NEW YORK (Reuters) - Investors bought everything Avon Products Inc (AVP.N) Chief Executive Sheri McCoy was selling last week, lifting shares 23 percent on the back of solid results and a confidence the new CEO has a turnaround plan.
That makes the spotlight even brighter on McCoy when she takes center stage on Thursday at an important industry analyst conference and details that turnaround. Among her biggest challenges: fix the company’s technology problems, and help the sales representatives generate more cash.
“She has to start speaking with specificity,” said Kathy Gersch, a co-founder of Kotter International, which helps companies implement strategies and whose clients include Coty Inc COTY.UL, a smaller rival that tried to buy Avon last year.
“It’s not just about fixing the company anymore. It’s about moving the company into the future.”
So far, McCoy and finance chief Kimberly Ross, have taken early steps to cut costs, stanch an exodus of representatives in top markets like Brazil and Russia, and start talks with U.S. officials to settle a costly overseas bribery probe.
Wall Street gives McCoy and Ross kudos for being frank about the depth of Avon’s problems and for taking tough steps like cutting 1,500 jobs in December as part of plan to save $400 million in costs a year by 2015; and exiting Vietnam and South Korea where it is too far behind rivals.
The quarterly performance turned in on Tuesday showed some of that progress, cheering investors who had become disappointed by the broken promises in the later years of the tenure of Andrea Jung, McCoy’s predecessor.
But that is just a start.
”We’d like to see a detailed plan of how they will fix the business, not just stop the bleeding,“ Sanford C. Bernstein & Co analyst Ali Dibadj said. He was unconvinced that there ”is enough fat in the cost-structure to cover for the significant reinvestment“ that the company needs.”
An Avon spokeswoman declined to give details of the presentation McCoy and Ross will give at the Consumer Analyst Group of New York, the venue where new managements often offer their grand vision for a turnaround strategy.
Few expect a laundry list of projects. But 10 months into her tenure, McCoy now should know the business well enough to be more expansive.
McCoy has said not to expect a linear recovery for Avon. U.S. sales remain a disaster, falling 12 percent last quarter, and Avon is largely missing out on Asia’s boom in cosmetics spending.
Last year, McCoy stated her goal of reaching mid-single digit percentage sales growth by 2016, and for an operating margin in the low teens. Those are ambitious targets, considering sales fell 5 percent last year, while operating margin was 6.5 percent.
Barclays Capital in a note, said that the shares’ current level, now above $20, prices in Avon achieving those goals.
So for shares to rise higher, McCoy will have to convince the Street, Avon can do better than just stanch the bleeding.
MCCOY‘S TO DO LIST
High on the list are details of what technology investments Avon will make to fix long term problems that have alienated countless sales representatives and cost it sales.
Avon’s computer software systems, by all accounts, are inadequate for a company of its size and complexity, operating in dozens of countries.
That has led to poor inventory management, product shortages and shipment mistakes, frustrating the “Avon Ladies” on whom the company depends almost entirely for selling its products.
In Brazil, Avon’s top market, poor implementation of a new computer system has been a big source of frustration for sales representatives, many of whom also represent rivals such as Natura Cosmetics SA (NATU3.SA). The company is making some progress with fixing its systems there, winning back some reps last quarter.
Another thing the analysts want to know is how the company intends to make being an Avon Lady more lucrative.
Last quarter, it took steps like offering accident and risk insurance to Mexican representatives who meet their goals.
And in Russia, sales returned to growth, helped in part by a line of high-end, color cosmetics made just for that market. Morningstar analyst Erin Lash told Reuters that she wants to hear more about products developed for specific markets.
Ultimately, though, it is money that talks. Avon reps keep a smaller cut of their sales than those of Mary Kay Cosmetics, for example, and other rivals, and that has to change.
“We suspect the company will have to increase its rep compensation by a meaningful amount in order to reduce its turnover rate,” UBS analyst Nik Modi wrote in a note to clients.
Whatever McCoy and Ross tell investors at CAGNY, these first few months of rolling up their sleeves, doing prosaic but important things like paying down some debt, and showing early results, have won them a lot of wiggle room.
“There are positive indications that Avon’s turnaround efforts are starting to have an impact,” BMO Capital Markets Connie Maneaty wrote. “The financial cloud is lifting.”
(Reporting By Phil Wahba; Editing by Brad Dorfman, Ed Tobin and Leslie Gevirtz)
This story corrects country to Mexico, not Brazil, in 6th to last paragraph