A chief executive officer shakeup at Avon Products Inc. may not be the magic formula that will fix the struggling direct-sales business.
The company said Thursday that Sheri McCoy, who has been ceo since mid-2015, would leave at the end of March, and that it had retained Heidrick & Struggles to begin an executive search. That news came at the same time as Avon — about halfway through the Transformation Plan it unveiled in January 2016 — posted a $46 million loss for its second fiscal quarter on sales of $1.4 billion, a 3 percent dip.
Wall Street analysts noted the ceo switch is likely to be a distraction as Avon tries to make improvements and they did not identify any clear front-runners for the job.
“I’m not sure there’s a lot anybody can do to turn the business around,” said Stifel analyst Mark Astrachan. “It took too long for [McCoy] to recognize the problems she inherited, and I think it’s something they will have to avoid with the new ceo,” Astrachan said, adding that there was “no question” the ceo hunt will be a distraction. “You’ve already had a ton of turnover amongst senior managers of the company,” he noted.
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In the past several months, Avon has appointed Jonathan Myers as chief operating officer, Miguel Fernandez as global president, James Thompson as senior vice president, general counsel and chief ethics and compliance officer and Jamie Wilson as chief financial officer.
“I think it makes sense to bring in somebody with a direct-selling or social-selling background because that’s where I see the category and business opportunity evolving,” Astrachan said. “It’s less about the products you sell and more about the opportunity you create.”
RBC Capital Markets analyst Nik Modi wrote in a note that while he expected McCoy’s exit to be viewed positively, “the company will now have to deal with transition disruption amid executing on its transformation plan.”
McCoy’s departure comes after pressure from Barington Capital, which in May called for Avon’s board to “immediately begin a search” for a new ceo after the company said it would hold onto its China business (it had been conducting a strategic review of the unit). Barington also took aim at Avon’s steep stock price declines under McCoy. In April 2012, before McCoy, the company’s shares were trading at $22.59. On Thursday, after earnings and the news of her departure broke, Avon shares closed at $3.
While the China business may have been retained, a strategic review did result in the spin-off of Avon North America (now New Avon), which Cerberus Capital Management bought.
“They spent a while exploring all strategic options and ultimately what they got was Cerberus taking over the North America business and a stake [in Avon]. It seems pretty unlikely that the other option here is they’re actually going to be able to put this on someone else,” Astrachan said.
Beauty made up just over $1 billion of Avon’s $1.4 billion in sales for the quarter ended June 30. Skin-care sales were down 4 percent, to $399.8 million; fragrance sales were up 2 percent, to $368.2 million, and color-cosmetics sales dropped 7 percent, to $236.3 million.
McCoy blamed weak color sales on a tough comparison from the prior-year period, when Avon launched Ulta Matte Lipstick, as well as problems in Brazil, where the company is transitioning to a three-tiered makeup model (with its Avon True, Mark and Color Trend lines at different price points).
McCoy said a “timing difference” was why Avon didn’t have a similarly large launch for the second quarter of 2017. “We have a lot more of it coming in Q3 and Q4,” she said. “As we were transitioning the business and moving the headquarters to the U.K., we were changing people and there were some timing differences…we expect the second half to be stronger than the first half.”
Launches for the second half include an “upgrade” to the Color Trend line, a new mascara for the Mark line, as well as a liquid lip that will roll into more markets, McCoy said.
But Avon’s issues are broader than its makeup category.
“They have big problems,” Astrachan said. “They’re continuing to lose share, relevance and there’s nothing you can really look at in the business to show that trends are improving…volumes continue to weaken, active representative growth continues to disappoint…and things are fluid — they get better, they get worse.” Active reps dipped 3 percent in the quarter, the company said.
Kathy Gersch, executive vice president at business consulting firm Kotter International said that in addition to “not keeping pace” with launches, Avon drastically needs to modernize the way it does business – something a new ceo could tackle.
“All the players playing in that space in a traditional way without evolving the model…will go by the wayside,” Gersch said, adding that Avon should be looking for “someone that’s really going to take a fresh look as a leader and be willing to make some pretty significant changes to the model, to evolve it fast enough to succeed and to survive. They have to learn a new way to leverage their direct sales force into much more of an influencer role, with a different kind of distribution channel that allows consumers to buy in a new way and not be dependent on seeing what their next-door neighbor has in stock.”