5 Reasons Avon Needs a Face-Lift

by Susan J. Aluise | April 3, 2012 1:56 pm

5 Reasons Avon Needs a Face-Lift

“No object is so beautiful that, under certain conditions, it will not look ugly,” Oscar Wilde once said. The 19th century Irish poet and dramatist might well have been talking about multi-level cosmetics marketer Avon (NYSE:AVP[1]) in the wake of several unattractive years of declining earnings, investigations and lawsuits.

Avon’s business model is under pressure from all sides now — ranging from Internet retailers, department store chains and other retail outlets, to brands like Revlon (NYSE:REV[2]) and Estee Lauder (NYSE:EL[3]). At a time when the company is struggling mightily to right the ship, it faces the added challenges of finding a new CEO and developing a plan to make its sales reps — the iconic “Avon Ladies” — happier.

That’s why some observers raised an eyebrow after Avon’s board rejected a $10 billion acquisition bid from Coty, a smaller, privately held rival. After a jumping 3.3% on the news Monday, AVP shares were trading around $22.50 at mid-day Tuesday – only 75 cents a share below Coty’s offer. This could be a big win for Coty[4], so don’t expect its leadership to give up soon.

Avon also is in the process of splitting up the chairman and CEO positions, seeking a CEO replacement for Andrea Jung[5], who will stay on as board chairman. Avon this week also added former Campbell Soup (NYSE:CPB[6]) President and CEO Douglas Conant to the board of directors.

Here are five reasons Avon needs a face-lift right now:

Sales force. The company’s 6.4 million Avon Ladies in 100 countries are growing increasingly frustrated, according to published reports[7].[8] They have called on the company to raise commissions, lower the cost of product brochures and ease up on the pressure to recruit more sales reps.

On the company’s last earnings call in February, Jung affirmed the importance of keeping the Avon Ladies happy. Noting that this is a time of tremendous change for Avon, she said her “critical priority is providing stability and day-to-day leadership as we continue to motivate and focus our 40,000 associates and our millions of representatives. Their full engagement is essential at this juncture.”

Investigations. Avon has been hammered over probes in the past couple of years, most notably an inquiry into whether the company bribed Chinese government officials, which would be a violation of the U.S. Foreign Corrupt Practices Act. The Justice Department also is investigating whether Avon officials knew about the alleged bribery, which apparently was discovered through a 2005 audit.

The investigation claimed its most senior victim in January, when Vice Chairman Charles Cramb was let go. To make matters potentially worse, the law firm of Brower Piven is investigating[9] whether the Avon board failed to exercise its fiduciary duty to shareholders when it rejected Coty’s $10 billion offer to acquire it.

Leadership. Avon’s senior management has been a source of shareholder angst in recent years, which is why the company is taking a broad-brush approach to the leadership search and transition. Avon brought in new CFO Kimberly Ross in November and hired Fernando Acosta to head Latin America operations.

In December, the board decided to separate the chairman and CEO positions, allowing Jung to remain in the role of chair while the company casts its net for a new CEO. The decision to keep her on as chair has raised questions because so many of Avon’s challenges emerged on Jung’s watch. Also, it could be more difficult to recruit a strong CEO with Jung looking over his/her shoulder.

Business model and products. Avon was built on the concept of selling cosmetics door-to-door and recruiting new sales reps into the multi-level marketing venture. That model worked exceedingly well because of the convenience of being able to buy from the comfort of home. But the Internet has made access to cosmetics easy — particularly elite brands like NARS and Laura Mercier, which are sold through LVMH’s (PINK:LVMUY[10]) cosmetics unit, Sephora.

And lower-price products are available at sites like drugstore.com. Sales reps often complain that Avon is trying to straddle the high-end and low-end niches, and that some products are missing the mark.

Earnings. The good news is that Avon sold $11 billion worth of makeup last year. The bad news: That’s 20% less than it rang up in 2007. And the worse news is that Avon’s fourth-quarter earnings missed Wall Street estimates by a huge margin, coming at 39 cents a share instead of the 51 cents analysts expected. The company attributed the miss to lower sales, expensive commodities, higher operating costs and inflation.

As of this writing, Susan J. Aluise did not hold a position in any of the shares named here.

Endnotes:
  1. AVP: http://studio-5.financialcontent.com/investplace/quote?Symbol=AVP
  2. REV: http://studio-5.financialcontent.com/investplace/quote?Symbol=REV
  3. EL: http://studio-5.financialcontent.com/investplace/quote?Symbol=EL
  4. big win for Coty: http://www.businessweek.com/news/2012-04-03/coty-low-ball-offer-seen-emerging-as-avon-s-best-option-retail
  5. CEO replacement for Andrea Jung: http://investorplace.com/2011/12/avon-surges-on-ceo-change-but-avp-stock-still-shaky/
  6. CPB: http://studio-5.financialcontent.com/investplace/quote?Symbol=CPB
  7. published reports: http://www.reuters.com/article/2012/03/16/us-avon-idUSBRE82F0VN20120316
  8. .: http://www.reuters.com/article/2012/03/16/us-avon-idUSBRE82F0VN20120316.
  9. Brower Piven is investigating: http://www.marketwatch.com/story/law-firm-brower-piven-announces-investigation-of-offer-to-purchase-avon-products-inc-2012-04-02
  10. LVMUY: http://studio-5.financialcontent.com/investplace/quote?Symbol=LVMUY

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