With the U.S. Securities and Exchange Commission probing Avon Products Inc. (AVP)’s dealings with analysts, Andrea Jung may be facing the toughest challenge of her 12-year tenure as chief executive officer.
The investigation increases scrutiny of the world’s largest door-to-door cosmetics company, which has trailed Wall Street’s forecasts and earlier this year fired four executives amid a probe involving possible bribes to Chinese officials.
“Any sensible board would have to look at management from head to toe and try to figure out whether these are the right people to turn around the company,” Ali Dibadj, an analyst at Sanford C. Bernstein & Co. in New York, said in an interview.
The SEC’s subpoena seeks information about the company’s contacts with financial analysts, Avon said yesterday. The SEC is also investigating Avon’s international operations.
The latest accusation, if true, “is like taking a chink out of a wall,” said Jay Lorsch, a corporate governance professor at Harvard Business School in Boston. The SEC doesn’t take such steps lightly, he said.
A year ago, Office Depot Inc. (ODP)’s CEO resigned after the retailer agreed to pay $1 million to the SEC to settle claims that it had signaled to some analysts in 2007 that earnings could miss estimates. Office Depot said the resignation wasn’t related to the SEC settlement.
“We are going to conduct in-depth operational and financial reviews and reassess the internal and external factors that impact our performance,” Avon spokeswoman Jennifer Vargas said. She declined to comment further.
In 2008, Avon began investigating its Chinese operations’ compliance with the Foreign Corrupt Practices Act, which outlaws bribing foreign officials. The four executives were fired in May, and Avon expanded the probe to other developing countries.
As Jung, 53, deals with those distractions, her company vies to compete with larger rivals in such emerging economies as China and Brazil, where newly affluent consumers are flocking to buy make-up and skin care. Avon generates more than 80 percent of its revenue from outside the U.S.
The company does well with its door-to-door model when traditional retail networks are rudimentary, Dibadj said. When a more sophisticated retail industry develops, Avon battles to compete with the likes of Procter & Gamble Co. (PG) and Estee Lauder Cos., which can outspend and out-innovate the direct seller.
Jung and her team should concentrate on markets such as Africa and India where door-to-door sales have less competition, Dibadj said.
The same day Avon disclosed the probe, it reported third- quarter net income that fell more than analysts estimated and said it no longer expects to meet its forecast for sales growth this year. The results marked the fourth time in five quarters profit trailed projections.
The disclosures punished Avon’s shares, which tumbled 18 percent in the biggest drop since 1999. Avon fell for a second day, sliding 1.5 percent to $18.53 at 9:46 a.m. in New York.
“If it was one or the other board” and Avon “was a stable company, you wouldn’t be so worried,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware in Newark. “Both of those companies have issues and are extraordinarily complex. One may wonder whether she’s spread too thin.”
Jung also hasn’t replaced Liz Smith, the president who left two years ago to head OSI Restaurant Partners LLC.
Smith had been chief of North American operations and global brands and a “very well qualified” potential successor at a company lacking in succession planning, Dibadj said.
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