Avon’s Disappointment Continues Due To Currency Headwinds, Brazil’s Travails, And Lackluster Demand

Avon Products (NYSE:AVP) released its Q3 2015 earnings on November 4th. As we expected in the company’s earnings preview, Avon is yet to recover from its disappointing performance trend. In the third quarter, the major roadblocks to the company’s growth were Brazil’s economic turmoil, leading consumers to spend less on beauty products, combined with Brazil’s IPI tax (introduced in May 2015) which eroded the company’s revenues especially in the color and skincare segment. Brazil is Avon’s top revenue contributor (~20% as of 2014) ^[1] Besides, though the company claims that around 500,000 women are interested to work for Avon in North America, the region is yet to show a recovery in terms of representative growth and hence profitability. The Liz Earle divestiture also weighed down the company’s performance. Finally, currency headwinds acted as a major blow to erode the growth of the company. Currency headwinds impacted Avon’s reported revenues by 20 percentage points and resulted in a decline of adjusted earnings per share by $0.16. Weak currencies have led to an erosion of $365 million pre-tax income, year-to-date in 2015.

Geographically, the Europe, Middle East and Asia (EMEA), and Latin America showed marginal recovery in performance. However, the overall performance of the company didn’t provide much hope for a near-term recovery.

Avon’s constant dollar revenue declined by 2% year-on-year and reported revenue fell by 22% to $1.67 billion due to the negative currency impact, the Brazilian IPI tax impact, and the aftermath of the Liz Earle divestiture. Avon’s representative base declined by 1% year-on-year, due to problems in North America and Latin America. Its adjusted gross margin witnessed an erosion of 80 basis points year-over-year to decline to 61.2%, while its operating margin declined by 610 basis points to 3.2%. Avon’s effective tax rate was adversely impacted by the additional allowances for deferred tax assets of approximately $665 million, which caused income tax expense to be significantly in excess of pre-tax income. The valuation allowances were mainly for the strong U.S. dollar and its impact on foreign earnings and Avon’s tax planning strategies. ^{[2] [3]}

Some of the positive aspects, according to Avon’s management, that can shape the company in the future are: the local market teams which are delivering well under pressure, such as devaluation, economic, and geopolitical problems, and reduced consumer spending. As a result most of Avon’s top 12 markets are performing well. ^[2]

We will shortly update our current price estimate of $4 for Avon Products.

See Our Complete Analysis for Avon Products Here

Avon’s Year-to-Date Increment In Representatives Gives Some Hope For Revival

Avon’s representative base displayed signs of improvement in most of its top markets and some of the markets even displayed marginal growth in representatives. Overall, the representative base witnessed a 1% year-on-year decline due to the regions like North America, Venezuela, and Argentina.

Avon’s Setbacks In Brazil And North America

The conditions dampening Avon’s growth in Brazil are: 1. Brazilian Real’s devaluation with respect to U.S. dollars – in Q3 there has been a 23% devaluation year-over-year, and a 40% overall devaluation year-to-date in 2015, as compared to the same period last year, 2. The heavy burden of Brazil’s IPI tax which came into effect post May, and which adversely impacted Color and Skincare growth, 3. The economic slowdown is also decreasing Brazilian users spending propensity on beauty products. However, despite the hindrances, the representative base witnessed growth resulting in an underlying constant dollar year-on-year growth of 6%. ^[2]

In the U.S. the company is primarily trying to improve the representative base and optimizing the cost structure. However, representative jobs are mostly contractual and with the economic recovery in the U.S. the representative job might not be the first choice when employees can opt for more stable sources of income. However, the representative retention in the U.S. is showing sequential improvements over subsequent quarters. According to the management, currently 500,000 women are showing an interest in working for Avon in the U.S. and the company aims to convert this gradually in line with the historical representative base in U.S. and with respect to the benchmark in other geographies. ^[2]

Avon Reorganizes Some Of Its Management Expecting Future Efficiency

Effective January 1, 2016, there will be some structural changes in the company’s leadership. The EMEA and Latin American region will be combined to be brought under the leadership of John Higson, who currently heads the EMEA region and Global Field Operations.

Fernando Acosta, who currently heads Northern Latin America and Global Marketing, will be dedicated to the brand marketing and innovation aspects, including the company’s move towards social selling.

Jim Scully, who is the current Chief Financial officer, will have his role expanded to a Chief Operating Officer. He will be overseeing the company’s enterprise strategy, infrastructure, and support. The global supply chain will also fall under his purview. ^[2]

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1. Avon’s Annual Report, 2014 [↩]
2. Avon’s Q3 2015 Earnings Transcript, Seeking Alpha, Nov 4, 2015 [↩] [↩] [↩] [↩] [↩]
3. Avon Product 10Q for the quarterly period ended September 30, 2015 [↩]