Avon’s long-awaited “Investor Day” was finally held on January 21. It was an important meeting for two reasons: First, Avon management cancelled this meeting twice last year. The meeting was initially scheduled to be held in May 2015, then it was postponed to Fall 2015, and then, that was postponed, too. Secondly, this was management’s first public appearance following the announcement of selling their North American operations to Cerberus Capital.
During the presentation, Avon’s CEO Sheri McCoy listed company’s reality today as below:
* Financial performance still not where it wanted it to be
* While there were good progresses on a number of fronts, some areas were harder than their expectations
* Macro-economic impact on the business had been massive
And “in light of the ongoing foreign exchange pressure and other challenges”, Avon management declared they had charted a new path forward outlined as: “Accelerate change”, “Transform business”, and “Improve competitiveness”.
Sheri McCoy also presented Avon’s top 10 markets (exclusive of North America) and how Avon ranked in each of them. The below 10 markets account for 70% of Avon’s 2015 revenue:
Selling of Avon North America to Cerberus Capital
Avon revealed during the presentation, the specifics of the deal made with Cerberus Capital. Avon had announced it would sell Avon North America to Cerberus last December. After this $605-million transaction, Avon North America will be a separate entity of which Cerberus will own 80% and Avon 20%. This company will have a 9-seat Board and the seats will be split as 7-2. Cerberus will pay $170 million for this 80% stake. With the remaining $435 million, Cerberus will own 16.6% of Avon Inc. and have 3 seats on Avon’s Board. Cerberus said, it will “be actively involved in planning and execution”. This transaction is expected to close in the Spring of 2016, pending regulatory review.
With this transaction, Avon expects to;
1) Have the necessary resources, focus and risk mitigation to improve North America,
2) Enable the transformation of Avon’s international businesses,
3) Bring a fresh perspective to Avon’s Board,
4) And last but not least, to have the financial resources to strengthen Avon’s balance sheet and provide funds to invest in transformation.
Avon from Cerberus Capital’s Perspective
Avon’s new partner Cerberus Capital, too, had a part in the meeting. Cerberus Capital’s presentation was made by Steven Mayer, Co-Head of Global Private Equity. Avon North America’s current situation from Cerberus’s perspective was quite depressive:
* Declining organically, especially as compared to other direct sellers
* Declining number of Representatives
* Struggling with profitability
* Brand loved but eroding in relevance
* Requiring significant investment and transformational change
One would wonder why they invested, then. The reasons as Steven Mayer stated, were:
* Direct selling industry is growing in the U.S.
* Avon’s scaled platform with a large direct sales force
* Exposure to highly attractive, high margin, growing and defensive beauty category
* Long-standing brand with deep beauty legacy
* Achievable, detailed operating plan to turn around business without the distraction of international markets or public market scrutiny
There was also a criticism made by Cerberus to Avon’s management, pointing out to the missing elements: “Management has good ideas but an accelerant, execution, and accountability are needed”.
Cerberus summarizes its role at Avon as “catalyst for change”. An analyst termed Cerberus’ involvement as “adult supervision”, claiming “if people don’t deliver, Cerberus will not be shy in replacing them at all levels.”
Avon’s Three-Year Transformation Plan
Avon aims at achieving those shown on the chart in the long run:
And the Three-Year Transformation plan includes:
1) Investing in Growth (* Invest in its Brand and Beauty Categories, * Improve Representative Engagement, * Bring Social Selling to Scale)
2) Driving Out Cost (* Improve Operating Model, * Optimize Supply Chain)
3) Improving Financial Resilience (* Cerberus Investment, * Dividend Suspension, * Opportunistic Debt Repayment, * Tax Planning)
With regard to product portfolio, CMO Fernando Acosta announced Avon would focus more on beauty products and more on its top 40 brands. Avon’s 40 core brands bring 80% of its revenue, the remaining 20% being generated by 50 local brands, and 185 “smaller” brands. Avon also said it had made significant savings through portfolio simplification and harmonization of packaging components and ingredients. Within this context, Avon had migrated from multiple disjointed brands to a single brand block under Avon Care, and started using single packaging components under “Avon Classics” brand name, for example.
There was a special section dedicated to the developments in Turkey and Brazil. It was announced that the measures have already been paying off in Turkey. With a yearly turnover of $200 million, Avon has returned to growth in this market after two years of transformation.
Avon said its financial gains were negatively impacted by the foreign exchange fluctuations. The accelerating foreign exchange erosion has diluted the cost savings made in the last three years.
COO and CFO James Scully’s part included criticisms to past strategies:
1) Decades of historical growth strategies contributed to a high expense base relative to our current revenues.
2) In addition, in 2010 the company announced aspirational goals to grow to $20B, which led to significant investments in emerging markets and fixed infrastructure.
3) The result is a large, global and primarily owned based of fixed assets with significant spare capacity. Avon has 9 manufacturing plants and 46 distribution centers globally.
Avon’s Three-Year Transformation Plan requires $500 million cumulative investments over the next three years. Avon expects to spend $150 million for media and social selling implementation, $200 million for IT and service model evolution, and $150 million for implementation of operating model and supply chain Improvements. And on the source of funds side, Avon expects $335 million from Cerberus investment, $330 million from dividend suspension, and $600 million from cash generation to be made through “Drive Cost Out Initiatives”. This, in the end, is expected leave a surplus of $765 million after three years that is to be used to strengthen the balance sheet.
Investors’ first reaction was very positive right after the presentation and the stock price initially jumped more than 14%, then settled at +8% towards the end of the day. Optimism continued in the following days and the shares have gained 40% since the Investor Day. Avon stock closed last Friday’s session at $3.39 which is 53% higher than its 52-week low ($2.21) but which is still about 1/3 of its 52-week high ($9.47).
Outside analysts seem to have approached cautiously to Avon’s presentation, calling Avon’s plans “age-old”, “familiar” and “lacking constructive detail”. An analyst from Wells Fargo Securities said, “Avon offered little detail to instill confidence that things will be different this time.” Obviously, all this is because they had seen similar promises before with no concrete results on Avon’s numbers afterwards. To remind, the last time Avon generated positive year-over-year growths in both revenue and operating income was back in 2011.
Tough Days Ahead
Avon management will have to work hard to live up to the promises made in this meeting. But along with regaining analysts’ confidence , they will have another challenge in the coming weeks which is the Annual Meeting. Right after the announcement on selling of Avon North America, a group of institutional investors holding more than 3% of Avon’s shares opposed this transaction saying Cerberus was getting the shares at a “fire sale” price. This investor group is expected to present their alternative plans for a turnaround and also to submit their candidates to Avon’s board at this annual meeting.
You can watch the five-hour presentation or download the presentation material here.