. Working a turnaround is not a linear process,” Avon chief executive officer Sheri McCoy told Wall Street analysts during the company’s earnings call Thursday. “We knew that the third quarter would be challenging. Given our sales performance, it’s clear that it was tougher than we anticipated.”
For the quarter ended Sept. 30, the company reported a net loss of $5.5 million, or 1 cent a diluted share, compared with a net profit of $31.6 million, or 7 cents share, in the year-ago period. Total revenues for the three months declined 7 percent, or 1 percent in constant dollars, to $2.32 billion, compared with $2.51 billion in the year-ago quarter.
Beauty sales fell 9 percent to $1.66 billion, or 2 percent in constant dollars.
Its business in North America continued to struggle, with revenues sliding 19 percent to $328.6 million. McCoy cited previous initiatives, such as the attempt several years ago to move to “one simple sales model,” as “a big-bang change” that was and still is disruptive to the U.S. business. Her aim, she said, is to stabilize the business by taking a more “evolutionary” approach to changes. “In the U.S., improving field health is job one,” said McCoy.
When asked why Avon continues to operate a business in the U.S., particularly after exiting several countries over the past several years, McCoy said, “The U.S. is a big market. It’s an important market. People are very committed and want the U.S. business to work.…We’re so heavily indexed in emerging markets and we don’t have the offset of a stable U.S. business to help us moving forward. So I think there is a portfolio reason to get that back to profitability.”
As for the remaining regions, during the quarter Avon’s total revenues in Latin America declined 5 percent to $1.21 billion, but gained 6 percent in constant currency, boosted by tax credits in Brazil and higher average order size, due in part to price increases and new launches. Total revenues in Europe, the Middle East and Africa were flat at $619.2 million, or up 2 percent in constant currency. In Asia-Pacific, total revenues declined 22 percent to $167.4 million, or 19 percent in constant currency. This was a result of the number of representatives decreasing across the region, and of Avon’s exit from South Korea and Vietnam, as well as a poor performance in China, where revenue slid 67 percent.
For the nine-month period, net income attributable to Avon declined 89 percent to $12.7 million, or 3 cents a diluted share, compared with $119.7 million, or 27 cents a share, in the year-ago period.
Total revenues declined 4 percent to $7.29 billion, from $7.61 billion in the prior-year period.
The company’s overall sales results prompted several analysts to press McCoy on how realistic the company’s goal is of achieving midsingle-digit revenue growth by 2016.
“As I look at our 2016 goal, I feel confident that we will get there,” the ceo said, adding that the larger issue is making the U.S. business profitable. “We set three-year goals because we knew it would take time to go through this turnaround,” she emphasized, noting that while the U.S. and Asia are a drag on the company’s business, Latin America and Europe, the Middle East and Africa are “performing in the right direction.”
Stifel analyst Mark Astrachan wrote in a research note on Thursday morning, “Overall, we believe the result is disappointing and an indication the turnaround remains in the very early innings. This is especially concerning as ceo Sheri McCoy has been in her position since April 2013 and has little progress to show, in our view. Should results remain challenged, we believe more dramatic steps need to be undertaken to improve performance, including potentially shuttering underperforming regions, such as the U.S., and scaling back in Western Europe and China/Asia.”
The aforementioned SEC matter weighs heavily on the company. Avon stated in a filing Thursday morning, “If the [Department of Justice’s] offer is comparable to the SEC’s offer and if the company were to enter into settlements with the SEC and the DOJ at such levels, we believe that the company’s earnings, cash flows, liquidity, financial condition and ongoing business would be materially adversely impacted.”
Despite the challenges in the quarter, McCoy said Avon is “headed in the right direction” and “course correcting” as it goes. “When things don’t go exactly as planned, instead of making wholesale changes in strategy, we are analyzing, adjusting, learning along the way and sharing those learnings with the rest of the organizations.”