Avon’s Third Quarter Performance Looked Promising With Most Of Its Strategic Initiatives Going According To Plan

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Avon’s Q3 2016 results were released on November 3rd. The company seems to be recovering well with its strategic initiatives and growth plans. All its top 10 markets showed signs of significant growth and it is on track with its cost saving initiatives. The top 10 regions are growing at a faster pace than the average company. Avon’s decision to sell off 80% of its North American business to Cerberus Capital and, in turn, use the $650 million it received for growth initiatives seemed like a prudent decision for the company, since after several years of poor performance, the company is finally seeing signs of recovery. 8 out of its 10 markets grew in terms of local currency, with significantly improved performances in Brazil and Mexico. It is worthwhile to mention here that Latin America accounts for around 50% of Avon’s net sales and within the region, Brazil is its most important market. Among Avon’s top ten markets, the two markets that didn’t show significant recovery were Turkey and Colombia. Avon’s revenues for the quarter rose by 4% year-over-year in constant currency terms to reach $1.4 billion. Active representatives, which gives an indication of the orders placed, remained flat for the quarter. However, the ending representatives, indicating the number of representatives able to place an order, grew by 1% in Q3 2016. The average order for the company went up by 4% mainly boosted by a 5% rise in the products and price mix.

In Q3 2016, the operating margin for the entire company grew by 310 basis points year-on-year to reach 7%, even after being dampened by 270 basis points due to the negative foreign exchange impact. The growth drivers for the operating margin were strategic pricing related steps undertaken by the company and the improvements in the SG&A expenses due to the cost savings initiatives.

All The Segments Showed Signs Of Growth

On constant dollar terms, Avon’s beauty rose by 3% with a 5% growth in fragrance, 3% in color, and 2% in skincare. The growth was 2% for the fashion and home segments. One of the most successful launches for 2016 was the True Matte Lipstick which showed how innovation, customer relevance, and excellent marketing can bring about success for the company. This success strategy will be followed for more innovations in 2017. Fragrance also showed promising growth with the launch of Avon Attraction in Latin America, an innovative launch in the upper mass fragrance category where the company sees the potential to build market share.

Focus On The Top Ten Markets Is Bearing Positive Results

Avon’s top ten markets’ growth is surpassing that of the overall company with a higher average order growth, higher active representatives, and higher ending representative growth. The strategy of focusing on top 10 markets is bearing fruit as almost 70% of its revenues is contributed by these markets.

For full year 2016, Avon expects its Active representatives growth to remain flat or increase by 1% for the entire company, while the growth is expected to lie between 1% to 2% for the top ten markets. The company’s resource allocation will remain partial towards the top ten markets, however, it might also extend resources to its mid-sized markets that show promising growth potential.

  • Brazil

Brazil experienced a sales growth of 6% y-o-y in terms of local currency. The company’s pricing strategies, programs to retain representatives, as well innovative product launches were some of the factors behind the success in this region. In the third quarter, two fragrances for the upper mass segment were released in Brazil, namely, Luck and Attraction. The company is using advanced e-commerce technologies to complement the representatives’ initiatives and make the sales more organized and far reaching.

  • Mexico

Mexico delivered a 9% y-o-y local currency growth, mainly due to a large average order size and marginal active representative growth. The growth in average order was due to its effective pricing and innovative launches across all its product categories, especially in the fragrance segment where the launch of the fragrance, Sofia Vergara, and the newly positioned Classics fragrance lines were major hits. Skin care also experienced solid growth with the aid of core products as well as the launch of fresh lineups such as the Anew Ultimate Supreme.

Progress With The Three Year Plan

The company’s $350 million cost savings over the next three years is going well and on track, with a savings of ~$70 million expected to be delivered in 2016. Avon’s move to the corporate headquarter in the U.K. is still underway. The balance sheet position of the company had been strengthened as part of its financial resilience plan, so that it can support more growth strategies in the future. The disciplined approach to the balance sheet will reduce debt by $235 million in this year. Avon is well on its way to implement its planned pricing strategies in its top 5 markets in order to drive sustainable growth.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Avon Products

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