Avon Q4 2014 Earnings Review: Currency Headwinds And Declining Representative Base Continue To Erode Sales

Avon Products (NYSE:AVP) reported fourth quarter results on February 12th. The fourth quarter revenues displayed a 12% year-on-year decline (5% year-on-year growth in constant currency terms) and stood at $2.3 billion. The company’s active representative base declined by 4% while the average order grew by 9%. The adjusted gross margin of 60.8% for Q4 2014 witnessed a 40 basis point year-on-year decline mainly due to the adverse foreign exchange impacts in regions such as Europe, Middle East & Africa, and Latin America, and higher supply chain cost from the high inflation countries. ^[1]

Avon’s is currently riddled by two main challenges, namely:

• Foreign currency devaluations that are masking Avon’s actual growth to a significant extent
• Erosion of its active representative base

In this article, we discuss the various trends that had an impact on Avon’s fourth quarter and also full year earnings. We are in the process of updating our 11.08 price estimate for Avon.

See Our Complete Analysis for Avon Products Here

Latin America: Improvement In Performance Was Undermined By A Weak Currency And Economic Travails

Within the Latin American region, Brazil is Avon’s single largest market and Brazil is also the third largest beauty market in the world. Direct selling penetration is relatively high in Brazil compared to other emerging markets, and this has favored Avon, particularly in the skincare, color and fragrance categories. Brazil is currently affected by a weak economic environment, higher consumer debt, and a currency devaluation. Growth is slow and the competition is intense. However, given its emerging middle class, the importance of beauty products, and the high penetration of direct selling in the company’s core categories, Avon will continue investing in Brazil and expects significant positive growth in the long term. In 2014, the company has forged strategic alliances with KORRES, a Greek skincare brand, and Coty, a French beauty and personal care company, to provide a boost to the Latin American, and specifically to the Brazilian, market. In the fourth quarter, Brazil performed as anticipated, with its underlying revenue performance sequentially improving by 3 points.

Avon views Mexico as an attractive beauty destination. However, the Mexican economy is currently weak, due to declining oil prices, with a consequent lack of growth in the beauty market. Sales in Mexico suffered in the first half of 2014, due to attrition in the representative workforce and an unsuitable portfolio price mix. The product portfolio and pricing have since improved, resulting in an  increase in average orders in Q3 2014, though the representative retention has yet to improve significantly. In the fourth quarter, Mexico grew by 7% in constant currency terms due to an improvement in active representative retention. ^[2]

Russia: Though Sales Improved In Constant Terms, The Weak Ruble Dampened Avon’s EMEA Margins

Avon Products’ Russian sales received a significant boost in the second half of 2014, on the back of the depreciating ruble and the economic weakness in Russia. According to Avon country chief Elena Starkova, the sales grew by both volume and value. Due to the weakening Russian economy, many people are seeking additional jobs by selling door-to-door products.  Avon’s business model of direct selling has helped them and has in turn increased Avon’s labor pool in Russia by over 10%. Around 4.3 million Russians are employed by Avon’s direct selling model now.

In Q4 2014, Avon posted a 2% constant currency growth in Russia and also grew its active representative base. However, the Russian ruble fluctuation led to the operating margin from Avon’s EMEA (Europe, Middle East, and Africa) region to be dampened. Management expects the negative impact of Russian’s economic turbulence to continue in 2015, though the constant currency sales growth  should continue.

North America: Sales And Representative Base Witnessed Decline; However, Management Optimistic About Growth In 2015

The North American management team was taking aggressive measures to recover Avon’s lost business. For the year, SG&A cost reduced by $178 million, with the majority coming from fixed cost reductions. There were simultaneous improvements in the commercial marketing process in the areas of product mix, pricing and merchandising execution. And as a result, average order in fourth quarter, grew by 5% versus prior year.

Although the third quarter displayed marginal improvement in the rate of representative attrition,  it still remained at worrying levels. Avon is taking actions on this area to improve the retention rate. The U.S. team has reallocated resources to continue improving the representative experience with a focus on recruiting and retention processes. Avon re-launched avon.com, which allows the representatives and consumers a more contemporary social selling model. In the fourth quarter, growth in online sales led to an increase in average order size. For 2015, the management expects North America to turn profitable and display significant growth.

In Q4 2014, North America experienced an 11% constant dollar decline in revenues and a 16% decline in the active representative base, that was partially offset by 5% average order growth. Currently Avon is trying to create additional channels through its active representatives, such as the social seller. This gives the representative the ability to use her own e-store and do online selling. Avon is also trying to to complement its direct selling model with a retail approach. For example, in Poland, representatives and sales people run their own retail store for Avon’s products. Avon plans to roll out this model to other geographies, in the future. ^[2]

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1. Avon Products Form 8-k, February 12, 2015 [↩]
2. Avon’s Q4 2014 Earnings Call Transcript, Seeking Alpha, February 12, 2015 [↩] [↩]