Avon in Numbers

We don’t know if Sheri McCoy knew how troubled Avon had been when she took over the CEO position in February 2012. Probably not. One year after her appointment, she said, “We still face considerable challenges. In some cases, driving improvement has been more challenging and has taken longer than I had anticipated,” during an earnings call with the investors.

Let’s take a look at where Avon has come from, how it has been doing in the last few years, and if its challenges are gone by now.

14 years ago from today in 2000, Avon was in a pretty good shape with a steady growth in sales as the graph to the right shows. Company’s total growth in the previous 10 years had been more than 70% (from $3.3b to $5.7b), posting a growth each and every year during that decade. Even in North America, which would then be a real head ache to Avon, the sales growth was a solid 5% in 2000. Profitability? Avon’s operating profit was $789m in 2000, 44% up from previous year. As a result, company’s share price ended the year with a remarkable 45% increase.

So, everybody was happy those days…

During the five years that followed, Avon continued to increase its sales. In 2005, which was also Andrea Jung’s sixth year at the CEO post, company’s global sales reached $8.1b. This represented a further 42% growth in five years. 2005 was a year when Avon saw a 6% decrease in sales in North America. Avon’s operating profit was $1.1b in 2005, 7% below previous year’s this time. Avon’s share price at the end of 2005 was $28.5, 26% down.

2006 was another year of growth for Avon. Annual sales increase was 7.5%. However, profit side was not that bright: Avon’s operating profits diminished by 34% as compared to 2005. The situation with net income was even worse. It was down by 44%! In that year’s annual report, CEO Andrea Jung was proud to say, “In 2006 we increased advertising by more than 80%, to $249 million.”

When we came to 2010, we see a company that had passed the $10b sales mark already in 2008, with a history of 125 years behind. Company’s yearly sales growth was more than 6%. In 2010, what we also saw was that Avon’s profitability had also been taking a positive wind. It increased by 42% since 2006. Sales in North America went down to $2.2b at the end of 2010. As an interesting initiative, Avon bought Silpada, a direct sales company selling silver jewelry in July 2010 for $650m.

andrea.jungIn 2011, Avon’s sales was up 4%, $11b for the first time. However, company’s operating profit was down more than 20%. Sales further decreased in North America and the operations here posted a loss for the first time this year. On the 2011 Annual Report, CEO Andrea Jung was officially announcing her leave, saying, “I am writing you at a time of momentous change for your company. After 12 years as Avon’s CEO, I believe that the time is right to recruit a new CEO to lead the company’s next chapter.”

Jung continued to say, “Looking ahead to 2012, we are moving forward with urgency to get the company back on a growth track as quickly as we can. In line with this, we have undertaken a full long-range operational and fi nancial review of the business, evaluating all external and internal factors that are impacting our performance. While we’re delaying any major, long-term strategic decisions until a new CEO is on board, we are taking immediate actions to reignite direct-selling momentum; cut costs; strengthen cash flow; and improve overall operating and management effectiveness.”

We would see all the reflections of these problems on Avon’s numbers in the following few years, under the new CEO Sheri McCoy’s leadership.

Some would have expected the new leadership to reverse things with a magic stick. However, it would not be realistic and this did not happen.

In 2012 Avon’s global sales declined for the first time in quite some time. It was down 5%. The situation with company’s profitability was much worse. The yearly decline in operating profits was more than 50% (from $1092m in 2011 to $525m in 2012). And again, for the first time in many years, Avon posted a net loss instead of a net profit. The main reason behind this loss was the increase in cost of sales. CEO McCoy said, “Since I joined Avon, my clear focus has been on turning this great company around. Nearly one year into my role leading Avon, I am even more confident that we will achieve our vision: Return Avon to its rightful place as an iconic beauty brand There is a lot of work ahead of us to achieve this vision.” Time proved her right: There was a lot of work ahead of Avon. Investors were obviously not happy with the results. One share traded at $14 at the closing session of 2012.

2012 was an important year for Avon from one other aspect, too. At the end of that year, the crown changed hands and Amway became the largest direct selling company, overthrowing Avon.

In February 2013, Avon’s top management gave a presentation at Consumer Analyst Group of New York Conference (CAGNY). There, CEO Sheri McCoy summarized Avon’s situation as:

• Underperforming for years
• Eroded financial health
• Disappointed stakeholders

Avon’s decline continued in 2013. Sales was below $10b for the first time since 2008. Commenting on 2013, Avon management said it had focused on improving financial performance and capital structure. It said it had achieved approximately one-third of the three-year, $400 million savings goal. In the meanwhile, Avon exited several small, underperforming markets in 2013. The same year Avon sold Silpada for $85m, about one-seventh the amount it paid to buy the company in 2010. Silpada’s sales at the time of purchase were about $230m a year, compared with $155m in 2012.

Avon’s operating profit further declined by 19%, reaching a level less than half of what it was in 2011 ($427m in 2013, $1.1b in 2011). Company posted a net loss for the second consecutive year in 2013.

Last but not least, the infamous “bribery” issue contributed to Avon’s numbers, too. Avon, after spending at least $344m on an internal investigation of corrupt payments, would pay an additional $135m to settle U.S. criminal and civil claims. Avon had begun looking into allegations of improper payments in China in 2008, sparked by a whistle-blower’s letter to then-CEO Andrea Jung.

I am sure you will find the below two graphs very interesting. While Avon did not have much problems on the growth side until 2011, its profitability has always been incredibly volatile, starting to severely deteriorate from 2008 onwards.

2014? So far the figures are far from being satisfactory. First quarter sales were down 11%, and the second quarter sales down 13% as compared to the same periods of 2013. Operating profit in the first six months is 78% worse than what it was last year. So, we don’t know for sure if there is really a light at the end of the tunnel. It is obvious that things are getting even worse this year. Sales in the first six months in North America were more than alarming: Down 21%! CEO Sheri McCoy said, “The second quarter results were not where I want to see them,” reflecting her disappointment.

Can the second half of 2014 and the following years be any different for Avon? We will wait and see.

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