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Avon profits fall 70 percent on lack of product focus

By Simon Pitman , 01-Aug-2012

Avon Products has reported one of its worst quarterly results in many years, with both sales and profits taking a big hit on the back of tough market conditions and an ill-defined product portfolio.

Total revenue was down 9 percent to $2.6bn, or 1 percent in constant dollars, a figure that represented a unit decline of 4 percent and a price/mix increase of 3 percent.

The worst hit categories were fragrance, which was down 8 percent, color cosmetics down 9 percent and skin care and personal care both down by 10 percent - although all of these figures were significantly better when compared at a constant dollar rate.

Dollar exchange rate impacts results

The constant dollar rate underlined the fact that a strengthened dollar had hit the company hard, as foreign currency revenues were diminished by unfavorable rates.

Revenue from the European, Middle East and Africa market declined by the biggest amount, down by 14 percent to $663.1m, underlined by the fact that sales in Russia, the UK and Turkey were down 15 percent, 10 percent and 29 percent respectively, when taking into account currency translations.

But the biggest hit was net profits, which fell 70 percent to $63m, compared to $206m in the corresponding period last year, a figure that had investors riling, in turn causing share prices to fall by more than 3 percent in pre-market trading today.

Hit on profits sends debt levels rising

The company’s debt level has also increased under the weight of the poor results, rising $194m during the quarter to reach a total of $2.3bn, a figure that the company said was primarily down to a new term loan of $500m, arranged during the period.

Newly appointed company CEO Sheri McCoy did not mince her words when reflecting on the results, hinting at significant restructuring as a means of getting the business back on track.

"Avon's second-quarter financial results are not good and they reflect the complex challenges that Avon faces. We are working to stabilize the top-line, improve cost structure and cash generation, and instill a more disciplined culture of accountability," said McCoy.

"We will also put the consumer and Representative back at the center of our business and ensure our associates are engaged and aligned. It will take time, but I am confident that we can turn the business around and reach a point of sustainable growth."

Further bidding speculation?

Although the company has taken a considerable hit from restructuring implemented by former CEO Andrea Jung, undoubtedly the current situation is going to lead to further restructuring and the incursion of more costs.

The results are also likely to lead to further investor speculation, raising the likelihood of renewed bidding attempts similar to the one made by fragrance player Coty back in May of this year.

Coty originally made a bid back in March to acquire Avon for $10bn, before this was upped in the month of May to $10.7bn - an offer that was withdrawn by Coty after Avon failed to take any action.

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