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Avon Looking to Right Its Ship as Q3 2012 Revenue Decreases 8%

Posted: November 1, 2012

Avon Products, Inc. reported third-quarter 2012 results and provided goals for future performance. "Avon's third-quarter results remain disappointing. The challenges that Avon faces developed over time, not overnight, and it will take time to implement the solutions as well," said Sheri McCoy, Avon’s CEO. "However, we have identified the first critical actions to return Avon to a position of financial health and improve our competitive position. With a clear focus on growing the top-line, managing costs, and improving our working capital, I am confident that we are moving Avon toward a steady recovery."

For the third quarter, total revenue of $2.6 billion decreased 8%, or increased 1% in constant dollars. Total units grew 1% and price/mix was flat during the quarter. Active representatives were down 1%. Avon Beauty sales declined 9%, or flat in constant dollars. On a reported basis, fragrance was down 7%, color and skin care both declined 11%, and personal care was down 9%. On a constant-dollar basis, fragrance increased 2% while color and skin care declined 1% and 3%, respectively. Personal care was flat.

Based on the continued decline in revenue performance in China and corresponding lowering of Avon’s long-term growth estimates, the company has completed an interim impairment assessment of the fair value of goodwill related to the business, which resulted in a Q3 non-cash impairment charge of $44 million, or $0.10 per share.

Management is focused on stabilizing the business and returning Avon to sustainable growth and has set financial goals of mid single-digit constant-dollar revenue growth and a low double-digit operating margin over the next three years. Management has the team fully aligned around actions that will accelerate top-line growth, reduce costs and improve working capital. Management is also targeting cost savings of at least $400 million by the end of the three years to be largely driven by a reduction in selling, general and administrative expenses. It also expects that there will be charges associated with the achievement of these goals.

Avon also announced a reduction in its quarterly dividend from $.23 per share to $.06 per share. This is part of an overall review of the capital structure and is consistent with prior communication that the company would assess the dividend in light of current operating performance as well as Avon's peer group. This dividend reduction, in conjunction with continued efforts to improve working capital, should help provide financial flexibility.

For Latin America, third-quarter constant-dollar revenue of $1.27 billion (down 6% from Q3 2011) was driven by growth in average order as well as an increase in active representatives. Brazil was down 19%, or up 2% in constant dollars, driven by increases in both active representatives and average order, while Mexico was up 1%, or 10% in constant dollars, driven primarily by an increase in active representatives as well as higher average order. Venezuela grew 6% in both reported and constant dollars, as average order benefited from the year-over-year inflationary impact on pricing, but was partially offset by a decline in active representatives.