The UK Provides Slight Glimmer Of Hope For Avon In Otherwise Grim Report

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Avon Products (NYSE:AVP) reported its second quarter results on July 31. Reported revenues slumped 13% on a year-on-year basis while constant currency revenues shrunk 3% during the quarter. Churn in active representative count continued to negatively impact the company’s performance, declining 6% in Q2FY14 compared to a 2% increase in Q2FY13.

Avon’s performance in the second quarter was weakened by representative declines in other geographies in addition to North America. The number of active representatives in its largest market of Latin America declined 6%. This translated into a 3% drop in units sold for the quarter. Similarly, representative count in the Asia-Pacific region declined 8% which resulted in a 5% decrease in unit sales.

The steep decline in overall revenue resulted in a 54% drop in operating profit. Geographically, the Latin American market and EMEA region witnessed double-digit declines in operating profit, driven by the weak top line performance across the board. Struggling geographic divisions of North America and Asia-Pacific continued to post operating loss, in addition to driving down the overall revenue. Avon finished the second quarter with a net income of $19 million, 40% lower than net income from a year ago period.

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Executional Lapses Restrict Avon’s Latin American Performance

Revenues from the Latin American region declined 6% in Q2FY14 to reach $1.05 billion. The company failed to capitalize on the surge in demand from the World Cup in Brazil, Latin America’s largest contributor to revenues. Sales from Brazil were down 5% in reported terms while constant dollar revenues increased 3% for the quarter. The weak performance from Brazil was a result of missed demand forecast and limited representatives to cope with rise in demand. New products launches experienced inventory shortages because of lower anticipation of demand. Additionally, the low demand forecast led to weak engagement between field representatives and customers, resulting in further sales decline.

Revenues from Mexico declined 16% in reported terms and 12% on a constant dollar basis. Decreasing representatives in Mexico was the primary reason for the decline in revenues. Revenues from Venezuela, on the other hand, declined 84% in reported revenues but increased 31% in constant dollar revenues, benefiting from the high inflation environment in Venezuela. However, number of units sold in Venezuela continued to decline due to the high price points of products in the inflationary environment. Beginning fiscal 2015, both constant dollar and reported revenues from Venezuela are expected to be severely impacted by the SICAD II exchange-rate framework.

U.K Posts First Signs of Progress on Business Turnaround

Second quarter revenues from Europe, the Middle East and Africa region were better than all other geographies. Reported revenues were only down 3% while constant currency revenues stood flat over a year prior period. Within the EMEA market, reported revenues in Russia, Turkey and South Africa were down for the quarter, while sales in the U.K posted a positive growth in reported revenues. Revenues from Russia, Turkey and South Africa was down by approximately 13%, 13% and 2% respectively. In terms of constant dollar revenues, South Africa posted a 9% growth for the quarter, while Russian constant dollar revenues were down 4%.

The U.K posted a surprising 11% growth in reported revenues for the quarter, although constant dollar revenue growth was only 1%. The change in regional performance in the U.K was effected by a change in the general manager and the head of sales in late 2012, which brought together a well-seasoned management team. New representatives were provided with training in all three forms of customer approach, namely face-to-face, phone and SMS contact, and this resulted in a gradual increase in field engagement between Avon representatives and customers. The company states that this sign of turnaround in the U.K took more than 18 months, and more importantly, provides a strategy for tackling problems in other geographic areas. However, financial performances for the company in the next few quarters are expected to remain heavily subdued.

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