Avon Products (NYSE:AVP) released its full year earnings Tuesday, February 12. The company reported a 63% decline in operating profits from $855 million to $315 million. Revenues declined by 5% from $11.1 billion in 2011 to $10.5 billion in 2012. However, the company’s stock jumped almost 20% to $21 after the earnings were released as the turnaround efforts showed some signs of early success. The company is now evaluating strategic alternatives for the Silpada business it acquired in 2010.  Silpada is direct seller of sterling silver jewelry with operations in the United States, Canada and the United Kingdom. The decision to look for strategic alternatives was taken after successive dismal results since the acquisition. The company now plans to focus on stabilizing its core business and growing sales.
In 2012, it wrapped up the initial cost cutting measures involving closing operations in Vietnam and South Korea besides reducing global headcount by approximately 1,500 positions. We expect the company to announce some more cost cutting initiatives in 2013, as it aims to reduce costs by $400 million by 2015. Avon is targeting mid single-digit revenue growth and an adjusted low double-digit operating margin by 2016.
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Positive Results From Emerging Markets
The growth in non-traditional markets of Latin America and Europe helped the company offset weakness in North America and Asia. In Q4, units sold rose 2%, driven mostly by Latin America and Europe. The count of active representatives was up 1%, largely driven by strong additions in Brazil.
The positive results in Brazil are a result of the company creating locally relevant product offerings, which were then supported by improved marketing and merchandising. Constant dollar sales in Brazil increased by about 10%, as did the count of active representatives.
Avon’s sales are highly dependent upon the active representatives who are the primary salesman for the product. The company introduced a new incentive program to boost representative retention in 2012. The program entails providing insurance to representatives who achieve certain goals and remain active. The growth in the number of active representatives was the primary cause behind the company growing sales in Latin America by 7% in constant dollar terms. The growth was supported by the successful launch of new products, improved merchandising and price adjustments. In Europe, sales increased by 2% in constant dollars driven by 5% unit growth and 1% increase in Active Representatives.
Struggle Continues In North America
Avon continues to struggle in the U.S. as sales declined by 8% y-o-y. The company’s efforts to turnaround the business were nullified by a 12% decline in Active Representative. It is currently in the process of redistricting its sales force and plans to increase focus on marketing execution in 2013. Also, the company’s new product launches in the holiday quarter were not received well by the market. Additionally, sales at Silpada were down 18% due to lower average order and a decline in active representatives. The company is currently looking for strategic alternatives for the Silpada business after continual under-performance since the acquisition was completed in 2010.
Cost Cutting Initiatives Bear Fruit
The company announced a plan to reduce its costs by $400 million by 2015. It completed the initial set of actions under the plan. These included a reduction of headcount of approximately 1,500, the closure of several facilities, including the Pasadena and Atlanta distribution centers in the United States and exiting the under-performing markets of South Korea and Vietnam. The company is also working on reducing its inventory and working capital. We expect these efforts to bear fruit and expect the working capital to decline in the near term.
We are currently revising our $17 Trefis price estimate for Avon.