Avon Products Poor Performance In Q2 Triggered Its CEO To Step Down But Will That Solve All Its Problems?

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Avon’s Q2 2017 earnings turned out to be lower than market expectations but the highlight for its earnings call was the stepping down of its chief executive Sheri McCoy. The company’s persistent poor performance seems to be the reason behind this. Since Ms. McCoy took her position as the CEO five years ago, Avon is yet to see a turnaround in its performance. In the second quarter, some of Avon’s transformation plans brought a halt to the product delivery system which, in turn, made the representatives face challenges with getting a steady supply of products to sell. This was coupled with Avon’s continuous problems in its most important market, Brazil, where it continued facing bad debt, challenges with representative retention, as well as stiff competition from other players. Also, the new categorization of its color segment product is yet to receive a positive customer response. All these brought down Avon’s performance, as well as its active representative base, ultimately resulting in its CEO’s resignation.

Avon’s net sales declined by 7% y-o-y in 2016 and its revenues declined by 1% in Q1 2017 (in constant dollar terms) while it declined by 3% (4% in constant dollars) to $1.35 billion in Q2. The decline in the second quarter was mainly due to the lack of a strong demand for its products from all its markets except South Latin America. In Q2, it incurred a loss of $45.5 million, compared to a profit of $33 million in the second quarter of last year, which was mainly due to the rise of its SG&A expenses. As a result of this disappointing performance, Avon’s management now expects the revenue in the second half of this year to remain flat or increase by a mere 1%. The company’s share price fell by around 11% post the news of its Q2 earnings. Avon is currently in the second year of its three year recovery plan. Among other things, the plan aims at a cost saving of $350 million by the end of next year.

Why Is Ms. McCoy Stepping Down?

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Ms. Sheri McCoy assumed the CEO’s position for Avon in April 2012. The company is yet to see a top line or bottom line growth since she took charge. The 130 year-old company, which had witnessed its last revenue growth way back in 2011, was almost on the verge of a bankruptcy in 2015 when Cerberus Capital and some other equity firms came to its rescue.  Avon’s sell-off of its North American business, receiving a $650 million funding, and subsequently undertaking a few major restructuring plans seemed to indicate that the company had finally embarked on the road to recovery. However, for the whole of last year, and so far this year, though Avon had shown some signs of recovery, yet no sustainable growth has been visible so far. In its most important market, Brazil, Avon is still grappling with macroeconomic slowdowns, stiff competition, and problems with representative retention. Even its focus on the top ten markets and its top 40 brands for growth, doesn’t seem to have brought about a significant turnaround in the company’s performance. It is amidst these difficult times, that activist investors, Barington Capital and NuOrion Partners (which has a combined 3% stake in the company) demanded that a new chief executive replace Ms. McCoy. Ms. McCoy is slated to step down next March while the company is still on the third year of its three year recovery plan. Since Ms. McCoy took the reins of the company in April 2012, Avon’s share price till date has declined by almost 85%.


(Image Source: Financial Times)

 

An executive search firm called Heidrick is currently leading in the search for a new CEO for Avon. In June, Avon appointed a new chief operating officer and global president.

Poor Representatives Growth Continue To Pull Down Performance

One of the most important drivers for a direct selling company like Avon is the retention and growth of its active representative base. Avon has been constantly struggling with growing its representative base and its retention, and Q2 was no exception. Avon’s active representatives declined by 3% y-o-y due to a number of service related issues. The company’s strategy to categorize its most important Color segment into three brands, namely, Avon True, mark., and Color Trend, in order to better serve specific customer needs seem to have not worked in a lot of markets. Color is the most important segment for Avon’s representatives and service issues in the product delivery in this segment tends to discourage representatives. Secondly, in Mexico, though there was healthy demand there wasn’t enough products to satisfy the representatives’ demands. Thirdly, with its ongoing transformation plan, Avon witnessed disruptions in some of its markets, such as the U.K. where the company changed its transportation carrier to ensure more flexible ordering and delivery. This slowed down the service of the representatives. As a result of all this, the company’s average order declined by 1% though its price/mix increased slightly by 1%, which was still lower compared to its last few quarters. Avon’s ending representatives declined by 2% mainly due to slowdown in regions such as Asia Pacific (most importantly Malaysia) and South Latin America (mainly Brazil). This was slightly offset by South Africa.

How Does The Future Look For Avon?

While we initially thought that fresh infusion of capital into the company last year, coupled with its transformation plan was going to help Avon finally make a turnaround, it seems that the company has yet not been able to find its own ground. The beauty industry thrives on competition. Beauty giants, such as L’Oreal and Estee Lauder, are constantly taking over smaller companies and consolidating their positions in the market. Revlon too acquired Elizabeth Arden last year and is trying to expand its presence and offering. Under this scenario, we do not see Avon to be in a position to make acquisitions in order to grow itself. More importantly, Avon’s door to door selling model is backdated in the current times of social media influencers and omni-channel sales. Though Avon is trying to make its presence felt in the digital space, yet, compared to its competitors, it still has a long way to go. We cannot say for certain whether a change in CEO is indeed going to revive the company, but whatever it takes to improve its performance, Avon needs to do it soon if it doesn’t want to end up as an acquisition target or worse still, on the brink of bankruptcy again.

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