Cosmetics manufacturer Avon Products (NYSE:AVP) is scheduled to report first quarter earnings on May 1. The company is the world’s direct-selling cosmetics organization, and employs over 6 million independent representatives for its products sales. The first quarter revenues for fiscal 2013 stood at approximately $2.4 billion, 4% lower than revenues in the same period in FY12. However, in constant currency terms, revenues were flat as a 1% increase in active representatives offset a 1% decline in average order.
Geographically, Latin America and Europe, the Middle East and Africa (EMEA) regions witnessed positive growth in constant currency revenues during Q1FY13. Latin America is the company’s largest operating geography, accounting for approximately 46% of revenues. In Q1FY13, Latin America posted a constant currency top line growth of 7%, although reported revenues were flat. Similarly, the EMEA region posted a 3% growth in constant currency, compared to a 1% growth in dollar terms.
Avon faced significant strategic and executional headwinds in the North American and Asia-Pacific (APAC) regions. Although revenues from these geographies declined by double digits during fiscal 2013, the impact of these lapses was extremely disruptive towards the second half of the fiscal. For full fiscal 2013, Avon’s revenues from North America and APAC witnessed decreases of 16% and 15%, respectively.
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For Q1FY14, we expect stronger growth from the EMEA division. Latin American revenues are likely to be impacted by currency headwinds this quarter, as seen with Q1FY14 sales results from industry leader L’Oréal (OTC:LRLCY) earlier this month. Sales from North America should be impacted by the tough weather conditions witnessed during the quarter.
North American Turnaround Should Strain Revenues, Margins
Avon’s business performance over the past year has been hit primarily due to disruption of its representative base in the North American market. Earlier in fiscal 2013, the company completed restructuring of its North American field operations and reduced its existing headcount. Furthermore, Avon simplified the Go-to-Market structure of its sales team to a One Simple Sales model that involved redistricting its representatives. This redistricting of employees impacted critical representative-customer relationships, leading to a sharp decline in sales.
Additionally, the company’s launch of the Service Model Transformation (SMT) in Canada for a pilot study did not resonate well with its representative base. Active representatives found it difficult to adopt the new order management system, which is different from Avon’s traditional catalog-based ordering system. Although the new online ordering system should be cost effective for the company, the weak adoption from representatives in the pilot study has halted the further roll-out of SMT.
For the current quarter, we expect the North American region to remain disruptive for Avon’s financials with a drease in constant currency revenues.
No Recovery In Sight In The APAC Region
Contrary to weakness in the North American region, Avon’s weak business performance in the APAC market is a more industry-wide phenomenon. The company operates boutique stores in a retail setting in the APAC market, as opposed to the direct selling model in other geographies. However, sales in the APAC market have seen a downtrend for Avon, partially due to consumer preference of cosmetics products from domestic manufacturers than international players. This has impacted its competitors and global players such as Revlon (NYSE:REV) and L’Oréal as well. Revlon shut down its operations in China, while L’Oréal closed its Garnier brand from China.
Going forward, we expect Avon’s sales from the APAC market to remain weak. The company has been reducing the number of boutique stores in operation in China, along with decreased inventory levels for Beauty boutiques in the region. Last fiscal, Avon reported a 50% decline in dollar revenues alone.  Given the weak performance from the region, the company will have to reassess its position there.Notes:
- Avon Products Management Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, February 2014 [↩]