Avon shares climb as long-awaited improvements start kicking in

Tue Feb 12, 2013 4:40pm EST

Avon products are seen at a sale in New York April 18, 2009. REUTERS/Eric Thayer

Avon products are seen at a sale in New York April 18, 2009.

Credit: Reuters/Eric Thayer

Related Topics

(Reuters) - Avon Products Inc's (AVP.N) stock rose more than 20 percent on Tuesday after the beauty products company posted surprisingly strong earnings in the fourth quarter, a sign CEO Sheri McCoy's turnaround plan is taking hold.

Avon reversed sales declines in top markets like Brazil and Russia, attracted more sales representatives and cut costs in the fourth quarter. Its shares closed at $20.79. In May smaller rival Coty Inc withdrew an unsolicited $24.75 per share bid to buy Avon.

McCoy, eschewing the flashy style of her predecessor Andrea Jung, took the reins of the world's largest direct-seller of cosmetics in April, after years of shrinking profits and market share, and missteps that made selling its make-up, skin creams and fragrances less lucrative for the "Avon Ladies" it needs.

In contrast to Jung, on whose watch Avon spent hundreds of millions on botched turnaround efforts and became embroiled in a ongoing U.S. probe into bribery overseas, McCoy has kept a low profile. She prefers a deliberate, gradual approach and is winning plaudits from Wall Street for being frank about the depth of Avon's troubles and not promising instant solutions.

"We have a lot of work ahead of us but I am confident that we will continue to make progress towards the financial goals that we laid out for you," she said on a conference call, even as she called the quarterly numbers "early signs of stabilization" and expects the progress to continue.

One of those goals is achieving mid-single-digit percentage revenue growth by 2016. In 2012, revenue fell 5 percent.

McCoy said she would provide further details on the next steps in Avon's efforts at an industry conference next week.

The world's largest direct seller of beauty products also said it sold 2 percent more items in the quarter that ended December 31, and that the number of sales representatives increased 1 percent, halting at least for now a shrinking salesforce.

That helped Avon, known for signature products such as Skin So Soft, report a stronger-than-expected profit.

"While there are still many challenges, there is also fundamental improvement," BMO Capital Markets analyst Connie Maneaty wrote in a note, pointing to rising sales in Latin America, Europe and the Middle East - markets that account for three quarters of Avon's business.

The company is being investigated by the U.S. government on allegations employees bribed overseas officials a few years ago. Avon did not provide an update on the probe on Tuesday.

BRAZIL RECOVERS, U.S. FLOUNDERS

In Brazil, its top market, revenue excluding the impact of currency rose 10 percent as more sales reps came aboard, reversing earlier declines. Revenue in Russia also improved, rising 3 percent.

In those markets, Avon took simple steps such as introducing products that were more in tune with what local customers want.

In Brazil, where Avon competes for reps with Natura Cosmeticos SA (NATU3.SA), Avon is also offering them insurance, provided they meet sales targets. Yet, McCoy said Avon was still not out of the woods in that important market.

North America, a market where Avon still gets about 15 percent of sales, continues to be a drag. Revenue in the New York-based company's home market fell 12 percent while the salesforce shrank 13 percent, continuing a years-long decline.

When asked if Avon would ever consider dropping out of the United States, McCoy said Avon is "committed" to it, calling it important to the company's image.

Still, the shares' rise was something of a relief rally and many said the company remained troubled.

"The U.S. is still imploding," said Ali Dibadj, a Sanford C. Bernstein analyst. "There really is only Brazil that did well."

In Asia, the world's fastest-growing cosmetics market, revenue was down 3 percent, hurt by declines in China.

Overall, revenue fell 1 percent to $3 billion in the fourth quarter, in line with Wall Street's projections, according to Thomson Reuters I/B/E/S.

The company is in the process of cutting $400 million in selling, general and administrative costs per year and has cut hundreds of jobs and exited markets like Korea and Vietnam.

Avon said the cost-cutting was on schedule.

Avon has a net loss for the quarter of $162.2 million, or 37 cents per share, compared with a loss of $400,000, or nil, per share a year ago.

Excluding some one-time item, Avon had a profit from continuing operations of 37 cents per share, beating Wall Street analyst estimates by 10 cents.

Avon has more exposure than most Western companies to Venezuela, where it gets 5 percent of its revenue.

Following the Venezuelan government's announcement that it would devalue the country's currency 32 percent, Avon said it expects a total of $100 million in various charges, including an after-tax loss this year for the writedown of some assets.

(Reporting by Phil Wahba in New York; Editing by Chizu Nomiyama and Maureen Bavdek)

FILED UNDER:
A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article