Avon’s Earnings Will Focus On New Cost Saving Initiatives

Direct-selling beauty products company, Avon Products, (NYSE:AVP) will announce its FY 2012 results on February 12. The company posted weak results for the first nine months of 2012, with revenues decreasing 6.5% and millions spent on an ongoing SEC investigations into alleged overseas bribery. Andrea Jung, executive chairman and board member, widely held accountable for the missteps by the company, stepped down from her position on December 31.  Her successor, Sherilyn S. McCoy, announced an ambitious turnaround plan that includes cutting out $400 million in costs, sharply increasing sales and almost doubling operating margins over the next three years, during the third quarter earnings call. ^[1] However the full details of how the targets will be achieved are still awaited, and we will be looking for the same.

Avon sells its products to the end-consumer through direct-selling, and has an active global sales force of almost 6 million sales representatives with presence in about 100 countries. Its direct selling business model separates it from peers such as L’Oreal (PINK:LRLCY), Procter & Gamble (NYSE:PG), Estee Lauder (NYSE:EL) and Revlon (NYSE:REV).

View our detailed analysis for Avon’s stock here

Avon had outlined initial steps toward the annual cost-savings target of $400 million by the end of 2015, in December. ^[2] These include a targeted global headcount reduction by approximately 1,500 positions and exiting the South Korea and Vietnam markets. It expects to wrap up the initial steps by the end of 2013. The cost to implement these actions is expected to be in the range of $80-90 million before taxes, of which approximately $50-60 million is expected to be recorded in the fourth quarter of 2012.

We expect these to negatively impact the operating margins of the company, which shrunk from about 10% in September 2011 to about 4% in September 2012. As part of these steps, the company had also announced an approximately 75% cut in dividends during the third quarter earnings call. ^[1] These initial steps account for approximately 20% of the total targeted savings, and we will look for guidance on how the company plans to generate the remainder of the saving.

The company is currently reassessing its long-term business strategy with a priority to stabilize the business and arresting the declines in its sales, number of orders and active sales force.

The North America business contributes about 20% to Avon’s revenues and has seen a 12% increase in the count of active representatives and units sold in the year so far. We will look for any improvements in this core market of the company and Avon’s strategy to improve its performance in the market.

We have a $17 Trefis price estimate for Avon, which is at par with the current market price.

1. Avon Products Management Discusses Q3 2012 Results, Seeking Alpha, November 2012 [↩] [↩]
2. Avon Announces Initial Steps of Cost Savings Initiative, Avon Products, December 2012 [↩]