Avon Shares Decline After Weak Results
Avon Products Inc., which on Thursday reported a first-quarter net loss, may soon see an end to its foreign bribery probe.
By Molly Prior on May 1, 2014
Avon Products Inc. chief executive officer Sheri McCoy may soon be able to put one headache behind her, but she quickly gained another on Thursday as the firm's share price dropped more than 10 percent on the New York Stock Exchange.
Wall Street seemed unimpressed by Avon's progress on getting closer to reaching a settlement with government officials tied to its six-year foreign bribery probe, and focused instead on the company's weaker-than-expected earnings results that included a 12 percent drop in beauty sales. Shares closed at $13.72, or down 10.2 percent, and at one point were down by more than 13 percent, hitting a 52-week low of $13.22.
During the first quarter, Avon's net loss widened to $186.3 million, while revenue declined across all product segments and regions.
"It's clear that our financials are not where they need to be, particularly as it relates to top line. Yet, we are making progress in strengthening the underpinnings of the Avon business," McCoy told Wall Street analysts during the company's earnings call. "The internal improvements we are making aren't yet reflected in our financial performance. However, I remain confident that we are making the right decisions for Avon's long-term health."
She emphasized that Avon faced significant macro headwinds in the quarter, including foreign exchange fluctuations.
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McCoy said Avon has reached an understanding on settlement terms with the U.S. Department of Justice and staff of the Securities and Exchange Commission related to the Foreign Corrupt Practices Act investigation into allegations of bribery in China and other foreign countries. The preliminary agreement, which is subject to authorization by the SEC and court approval, would require Avon to pay $135 million in fines, with $68 million of the total payable to the DOJ and the remaining $67 million payable to the SEC. As part of the agreement, the DOJ would defer criminal prosecution of the company for three years, and Avon would agree to a compliance monitor which — with approval from the government — could be replaced by self-monitoring after 18 months. If Avon remains in compliance with the deferred prosecution agreement, the criminal charges against the company would be dismissed. But Avon would plead guilty to "books and records provisions" related to the China subsidiary.
As a result, Avon recorded an additional accrual of $46 million, bringing the total accrual to $135 million, which is the expected amount of the settlement.
But for investors, Avon's progress on the FCPA front was overshadowed by the firm's first-quarter results.
For the three months ended March 31, net loss attributable to the company widened to $168.3 million, or 38 cents a diluted share, compared with $13.7 million, or 3 cents a share.
Avon's net revenues declined 11 percent to $2.18 billion, or 3 percent in constant dollars, compared with $2.46 billion in the year-ago period. Total units declined 6 percent. The number of active representatives was down 4 percent, driven by declines in North America, while average orders ticked up 1 percent.
Beauty sales declined 12 percent, or 4 percent in constant dollars. Fashion and home sales were down 9 percent, or 1 percent in constant dollars.
By region, Avon's total revenue in Latin America declined 7 percent to $1.07 billion; in Europe, the Middle East and Africa, revenues were down 11 percent to $654.8 million; in North America, sales slid 22 percent to $295.7 million, and in Asia-Pacific, revenue declined 17 percent to $166.4 million, dragged down by a 41 percent decline in China due a reduced number of retail boutiques.
In North America, where there is a dedicated turnaround effort in place designed to restore profitability in 2015, the number of active representatives declined 18 percent and unit sales fell 25 percent. Avon cited less frequent discounting for the steep decline in unit sales. Beauty and fashion and home sales declined 21 percent in constant dollars. The adjusted North American operating loss was $2.9 million, primarily due to the impact of lower revenue.
McCoy told analysts, "Most importantly, we are staying the course on our turnaround plans. We are looking at the financial health of the company holistically and remain committed to improving top line, bottom line and cash to ensure a sustainable recovery. All things considered, we are about where we expected to be entering the first half of the year."