February 11, 2016 / 12:02 PM / 3 years ago

Avon turnaround in doubt after sales drop more than expected

(Reuters) - Avon Products Inc (AVP.N) reported a bigger-than-expected drop in quarterly sales as it failed to revive demand for its cosmetics in Latin America, casting doubts over the company’s ability to turn around without changing its business model.

The Avon Products headquarters is seen in midtown Manhattan area of New York, June 21, 2013. REUTERS/Brendan McDermid

The company’s shares fell as much as 19 percent in late morning trading on Thursday.

Avon is selling most of its North America business to Cerberus Capital, its biggest investor, after four years of falling sales heighten concerns that its 130-year-old direct-selling model is outdated in a modern consumer environment.

Sales in Latin America, which accounts for nearly half of Avon’s total revenue, fell 26 percent in the fourth quarter.

Sales in the Europe, Middle East and Africa region, its second biggest market, declined 13 percent as a strong dollar more than offset a rise of 6 percent in constant currency.

Avon has announced plans to cut $350 million in costs over the next three years, invest in technology and tap social media to revive sales as its direct-selling model, under which products are available on order rather than on shelves, fails to attract shoppers seeking instant gratification.

Thursday’s numbers show that the business model isn’t conducive to growth and “the management does not understand that it needs to change,” research firm Conlumino’s CEO Neil Saunders said.

“This is going to be a year of no real progress.”

Avon’s sales in China, where it was hit by a bribery scandal in 2014, plunged 41 percent.

China imposed restrictions on the direct-selling model, forcing Avon to open outlets to retail its products instead of selling door-to-door through representatives.

The company expects to find strategic partners in the country by the end of 2016, Chief Executive Sheri McCoy said on a conference call.

China, a hot-selling market for beauty products, contributes about 1 percent to Avon’s total revenue.

LOSS WIDENS

Avon’s revenue fell 20.2 percent to $1.61 billion in the quarter ended Dec. 31. Analysts on average had expected a drop of 9.4 percent to $1.82 billion, according to Thomson Reuters I/B/E/S.

The net loss attributable to Avon widened to $333.4 million, or 76 cents per share, from $330.7 million, or 75 cents per share, a year earlier.

Loss from continuing operations was $14.8 million, or 4 cents per share.

Avon shares were down 17.5 percent at $2.68. Up to Wednesday’s close, the stock had lost nearly two-thirds of its value in the past 12 months.

Reporting by Yashaswini Swamynathan in Bengaluru; Editing by Kirti Pandey

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