Once the darling of the cosmetics industry,
Avon (AVP) has found itself in quite a mess in its attempt to get back to the top. The global $10 billion company is having to clean up its act in a hurry before it risks losing its reputation, which means big changes in 2012.
The company released its third quarter earnings in late October. Total sales were nearly flat and income slipped to $165 million from $167 million during the same period in 2010. It promptly announced new leadership was required and the search was on for a CEO.
The decision to split the position of CEO from the chairmanship helped give the company’s shares a temporary boost, but the soon-to-be executive chairman will remain in that position for at least two years. The move was booed by two former Avon CEOs, including the current CEO’s mentor.
A number of blips have damaged the company recently, including in its key Latin American market, where sales growth fell below double digits for the first time in 10 quarters, to just 6 percent. The company blamed the drop in sales growth on poor execution of a new supply chain system in Brazil.
On an adjusted basis, Latin America's third-quarter operating profit was down 15 percent and the operating margin was 12.4 percent, down 380 basis points from a year ago. Again, the blame fell on Brazil.
SEC trouble
But China may be the real story. Chinese revenue fell 6 percent year-on-year, and the company is the target of an U.S. Securities and Exchange Commission investigation over alleged bribery of foreign officials.
According to the Guardian newspaper, the company resorted to bribes in order to help it get into the Chinese market — where it was struggling — and the eventual fine could be very high because it will be linked to the potential benefit derived. In other words, the value of the entire Chinese market to Avon, potentially.
Sales in other markets also slumped, with the blame on consumer uncertainty, especially in Europe. The company can’t be blamed for the poor global economy, but it can be blamed for not reacting appropriately, which is why the company expects to announce a new long-term roadmap during the first quarter.
BMO Capital recently upgraded AVP to outperform from market perform.
The company next reports earnings around Feb. 8.
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