Avon Products 1st-qtr net income drops partly on bigger restructuring charge, commodity costs

NEW YORK, N.Y. – Avon Product’s new CEO, on the job for a week, said Tuesday she plans to review every aspect of the beauty seller’s business, including its operating model, cost structure and product portfolio.

Sherilyn S. McCoy says she also plans to visit key markets like Brazil and China, as she works on a plan to stabilize results.

Avon’s first-quarter results on Tuesday show the former Johnson & Johnson executive has her work cut out for her.

The New York company’s net income fell 82 per cent, hurt by a restructuring charge and high costs for labour and commodities such as packaging and fuel. Results missed expectations and shares fell almost 8 per cent in morning trading.

The middling quarter adds to the three years of lacklustre growth that lead to the exit of longtime CEO Andrea Jung last week from that position and the entrance of McCoy. Jung remains chairman.

“Avon … faces significant challenges,” McCoy said in a call with investors. “It has lost market share and missed expectations. It has had problems executing. … Stabilizing the business is my first and most urgent objective.”

Avon has already begun making some changes after a strategic review. It said Tuesday it cut 100 corporate jobs and shifted more decision making power closer to field representatives in its marketing, sales and analytics department. More job cuts are expected in the second quarter as the company extends its review of operations from its corporate office to its regions, CFO Kimberly Ross said.

Not discussed was smaller beauty product maker Coty Inc.’s $10 billion takeover offer. Avon rejected the offer last month, but Coty said it still wants to meet with Avon. Coty has said it wants to look at Avon’s books before making a formal offer. Avon has so far declined, saying that its board continues to believe that the offer does not reflect the value of the company.

Avon, whose brands include Skin-So-Soft, Anew and mark, reported net income of $26.5 million, or 6 cents per share, for the period ended March 31, down from $143.6 million, or 33 cents per share, a year earlier.

Excluding a restructuring charge related to the job cuts, earnings were 10 cents per share. That fell far short of the 28 cents per share analysts expected, according to FactSet.

Revenue slipped 2 per cent to $2.58 billion from $143.6 million a year ago. Still, it was enough to beat Wall Street’s estimate of $2.52 billion.

Fragrance and skincare sales dipped 1 per cent, while sales of personal care products fell 2 per cent on a reported basis.

Avon continued to experience weakness in North America, with revenue down 4 per cent to $490.3 million. The company has struggled with a sales dropoff in the region over the years, and about 80 per cent of its more than $11 billion in annual revenue now comes from overseas.

Revenue fell 4 per cent to $394.6 million in Central and Eastern Europe and slid 5 per cent to $330 million for Western Europe, the Middle East and Africa. Revenue for the Asia Pacific region dropped 2 per cent to $221.7 million, while Latin America revenue edged up 1 per cent to $1.14 billion.

Total units dropped 1 per cent in the quarter, while the number of direct sellers declined 2 per cent.

Shares fell $1.73, or 8 per cent, to close at $19.87 Tuesday. The stock is up about 14 per cent since the beginning of the year.