At some point investors won’t ask for the company’s next turnaround plan. They may start asking for the company’s survival plan. Or worse, a living will. Avon is another direct selling company with a model that just seems broken, with no real answers anywhere in sight.
The news wires are full of Avon paying a $135 million bribery probe settlement under the foreign corrupt practices. The hope is that this will allow CEO Sheri McCoy to finally enact a turnaround after years of this bribery cloud being over the company. Investors are not signaling that this will be much of a help. The real issue is not just an earnings miss either. It genuinely feels like a relevance issue is arising.
If you don’t believe that relevance is an issue, ask yourself what it means when a company’s stock is hitting a 52-week low at the same time that the DJIA and S&P 500 are within striking distance of all-time highs.
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Avon Products missed its earnings per share by $0.09 at $0.12 per share. Revenues fell 11% to $2.18 billion, also under the $2.21 billion consensus. The revenue drop is represented as being only down 3% if you back out currency fluctuations for a constant dollar basis.
Other metrics keep heading south as well. Avon showed that total units were down 6%, even though the price and mix rose by 3%. The company’s active representative count was down 4%, even though the average order was up by 1%. Avon’s beauty sales were down 12% (4% in constant currency), while Fashion & Home sales slid by 9% (1% in constant currency).
Adjusted operating margin was 6.1%, down from 8.5% in the first-quarter of 2013. The company’s gross margin was 56.2%, but the adjusted gross margin was down 120 basis points to 61.5% due largely to foreign exchange.
The regional revenues are very skewed from country to country. For that reason, we are omitting the constant dollar figures. The numbers are more smooth on a constant currency basis, but this is yet one more risk over the long haul that Avon Products must deal with. These regional sales were as follows:
- Brazil revenue was down 10%.
- Mexico revenue was down 12%.
- Venezuela revenue was up 27%.
- Russia revenue was down 23%.
- Turkey revenue was down 22%.
- South Africa revenue was down 16%.
- China revenue was down 41%.
- Philippines revenue was down 10%.
- U.K. revenue was up 1%.
- And finally, North America constant dollar Beauty sales and Fashion & Home sales each declined 21%.
While reasons have been listed on each, a decline in the number of Active Representatives is one that stood out (even in North America). This all plays into the questionable future question – who really wants to become an Avon representative now after all the awful press?
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Annual sales have fallen each year since 2011, and Thomson Reuters is calling for a sales drop down to just under $9.5 billion in 2014 and a whole 1.4% gain to $9.61 billion in 2015. What if Avon keeps losing its active representatives that drive all the sales?
Again, Avon’s questionable future amazingly comes with the caveat that the company is still generally considered to be one generating profits. It is still expected by Thomson Reuters to earn $1.02 per share in 2014 and $1.15 per share in 2015.
The company’s market cap is nearly $5.9 billion, but the stock hit a 52-week low of $13.22 on Thursday — again as the Dow and S&P 500 are close to all-time highs. To prove the point further, Avon shares are now lower than they were at the peak-selling level during the recession in 2009.
Avon may dispute that its future is questionable. Our answer is that having a questionable future is very different from the many other companies that do not have its ongoing problems. The good news is that most companies can turn their ships around under the right circumstances. If someone can turn the Avon ship around, they will get high marks in the history of business leadership.
UBS was so impressed with Avon’s business case that it initiated coverage on Avon with a Sell rating in early March. Avon shares were down 11% at $13.59 in mid-afternoon trading on Thursday, on about four times average trading volume.
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