Avon Said to Plan Global Restructuring Amid Declining Profit

Avon Said to Plan Global Restructuring Amid Declining Profit
Avon products are displayed inside the U.S. headquarters for Avon Products Inc. in New York City. Photographer: Mario Tama/Getty Images

Avon Products Inc. is planning to restructure its global operations with the help of McKinsey & Co., according to a person familiar with the matter.

The overhaul includes cutting costs in Avon’s North American unit, said the person, who declined to be identified because the matter is private. Avon’s North American sales have dropped every year since 2007 and slid about 7 percent in the third quarter. The company may provide details as early as today, said the person.

Avon is trying to turn around two years of declining profit and find a replacement for Chief Executive Officer Andrea Jung while at the same time investigating allegations that executives bribed foreign officials. That probe has now been taken up by a U.S. grand jury, a person familiar with that matter said yesterday.

“This is a rudderless ship right now, and trying to turn it massively may not get you anywhere,” Ali Dibadj, an analyst at Sanford C. Bernstein & Co. in New York, said yesterday in an interview. “The problem with Avon isn’t that it needs a restructuring, it’s that it has been in perpetual restructuring, literally for the past 15 years.”

Avon is projected to report today that fourth-quarter profit fell to 51 cents a share, the average estimate of 15 analysts surveyed by Bloomberg. The New York-based company posted profit of 59 cents a year earlier.

Avon fell 1.9 percent to $17.53 yesterday in New York. The shares have tumbled 40 percent in the past year.

Yolande Daeninck, a spokeswoman for New York-based McKinsey, declined to comment about its work with Avon. Victor Beaudet, vice president of Avon’s corporate communications, declined to comment.

Avon Review

Jung told investors on an Oct. 27 earnings call that Avon was “conducting an in-depth operational and financial review” that would look at its markets, management roles and capital allocation, among other things.

Avon may benefit from a restructuring that reduces its expenses, which are higher than at most of its competitors, Dibadj said. The company’s 2010 fiscal year operating margin, which measures its operating profit as a percentage of sales, was 9.9 percent, trailing the 18.3 percent average for consumer staples companies in the Standard & Poor’s 500 Index that year, according to data compiled by Bloomberg.

Aside from the financial difficulties, Avon may have trouble finding a new CEO because Jung has said she plans to remain chairman, said Jay Lorsch, a corporate governance professor at Harvard Business School in Boston.

Inhibited Board

“Most people looking to be a CEO don’t want to go to a company where their predecessor is now chairman,” Lorsch said yesterday in a telephone interview. “When that’s the case, your board will feel inhibited and you as the new CEO will feel inhibited, so it’s seen as a bad idea, even when a company doesn’t face legal or other problems.”

When Jung, 53, ascended to the top job in 1999, the company appointed executives with strong operations backgrounds to bolster her marketing-heavy experience, honed at retailers such as Bloomingdale’s and Neiman Marcus. Some eventually left and weren’t replaced, most recently President Liz Smith in 2009, who was considered a potential successor.

Jung has served as the company’s public face, touting it as “the company for women” that helped its iconic “Avon ladies” attain economic independence.

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