Consumer

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Another day, another Avon disappointment.  

The struggling door-to-door cosmetics seller late Monday spelled out the details of a previously announced cost-cutting plan: Avon will eliminate about 2,500 jobs and move its headquarters to the U.K. Investors weren't impressed: the stock tanked as much as 10 percent.

You can hardly blame them for not being blown away. Just a few months ago, Avon had laid out a goal of cutting $70 million in expenses in 2016. These job eliminations get it only part of the way there, with about $50 million in savings estimated for this year. It expects the actions will yield as much as $70 million in pretax savings by 2017. This also isn't CEO Sheri McCoy's first attempt at cost-cutting in her four years at the company. And what have prior efforts yielded? About $8 billion in lost market value.

In Need of a Touch-Up
Avon's shares have tumbled in the four years CEO Sheri McCoy has been in charge. Many of the company's challenges were inherited from her predecessor Andrea Jung.
Source: Bloomberg

McCoy took the reins in April 2012, just as the company was in the middle of rebuffing a takeover offer (ill-advisedly, in hindsight) from rival Coty Inc. There was a round of cuts later that year, more slashing in 2013 and then again in 2014.  As things at Avon got uglier and uglier, job cuts that would have been aggressive at your average similar-sized company amounted to little more than slapping some lipstick and mascara on the increasingly dour results and ongoing share slump.

Hold on, though -- could this time be different?

McCoy seems to be more aggressive about getting Avon back on track and is finally listening to her critics. After years of brushing off calls to get rid of the money-losing North American business, McCoy finally pulled the plug, selling an 80-percent controlling stake in the division to private-equity firm Cerberus Capital Management in an $170 million deal that closed this month. The price left much to be desired, but at least Avon is finally rid of that albatross around its neck and got a much-needed capital infusion for the parent company as part of the bargain. Activist investor Barington Capital criticized the ``fire sale prices" but never mounted a serious contest to oppose the Cerberus deal.

Barington had also called for more aggressive cost cuts -- and McCoy is delivering on that front with this latest announcement. And the projected $70 million in annualized savings by 2017 is actually pretty substantial relative to Avon's forecast pretax income of about $275 million that year, notes Piper Jaffray's Stephanie Wissink. McCoy is also looking at alternatives including strategic partnerships for the struggling China business that's been a drag on results. 

She still has a lot of work ahead of her, though, as Barington said on Monday. While the North American division won't be as much of a distraction, steering the overseas business on the right course has its own challenges.

Stopping the Bleeding
Avon has a shot at boosting revenue again. But the journey hasn't been -- and won't be -- easy.
Source: Bloomberg

The European, Latin America and Asia businesses still make money, but revenue abroad has been slumping, in part because of currency fluctuations. Stronger retailers than Avon are struggling right now and all the cost cuts in the world can't produce revenue growth in the face of broader macroeconomic and market volatility challenges. Analysts are projecting that some of those difficulties will abate by 2017, giving Avon its first year of revenue growth since 2011. But there's also a longer-term question as to whether the direct-selling model will eventually fall out of favor abroad in the same way that it has in the U.S., as specialty makeup shops like Sephora and subscription services like Birchbox gained followers.

At least McCoy will be able to keep a closer eye on Avon's international business from its new headquarters in the U.K. The company's planned move abroad is one that shareholders have advocated for in the past. It's not technically an inversion (and Avon will keep its U.S. incorporation), but it's just the latest reminder that companies don't have much incentive to call the U.S. home. 

Here's hoping a European-based Avon is prettier than a U.S.-based Avon. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. A bill of about $500 million to clean up bribery charges mopped up a chunk of the savings. In 2014, Avon agreed to pay a fine and have a Chinese subsidiary plead guilty to settle claims that it violated the Foreign Corrupt Practices Act. 

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net