08.02.16
Avon was done in by FX, but company executives insist a turnaround is gaining momentum—even if results for the first half of 2016 have been disappointing. Second quarter revenue for Avon Products, Inc. declined 8% to $1.4 billion, but increased 4% in constant dollars and increased 5% in constant dollars when excluding the impact of the sale of Liz Earle.
"Our second quarter results came in slightly above our expectations, driven by operating performance that was better than anticipated. We also saw some modest easing in foreign currency pressure. Importantly, our performance improvements were broad-base with nine of our top 10 markets growing in local currency," said CEO Sheri McCoy. "We continue to make steady progress on a number of fronts: improving pricing discipline; driving additional cost out of the business; and, continuing to build our brand and enhance the representative experience."
Active representatives were up 1% year-over-year, as increases in Europe, Middle East & Africa and North Latin America were partially offset by declines in Asia Pacific.
Average order increased 4% due to growth in all reportable segments as the company continues to benefit from pricing.
Ending representatives improved 2% due to growth in Europe, Middle East & Africa and South Latin America, partially offset by declines in Asia Pacific.
Gross margin was 60.6%, down 40 basis points while adjusted gross margin was 60.6%, down 70 basis points. These year-over-year comparisons were negatively impacted by an approximate 290 basis point impact from foreign exchange, partially offset by pricing actions, favorable mix and lower supply chain costs.
Operating margin was 6.6% in the quarter, up 90 basis points while adjusted operating margin was 7.3%, up 100 basis points. These year-over-year comparisons benefited from the favorable net impact of price/mix, as well as continued benefits from cost savings initiatives, partially offset by approximately 350 basis points of unfavorable impact of foreign exchange.
By region:
• Europe, Middle East & Africa revenue was down 2%, or up 7% in constant dollars. Constant-dollar revenue was driven by an increase in active representatives as well as higher average order.
• Russia revenue was down 7%, or up 15% in constant dollars, primarily driven by an increase in active representatives and higher average order.
• U.K. revenue was down 7%, or was relatively unchanged in constant dollars, as a decrease in active representatives was offset by higher average order.
• South Latin America revenue was down 12%, or up 5% in constant dollars primarily due to higher average order. Constant-dollar revenue was negatively impacted by an estimated 2 points due to MVA taxes in Brazil, which are additional VAT-like state taxes that went into effect in various jurisdictions in Brazil in the latter part of 2015. The Industrial Production Tax ("IPI") in Brazil, levied by the Brazilian government on cosmetics, which began in May 2015, had an estimated 1 point unfavorable impact on this constant-dollar revenue growth. Argentinacontributed approximately 3 points to this constant-dollar revenue growth.
• Brazil revenue was down 10%, or up 2% in constant dollars, primarily due to higher average order, which was partially offset by a slight decline in Active Representatives. MVA taxes (discussed above) negatively impacted Brazil's constant-dollar revenue growth by an estimated 4 points. Constant-dollar revenue growth was also negatively impacted by an estimated 2 points due to IPI taxes (discussed above).
• North Latin America revenue was down 5%, or up 6% in constant dollars. Constant-dollar revenue benefited from an increase in Active Representatives and higher average order.
• Mexico revenue was down 8%, or up 7% in constant dollars, primarily driven by higher average order and an increase in Active Representatives.
• Asia Pacific revenue was down 10%, or 5% in constant dollars as growth in the Philippines was not enough to offset declines in other markets. The region's constant-dollar revenue decline was driven by a decrease in Active Representatives, partially offset by higher average order.
• Philippines revenue was up 1% and up 6% in constant dollars driven by higher average order, partially offset by declines in Active Representatives.
