Avon Faces Tough Road To Recovery As Sales Shrink

Avon Products (NYSE:AVP) reported that its profits declined 81% to $32 million in the third quarter results released November 1. The company has been going through a rough period as a result of its attempt to reposition itself as an upscale beauty products company which alienated it from both its customer base and its direct selling representatives. The margins include a one time impact of an impairment charge besides being the result of growing costs even as the top-line sales growth has slowed down. Compared to the same period a year ago, sales were down 8%, and the number of active representatives were down 1%. The company also cut its quarterly dividends to keep costs in check.

Its direct selling business model differentiates it from its competitors, L’Oreal (PINK:LRLCY), Procter & Gamble (NYSE:PG), Estee Lauder(NYSE:EL) and Revlon (NYSE:REV).

View our detailed analysis for Avon’s stock here

Sales continue to decline

In Q3, the direct selling beauty company sold 1% more units, an improvement from a 4% decline in Q2. The global revenues continued to decline and dropped 8% to $2.6 billion with the weak performance weighing on its product categories and markets. Beauty sales, which account for almost three-fourths of Avon’s stock value, continued its sharp fall and declined by 9%. The results also suffered due to adverse currency exchange rates last quarter.

Positive growth in Latin America offset weakness in North America, Asia and Europe. Based on the continued decline in revenue performance in China (sales declined 31%) and corresponding lowering of its long-term growth estimates, the company re-assessed the fair value of goodwill related to the business, which resulted in a Q3 non-cash impairment charge of $44 million. The one time impairment charge was a major contributor to the drop in margins which was offset by an $18 million decline in advertising, down 24% to $58 million.

Focus on better relationship with representatives

Led by the Asia-Pacific and the U.S. markets, the number of active representatives fell by 1% during the quarter, a more modest drop than in recent quarters. The Russian market continues to be a worry where it recorded another decline in the number of representatives. However, the company recorded a modest increase of 2% in the number of representatives in the Latin American and EMEA (Europe, Middle East and Africa) markets. It is investing to improve representative engagement (through social media initiatives) and experience, including ordering, delivery and billing. It is also developing mobile solutions to give representatives better access to the company and plans to launch its first mobile program early next year.

Targets going forward

As part of its turnaround plan, the company has set stiff target of getting to low-double digit operating margins over the next three years. The company aims to cut costs annually by $400 million and plans to do so mainly by reducing its selling, general and administrative expenses. With the global beauty industry poised to grow at 6% annually, and the developing markets expected to lead the growth, the company with strong presence in China and Brazil is well positioned to benefit from it.

We are in the process of revising our $18 Trefis price estimate for Avon stock.