Key Takeaways from Avon’s Q4 Earnings

Avon (NYSE: AVP) reported dismal Q4 2018 earnings, where its total reportable Segment Revenue in reported currency decreased 10% and like-for-like total Segment Revenue decreased 1% in constant dollars. This was due to the impact of adopting the new revenue recognition standard required by generally accepted accounting principles in the United States (“GAAP”). Avon also had experienced a decline in Active Representatives and Ending Representatives. Each declined 6% and 8%, respectively, 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 and completed the restructuring actions associated with the cost savings program initiated in 2016, exiting 2018 with run rate savings in excess of the targeted $350 million. Avon also realized approximately $40 million of savings against the Open Up Avon cost savings initiative outlined at Investor Day.

The company is positive that injecting new talent and capabilities into the business will now steer Avon toward the path of growth. The company is focused to generate efficiencies, and will strive to improve in the remaining year by strategically redirecting investments to support underlying growth initiatives. Please refer to our dashboard analysis on Avon’s Q4 Earnings.  In addition, here is more Trefis Consumer Discretionary data.

Segment-wise performance in Q4 – Avon’s performance across different regions was low in the Q4. Avon’s Europe, Middle East & Africa segment generated revenues of $581.8 million, which fell 9% year over year. Results included an 8% decline in Active Representatives and a 9% fall in units sold. Also, Ending Representatives fell 10%. South Latin America’s revenues fell 15% to $488.3 million, while the same rose 6% on a constant-dollar basis. In the reported quarter, Active and Ending Representatives declined a respective 7% and 9%, while units sold fell 10%. North Latin America’s revenues dipped 3% year over year at $199.4 million but improved 3% in constant dollars. While Active Representatives remained flat year over year, Ending Representatives declined 7%. Asia Pacific’s revenues remained flat at $125.8 million, while it improved 4% in constant dollars, mainly owing to a 6% increase in average orders and a 4% rise in units sold. This was partly negated by a 2% fall in Active Representatives and a 3% decline in Ending Representatives.

Avon’s focus areas: The factors below have been working in favor of Avon in Q4 and are likely to benefit the company’s performance in 2019 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 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 2019 – Avon is expecting that it would be able to grow its top line in 2019 by executing significant operational improvements, despite continued competitive pressures. Avon has been taking strategic measures to create a simpler and more agile company. 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 remains mid-single-digit constant dollar revenue growth and low double-digit adjusted operating margin.