The company's three-year Transformation Plan, announced earlier this year, includes cost reductions in an effort to continue to improve its cost structure and to enable Avon to reinvest in growth. As a result of this plan, the company expects pre-tax annualized cost savings of approximately $350 million after three years, with an estimated $200 million from supply chain reductions and an estimated $150 million from other cost reductions. These pre-tax cost savings are expected to be achieved through restructuring actions as well as other cost-savings strategies that will not result in restructuring charges. Avon plans to reinvest a portion of these cost savings in growth initiatives, including media, social selling and information technology systems that will help the company modernize its business. The Transformation Plan was initiated in order to enable Avon to achieve its long-term goal of a targeted low double-digit operating margin and mid single-digit constant-dollar revenue growth.
That plan, announced in January, hasn't helped results so far in 2016. For the six months, sales fell 13% to about $2.7 billion. Net losses rose 12% to almost $133 million.
"Our second quarter results came in slightly above our expectations, driven by operating performance that was better than anticipated. We also saw some modest easing in foreign currency pressure. Importantly, our performance improvements were broad-base with nine of our top 10 markets growing in local currency," said CEO Sheri McCoy. "We continue to make steady progress on a number of fronts: improving pricing discipline; driving additional cost out of the business; and, continuing to build our brand and enhance the representative experience."
Active representatives were up 1% year-over-year, as increases in Europe, Middle East & Africa and North Latin America were partially offset by declines in Asia Pacific.
• Europe, Middle East & Africa revenue was down 2%, or up 7% in constant dollars. Constant-dollar revenue was driven by an increase in active representatives as well as higher average order.
• Russia revenue was down 7%, or up 15% in constant dollars, primarily driven by an increase in active representatives and higher average order.
• U.K. revenue was down 7%, or was relatively unchanged in constant dollars, as a decrease in active representatives was offset by higher average order.
• South Latin America revenue was down 12%, or up 5% in constant dollars primarily due to higher average order. Constant-dollar revenue was negatively impacted by an estimated 2 points due to MVA taxes in Brazil, which are additional VAT-like state taxes that went into effect in various jurisdictions in Brazil in the latter part of 2015. The Industrial Production Tax ("IPI") in Brazil, levied by the Brazilian government on cosmetics, which began in May 2015, had an estimated 1 point unfavorable impact on this constant-dollar revenue growth. Argentinacontributed approximately 3 points to this constant-dollar revenue growth.
• Brazil revenue was down 10%, or up 2% in constant dollars, primarily due to higher average order, which was partially offset by a slight decline in Active Representatives. MVA taxes (discussed above) negatively impacted Brazil's constant-dollar revenue growth by an estimated 4 points. Constant-dollar revenue growth was also negatively impacted by an estimated 2 points due to IPI taxes (discussed above).
• North Latin America revenue was down 5%, or up 6% in constant dollars. Constant-dollar revenue benefited from an increase in Active Representatives and higher average order.
• Mexico revenue was down 8%, or up 7% in constant dollars, primarily driven by higher average order and an increase in Active Representatives.
• Asia Pacific revenue was down 10%, or 5% in constant dollars as growth in the Philippines was not enough to offset declines in other markets. The region's constant-dollar revenue decline was driven by a decrease in Active Representatives, partially offset by higher average order.
• Philippines revenue was up 1% and up 6% in constant dollars driven by higher average order, partially offset by declines in Active Representatives.
The company's three-year Transformation Plan, announced earlier this year, includes cost reductions in an effort to continue to improve its cost structure and to enable Avon to reinvest in growth. As a result of this plan, the company expects pre-tax annualized cost savings of approximately $350 million after three years, with an estimated $200 million from supply chain reductions and an estimated $150 million from other cost reductions. These pre-tax cost savings are expected to be achieved through restructuring actions as well as other cost-savings strategies that will not result in restructuring charges. Avon plans to reinvest a portion of these cost savings in growth initiatives, including media, social selling and information technology systems that will help the company modernize its business. The Transformation Plan was initiated in order to enable Avon to achieve its long-term goal of a targeted low double-digit operating margin and mid single-digit constant-dollar revenue growth.
That plan, announced in January, hasn't helped results so far in 2016. For the six months, sales fell 13% to about $2.7 billion. Net losses rose 12% to almost $133 million.