Avon Turnaround Progress Has Firm Training Sights On Growth

Direct seller says it is on track to realize up to $90m in cost savings in 2016, which it plans to reinvest in brand support and innovation, among other initiatives. Avon’s sales continue to suffer from negative currency effects, but in constant-dollar terms, its business advanced 4% in the second quarter, the firm reports.

With cost-cutting initiatives paying off and macroeconomic headwinds abating, Avon Products, Inc. is turning its sights on the third pillar of its transformation plan – investing in growth.

The direct-seller’s fiscal 2016 second-quarter results reflect considerable progress in its massive turnaround effort, which has been underway since the exit of former CEO Andrea Jung in December 2012.

While currency headwinds continue to hammer reported sales, which declined 8% for the quarter to $1.4bn, Avon’s Q2 sales increased 4% in conshtant-dollar terms.

Excluding the firm’s July 2015 divestiture of UK-based natural skin-care brand Liz Earle to Walgreens Boots Alliance, Inc., sales were up 5% in constant dollars (Also see "In Brief: U.S. Cosmetic-Related Bills Gain Congressional Support; More" - HBW Insight, 17 Jul, 2015.).

Avon says it recorded local-currency gains in nine of its leading 10 markets and across all product categories. Specifically, beauty sales advanced 5%, with 5% growth in fragrance, 6% in color cosmetics and 4% in skin care.

The firm’s operating profit rose 6% to $95m for the quarter, according to its Aug. 2 release.

“We're quite pleased with our overall innovation performance. And as I said, as we look at the long term, we have a lot of things coming in the second half and into 2017 and 2018, and we are very excited about the portfolio,” CEO McCoy said.

Meanwhile, Avon says it is on track to achieve up to $90m in cost savings in 2016, targeting $350m in total cost reductions over a three-year period, according to a plan it announced in January (Also see "Avon Outlines Transformation, Cost-Savings Plan; Analysts Still Wary" - HBW Insight, 5 Feb, 2016.).

The savings will be derived from changes in its operating model, including a planned headcount reduction impacting 2,500 positions across multiple geographies, as well as sourcing and supply-chain rationalization.

Having been focused to date primarily on bailing out its sinking ship, Avon increasingly is in a position to begin focusing on sailing forward, company leadership suggested.

“The initial focus of the transformation plan is on driving out cost and improving our financial resilience in order to fund the investment behind our key growth initiatives,” CEO Sheri McCoy noted during the company’s same-day earnings call.

That includes investing in the Avon brand and R&D, she said, promising incremental investments in “a couple of key markets” to build on momentum established in the second quarter.

“I’m both encouraged by our growth trends and very excited about our innovation pipeline, both long-term and for the remainder of the year,” the CEO remarked.

Recent innovations driving gains include Avon True Color Perfectly Matte Lipstick, described as “an extremely smooth, completely matte lipstick that never cakes, cracks or compromises.”

The exec says the lipstick “is very competitive with department store brands.” Increased advertising in Brazil, Mexico and other markets is helping to propel sales of that product and other color offerings, she indicated.

McCoy also highlighted Avon’s new Ultimate Supreme skin-care line, which features an Advanced Performance Crème launched in markets outside the US, and said the firm has some “really strong new mascara products” as well.

According to the exec, Avon is recapturing share in color, skin-care and fragrance segments in key geographies including Brazil, its single largest market.

“We're quite pleased with our overall innovation performance. And as I said, as we look at the long term, we have a lot of things coming in the second half and into 2017 and 2018, and we are very excited about the portfolio,” she added.

Avon also is prioritizing improved representative engagement “through better onboarding, segmentation and execution of an improved service model,” according to McCoy, who said the firm’s work in that area is “progressing nicely.”

Active representatives and ending representatives (those with the ability to place an order) increased 1% and 2% in the second quarter, the company says.

McCoy acknowledged that strategic pricing has played a role in the company’s gains of late. Average order for the quarter among representatives was up 4%, driven by a 7% increase in price mix, the company says.

The CEO emphasized that Avon has taken a “disciplined approach” to pricing and said the impact will moderate over time, “but it’s important for us to do that particularly as we build the brand and invest behind the brand,” she said.

Avon Headquarters Headed For UK

Executive VP and CFO Jim Scully said the firm has seen “some easing” of currency effects earlier than expected. Meanwhile, Avon is making moves to hedge currency exposure, which include relocating its headquarters to the UK to align its cost and revenue bases.

The firm expects the new headquarters, announced in March, to be operational by the first quarter of 2017. Avon will remain incorporated in New York with facilities in Suffern and Rye, N.Y.

Avon sold a majority stake in its North America business to Cerberus Capital Management through a deal announced late last year. Since the transaction’s close at the start of March, New Avon LLC operates as a privately held company that, according to McCoy, “is in good hands.”

The separation has left Avon with $20m in “stranded costs,” which the firm expects to absorb largely through sourcing efficiencies, adding to a projected $70m in 2016 savings that broader streamlining efforts are on track to deliver.

She noted that Avon Products and New Avon have an agreement in place for the next 24 to 36 months under which the latter can source innovation from the former for a fee, and the two are expected to continue working closely on potential innovation-sharing opportunities.

While Avon recognizes that “much effort and work lies ahead,” McCoy said she is confident that the firm is on a path to sustainable, profitable growth.

The direct seller is projecting continued year-over-year revenue and operating profit improvements in the back half of fiscal 2016, as well as 1% to 2% growth in its active representatives base.

“Even in a tough economic environment, women need an income to care for their families,” McCoy noted. “So we continue to see strong interest in the Avon opportunity.”