Key Takeaways and Trends From Avon’s Q2 FY’18 Earnings

Avon (NYSE: AVP) reported its Q2 2018 earnings, where its top line declined to $1.4 billion, down 3% on a y-o-y basis in Q2,  as compared to the same period last year, due to the impact of adopting the new revenue recognition standard required by generally accepted accounting principles in the United States (“GAAP”). Avon has also experienced a decline in Active Representatives and Ending Representatives.  Each declined 4% excluding the Brazil truckers’ strike. Avon’s bottom line remained dampened as it experienced continued variability with challenges in key markets, particularly Brazil, where it was facing bad debt, challenges with representative retention, as well as stiff competition from other players.

On the brighter side, the company remains on track with the Transformation Plan that targets achieving cost savings of $65 million in 2018, of which $24 million was reached in the second quarter. They also  completed the early redemption of their 2019 bonds to reduce their debt and further strengthen their balance sheet.

With the recent inductions made in Avon’s top management, the company is positive that injecting new talent and capabilities into the business will steer Avon toward the path of growth. The company is focused to generate efficiencies, and will strive to improve on these second quarter trends in the second half by strategically redirecting investments to support underlying growth initiatives. Please refer to our dashboard Takeaways From Avon’s Q2 Earnings.

Segment-wise performance in Q2 – Avon’s performance across different regions was a mixed-bag in the second quarter. Its revenues were up by 1% y-o-y in Europe, Middle East & Africa (EMEA), however was down by 8% in South Latin America, where Brazil suffered an outsized impact from the trucking strike in the second quarter.  In North Latin America, revenues were relatively unchanged, while the Asia-Pacific division’s revenue was down by 1%. A similar trend was observed in the company’s Ending Representative figures across geographies. Active Representatives and Ending Representative declined 4% each, driven by decreases in South Latin America, primarily Brazil, Europe, Middle East & Africa, and North Latin America, but majorly hit by the Brazil truckers’ strike.

Avon’s focus areas : The below factors have been working in favor of Avon in Q2 and are likely to benefit the company’s performance in Q3 2018 and beyond:

• Digital Initiatives – The company is aggressively focusing on digital and e-commerce initiatives. Avon’s social media presence has increased with it having the third largest fan following among beauty brands. Along with increasing investments on advertisement, the company is shifting many of its campaigns to the digital platform. In our view, this will positively impact its performance as an increasing number of customers are buying beauty products online.
• Rigorous performance management –  Following the stepping down of its CEO in early 2018, Avon has hired a new CEO and executive members to steer the company toward the path of better future growth.
• Relentless focus on execution capabilities  –  Avon is channelizing its investments toward upgradation of its systems that will help the representatives in their roles of selling its products. Brazil witnessed an upgraded system and similar projects are being run in other countries including China, Russia, and Poland.
• Competitive representative experience – Avon is focusing on improving the end-to-end of its business model starting from forecasting customer demand, planning of operations, distributions, and shipment to representatives. The company is also gathering analytical data on each representative’s business in order to understand their functioning at a more detailed level. Further, Avon’s grouping of its representatives as top sellers, sellers, and new Representatives, will likely motivate better performance as representatives aim to gain the title of top sellers.

Outlook for fiscal 2018 – Avon is expecting that it would be able to grow its top line in fiscal 2018 by executing significant operational improvements, despite continued competitive pressures. The company also plans on continuing to realize cost savings to improve financial resilience and to be able to invest in its growth. Its long term financial goal is mid-single digit constant dollar revenue growth and low double-digit adjusted operating margin.