After posting a dismal performance in its third quarter, Avon Products (NYSE:AVP) reported plans of halting the global rollout of its $125 million order management system project.  The company’s decision comes after Avon posted a 7% and a 1% decline in reported and constant dollar revenues, respectively, in its recent Q3FY13 earnings. The decline in revenues was a result of adverse currency fluctuations along with severe employee relationship disruptions caused by the new order management system.
In this article, we look at the disruption made through the implementation of Avon’s Service Model Transformation (SMT) project and its implications for the fourth quarter.
New Consumer Proposition Model Deleverages Growth
Avon has been planning a tectonic shift from its current paper-based order model to an omnichannel experience for the past four years, as part of its $400 million cost-savings initiative. The new omnichannel experience leverages various social and digital media channels to provide multiple touch points for the consumer. Additionally, the company has targeted an improvement in its consumer service by providing more relevant and locally positioned products. While this Service Model Transformation (SMT) project provides Avon with a faster order processing system and reduced operating expenses through online and mobile order channels, the resistance of its sales representatives has restricted the rollout since 2009.
The company pushed forward with the SMT implementation by launching a pilot program in Canada. The model continued to have very low representative adoption and disrupted employee-representative relationships. Additionally, the One Simple Sales model launched within the U.S. in 2011, which consolidates field operations and presents leadership positions to its representatives, continued to lose traction. In its Q3 transcript, Avon reported further disruption between its field representatives and employees. These disruptive instances within the North American region resulted in a 3% drop in Avon’s active representative count, which is critical to Avon’s growth.
We expect Avon’ revenue to encounter significant downward pressure going forward as a result of the disruption caused by the SMT implementation. Additionally, continued weak performance in the U.S. and China is also expected to weigh on results for Avon in coming quarters. During Q4FY11 and Q4FY12, Avon posted revenues between $3.00 – $3.05 billion, compared to last quarter’s $2.32 billlion. Given the disruption in the North American market, we expect revenues lower than the $3 billion mark for Q4FY13, in line with the consensus estimate of $2.75 billion. Operating profits during Q4FY11 and Q4FY12 were approximately $13 million and $11 million, due to goodwill impairment charges of approximately $263 million and $207 million respectively. The charge-offs have continued, albeit at much lower levels.
For the forthcoming Q4, the company expects to write down the remaining part of the SMT software amounting to $100 – $125 million, which could negatively impact operating margins for Q4 on a sequential basis. However, on a year-on-year basis, we could see an expansion in operating profit margins as the lack of goodwill impairment charges for the quarter offsets write down charge. That said, management must stabilize the business model and achieve updated selling tools and processes its representatives can use to go to market.
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