Avon Products‘ (NYSE:AVP) new CEO Sherilyn McCoy is up for a very challenging task ahead as the direct selling company’s latest earnings revealed that the business continues to remain significantly compromised with sliding sales and a much larger-than-expected drop in profits. The results prompted a sharp reaction from the market, pulling the stock down by 8% on Tuesday. Adding to the woes, the company foresees further weakness in its biggest markets of U.S. and Brazil in the coming months. Avon sells its products to the end-consumer through direct-selling and has an active global sales force of over 6 million sales representatives. This business model separates it from peers such as L’Oreal (PINK:LRLCY), Procter & Gamble (NYSE:PG), Estee Lauder (NYSE:EL) and Unilever (NYSE:UL).
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After a dismal performance in the latter half of 2011, Avon’s sales continued to slide this quarter with further declines in the number of active sales representatives and falling number of orders. Operating profit shrank by 70% last quarter (y/y) with cost pressures, including commodities and higher labor costs, unfavorable exchange rates and product mix as well as restructuring charges. SG&A expenses also increased with investments in the Representative Value Proposition (RVP) in the U.S. and sustaining representative engagement in Brazil.
The company’s position has weakened over the past few months with poor earnings results, disruptive ERP implementation in Brazil and the costly SEC investigations into alleged overseas bribery. The delay in hiring a new CEO also delayed business recovery and made it susceptible to hostile take-over bids during rough times. Avon is in the process of reassessing its long-term business strategy and McCoy’s priority is to stabilize the business and arrest declining sales and sales force. The new CEO plans to comprehensively review Avon’s operating model, cost structure and product portfolio. Nonetheless, the company’s woes are likely to continue, at least in the near term, as its most important markets like Brazil and the U.S. could weaken further.
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