Avon Products (NYSE:AVP) recently posted another quarter of weak results with challenges that indicate a long, drawn out and tedious road ahead for business stabilization and recovery. With lower sale and fewer sales representatives, higher input costs and SG&A expenses, one-time charges and adverse currency exchange rates, the company had little going in its favor last quarter. As a result, net income tanked by 70%. To make matters worse, the company expects this trend to continue for the rest of the year.
Avon sells its products to the end-consumer through direct-selling with $11 billion in annual revenue and has an active global sales force of over 6 million sales representatives in more than 100 countries. This business model separates it from peers such as L’Oreal (PINK:LRLCY), Procter & Gamble (NYSE:PG), Estee Lauder (NYSE:EL) and Revlon (NYSE:REV).
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Recovery Looks Distant
Last quarter, the direct selling beauty company sold 4% fewer units as the number of its active sales representatives continued to shrink by 3%. As a result, the global revenue declined 9% with a weak performance weighing on its product categories and markets. Beauty sales, which account for three-fourths of Avon’s stock value, fell sharply by 9%. The results also suffered due to adverse currency exchange rates last quarter.
The company faced strong headwinds in its strongest markets like Latin America, which generates half of its revenue, with a steep 9% dip in sales last quarter. The decline was led by its largest market in the region, Brazil, that suffered a sales decline of 19% driven by a decline in active representatives, decreased demand and adverse currency exchange rates.
It also faced tough business conditions in Europe/Middle East/Africa (that account for one-quarter of the sales) with 14% sales decline and North American markets (one-fifth of Avon’s sales) with 6% lower sales. It continued to lose sales representatives in both these markets with 12% active sales reps leaving the company in North America alone.
In May, the struggling company fended off a $10.7 billion takeover bid from perfume maker Coty that had the backing of Warren Buffett’s Berkshire Hathaway, explaining to the shareholders that the company’s value could rise more from a turnaround led by the new CEO. But that does not seem to be happening anytime soon.
Settling Bribery Probe Would Help Focus On Business Recovery
Meanwhile, Avon is trying to settle its costly SEC investigations into alleged overseas bribery. Avon has spent around $250 million so far on its own internal probe into corruption charges. Though there is still no certainty of the possibility, time or cost of the settlement of the probe, it could help the beleaguered direct-selling company get rid of a costly distraction while it tries to stabilize its business.
The company’s active sales representatives registered strong growth last decade, consistently growing from 5 million in 2005 to 6.5 million in 2010. The number suddenly declined to 6.4 million in 2011 with another 2% decline so far this year.
We have a revised $18 Trefis price estimate for Avon stock.