CFO Departure Could Further Delay Turnaround For Avon Products

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Avon Products

In a recent press release, the management of Avon Products (NYSE:AVP) reported the resignation of its Chief Financial Officer (CFO) Kimberly Ross. [1] The senior management transition comes at a critical time for the struggling cosmetics manufacturer. Avon’s sales so far in fiscal year 2014 have declined 12% year on year, reaching $4.37 billion. Although external factors such as volatile currencies have played their part in declining sales, internal representative churn and lapsed management strategies across geographies have contributed to significant declines in constant currency sales.

H1FY14 revenues from its largest market, Latin America, fell 12% due to volatile currencies. The domestic North American market, although smaller than Latin America, witnessed a 21% decline in sales due to increasing representative attrition. Similarly, sales in the Asia-Pacific market contracted 15%, impacted by depreciating local currencies and weak product consumption. In addition to declining sales, Avon’s gross and operating profit margins have spiraled down. Gross margins declined from 62.4% in H1FY13 to 59.6% in H1FY14, depressed by significant manufacturing overhead costs. Similarly, non-manufacturing overhead costs depressed operating profit margins in the declining sales environment, with margins deteriorating from 7.5% in H1FY13 to 1.0% in H1FY14.

Below, we discuss specific trends that can influence our Trefis price estimate of $14 for Avon Products.

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Volume Sales in LatAm and EMEA Could Regain Lost Ground

Sales from Latin America (LatAm) declined 12% on a year-on-year basis in H1FY14, with the region accounting for about 48.5% of total first half sales. Constant currency sales, which excludes the impact of currency fluctuations, increased 4% on a similar basis. In the second quarter, Avon failed to capitalize on the increased passenger traffic in Brazil resulting from the FIFA World Cup. The company underestimated product demand for the quarter ahead of the World Cup and did not have enough representatives to cope with rise in demand. However, the positive constant currency sales highlight the strength of product demand in the region.

Additionally, the Europe, Middle East and Africa (MENA) market showed signs of recovery last quarter. The MENA region accounts for nearly 30% of total Avon sales, and regional sales declined 7% year on year in H1FY14. However, sales last quarter posted a growth rate of 2% over Q2FY13, driven by a strong recovery in the U.K., which posted a 11% growth in reported revenues. 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.

Implementation of these initiatives across the LatAm and EMEA markets could lead to a recovery in sales for Avon in the near term. The management team at Avon has stated its plan to improve training to new representatives that should lead to better retention and increase their earnings potential.

Management Shift Could Weigh on North American Operations

The transition of senior management responsibilities from Ms. Kimberly Ross to Mr. Robert Loughran could multiply Avon’s weakness in the North American market. Sales in H1FY14 declined 20% on a year-on-year basis, driven by continued decline in its representative base. Avon’s representative base has been declining rapidly after the company reorganized its sales personnel in the U.S. This restructuring resulted in severe disruption between Avon representatives and field personnel, which led to rapid attrition across the U.S.

During the same time as the restructuring in the U.S., Avon implemented a pilot program to replace its existing paper-based order management system with an electronic system to reduce costs. However, this system did not have significant adoption amongst representatives and contributed to some representative churn. We believe the current attrition in representatives is primarily resulting from the disruption in field operations in the North American market. In addition to the complexities of restricting churn in Avon’s representatives, high overhead costs across all operating geographies could further constrict the ability to make radical changes for the new CFO.

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Notes:
  1. Avon Announces CFO Transition, Avon Investor Relations, September 2014 []