Though Weakness Continued In The Fourth Quarter, Avon Products Is Taking Several Initiatives To Revive Its Performance

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Avon Products (NYSE:AVP) released its Q4 2015 earnings results on February 11th. Though the company’s weak performance continued in the fourth quarter, there were signs of improvement in some of its key geographies. Also, post Avon’s deal with Cerberus Capital, the company is undertaking a lot of initiatives to turn around its poor performance trend. We expect Avon to show better signs of recovery in the future. 

Avon sold around 80% of its North American business to Cerberus Capital. Hence, excluding North America and Liz Earle (which was also sold off in 2015), revenues for Q4 2015 rose by 3% on a constant dollar basis. The revenue growth would have been around 6% excluding Brazil’s IPI taxes and the VAT credit. However, on a reported basis, Avon’s revenues declined by 20% to $1.6 billion. Avon’s active representative base grew by 2% for the fourth quarter. The operating margins continue being dampened by the weak foreign currency impact, the adjusted operating margin for the fourth quarter was down 420 basis points to 6%. [1] 

For full fiscal year 2015, Avon’s revenues declined by 19% to $6.2 billion. The active representative base grew by 1% for 2015. Avon’s adjusted operating margin was 5.7% down by 360 basis points. The decline was due to Brazilian IPI taxes, Brazil’s VAT credits, and the foreign currency impacts on Avon’s performance. [1]  

We will shortly update our price estimate of $3 for Avon Products.

See Our Complete Analysis for Avon Products Here

Region-Wise Performance

  • Latin America
Avon’s performance in Latin America was flat on a constant dollar basis, but declined by 26% in reported terms. Brazil’s economic problems continue to trouble the company, however, the sales in Mexico grew by 6% on a constant dollar basis, due to a healthy growth in average orders. The company’s revenues declined by 44% on a  constant dollar basis in Brazil primarily due to the decline in average orders. Beauty spending is currently very weak in Brazil on account of its economic challenges. Brazil’s IPI taxes (industrial product related taxes in Brazil) are putting additional pressure on the margins. [2]
  • Europe, Middle East, and Africa
Avon’s performance in Europe, Middle East, and Africa has improved considerably (6% growth in constant dollar terms) mainly due to the growth in regions such as Russia and South Africa. The active representative base grew by 8% in the region. Though Avon’s performance in the U.K. is still weak,  improvements have been observed in the average orders. ((Avon Products’ (AVP) CEO Sheri McCoy on Q4 2015 Results – Earnings Call Transcript, Seeking Alpha, Feb 11, 2016))
  • Asia Pacific 
Within the Asia Pacific region, most of the markets continued showing weakness with the only exception being the Philippines. However, the strong market in one region was not enough to compensate for the declines in the rest of the markets in this geography, where revenues fell by 8% year-on-year in constant dollar terms (16% reported decline). ((Avon Products’ (AVP) CEO Sheri McCoy on Q4 2015 Results – Earnings Call Transcript, Seeking Alpha, Feb 11, 2016))
Category-Wise Performance
In terms of categories, in 2015, Avon’s Beauty division grew by 3% driven by 7% growth in Fragrance, 1% growth in Color, and flat performance in Skincare. Avon’s Fashion & Home division grew by 5% year-on-year.
 
Changes That Took Place In 2015

  • Avon re-positioned its brands in 2015 with a new theme titled Beauty for a Purpose which received a positive response across the globe. The company is planning to build further upon the theme this year. Also, the social media and digital reach of the company grew considerably last year and it is currently rolling out upgraded service models in key markets.
  • It is worth noting that in January this year, the company entered into a strategic collaboration with Hewlett-Packard to identify cost-effective tools and processes in order to boost its operational efficiency. This move might help Avon in adapting better to the dynamic beauty industry. As a part of this partnership, the company, along with other such enhanced technological upgrades, also intends to cut its global headcount.
  • Avon’s biggest highlight for the year probably came in December 2015, when private equity management firm, Cerberus Capital Management invested $435 million into the company and carved out Avon’s North American division into a separate entity by investing another $170 million in it. Avon sold 80.1% of its North American business to Cerberus. The company had been striving to make a turnaround post the deal. ((Avon Products’ (AVP) CEO Sheri McCoy on Q4 2015 Results – Earnings Call Transcript, Seeking Alpha, Feb 11, 2016))
 Avon’s Three-Year Road Map To Improvement
The three-year plans broadly entails investing in growth areas, cutting costs, and better recovery from financial stress. With respect to the first point, Avon will ramp up investments in the new brand positioning in its important markets. There will be a detailed pricing list in place in the company’s top ten markets. The company is currently striving to develop its top 40 brands. For better representative retention, the company has launched an improved on-boarding program. The service model for the company is undergoing changes and there is a three-year plan for the same. Some of the countries where these changes have been set in motion include Poland, Turkey, the U.K., and a few markets in the EMEA. The implementation will be completed in its major markets over 2016.

Also, in Brazil there is a upgradation of the service model which involves a better order management system and key digital tools that will enhance the business management aspect of representatives and sales managers. The company is in the pilot testing stage of pickup points, where buyers can get their merchandise, and on-demand delivery for the top sellers.

In the cost cutting aspect, the company plans on $350 million of cost cutting over the next three-year period. For building up its financial resilience, the company will increase investments in services with the suspension of dividends, better repayment of debt, and improved operational efficiency. ((Avon Products’ (AVP) CEO Sheri McCoy on Q4 2015 Results – Earnings Call Transcript, Seeking Alpha, Feb 11, 2016))

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Notes:
  1. Avon Reports Fourth-Quarter and Full-Year 2015 Results, Avon Press Release, Feb 11, 2016 [] []
  2. Avon Products’ (AVP) CEO Sheri McCoy on Q4 2015 Results – Earnings Call Transcript, Seeking Alpha, Feb 11, 2016 []
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