Will Avon be Able to Turn Things Around?

Does the fourth quarter show that Avon has reached the point of no return?

Apr 16, 2014 at 2:43PM

Avon (NYSE:AVP) has given investors a year-over-year loss of more than 27%. The company's dull performance continued into the fourth quarter, when it posted yet another big loss. Let's see whether the company will be able to turn its fortunes around or not.

Fourth quarter result
During the fourth quarter, Avon reported a loss of $0.16 per share compared to $0.08 a share in the same period last year. Total revenue for the quarter waned 10% to $2.7 billion, caused by sales declines of 11% and 8% in the Beauty and the Fashion & Home segments, respectively. Total units sold decreased 10% while the average order increased by 1%. The dip in revenue was largely attributed to swings in foreign exchange rates and other macroeconomic challenges.

For full-year 2013, revenue shrank 6% to $10 billion compared to 2012; this was due to a 7% decline in Beauty sales and a 4% dip in Fashion & Home sales. Total units sold in the year decreased 5%, while the average order slightly increased by 1%. The company reported a loss of $0.01 per share as opposed to a profit of $0.20 a share in 2012.

What is Avon up to?
In the latter part of 2013, Avon began testing SAP's order management software in Canada. Unfortunately, the system drove away a lot of salespeople, as the new software became burdensome for the company's representatives. The order management software was introduced at the company to enhance productivity by streamlining procurement and improving inventory management, but the system didn't work as planned. Avon has said that it will keep on using the software system in Canada and will try to upgrade it. However, the company has abandoned its plan of expanding the system to other countries such as the US, Brazil, Mexico, Russia and the UK. As a result, the company expects to incur a loss of $100 million to $125 million.

In 2008, Avon was accused of paying bribes in China to develop new markets. Now, the company might have to pay as much as $132 million to settle the issue. Prior to that, the company initiated an internal probe in 2008 regarding the allegation; its own probe has already cost the company about $300 million. The company has said that the deal to settle the Foreign Corrupt Practices Act Investigation (FCPA) could be between $89 million and $132 million. Sources say that the settlement, if reached, would be one of the largest for a US company.

Avon and Coty are going through a partnership deal that will enable Avon to carry Coty's celebrity and lifestyle fragrances on its brochures in Brazil. The deal will provide Avon sales representatives a wide range of products to sell, while Coty will benefit from Avon's strong distribution network. The deal is expected to be closed in the next few months. Coty expects to do pretty well in the developing countries, as it has one of the leading brands in the personal care segment, including Calvin Klein perfume and Sally Hansen nail polish.

Industry peers
During the fourth quarter, Revlon (NYSE:REV) posted a loss of $0.63 per share, in contrast to a profit of $0.89 a share in the year-ago quarter. The loss was largely driven by exchange rate fluctuations and charges related to long-term structural changes at the company. However, the company's revenue in the quarter grew by 28% to $491 million. Revlon's acquisition of The Colomer Group (TCG) has already started bearing fruits for the company as TCG generated $116.8 million in revenue during the quarter. Unfortunately, the company has been fighting a losing battle in China since 2012, which is why it eventually decided to abandon the region.

In the most recent quarter, Coty (NYSE:COTY), the global beauty care manufacturer, experienced a drastic decline in earnings due to lower demand and falling sales. Earnings stood at $0.21 per share, down 33% from a year earlier. The company also missed the analyst forecast of $0.29 a share. Coty's profits were hit by softness in the U.S retail market as sales dwindled by 4.1% to $1.32 billion. Color-cosmetic sales were down 9%, whereas Fragrances and Skin & Body Care suffered declines of 1% and 2%, respectively. The company has recently entered into a partnership with Piaggio, the renowned manufacturer of motor vehicles. Under this agreement, Coty will produce and distribute a new range of fragrances under Piaggio's iconic Vespa brand name.

Final thoughts
Avon's fourth quarter result clearly shows that the company is going downhill, as earnings along with sales kept on declining. Instead of posting any profit, the company's loss doubled from the previous year's quarter, which is a worrying sign for investors. To make matters worse, the company will have to pay a huge amount to settle the ongoing bribery case. Moreover, the SAP software mishap will cost the company at least $100 million. However, Avon's partnership with Coty in Brazil will certainly boost Avon's sales in the future. Still, it won't help the company achieve a major turnaround. Therefore, I believe Avon isn't a great investment choice at this point in time.

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