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Avon (AVP) Eyes Turnaround, Reduces Headcount and Inventory

Zacks Equity Research

Avon Products, Inc. AVP is progressing well with its ‘Open Up’ Avon strategy. This is quite evident from its recent actions to ascertain and capture cost savings within its commercial practices, supply chain and global infrastructure. As a next step, the company plans to improve operating efficiency, slash inventory levels and reduce portfolio complexity. It plans to do so by certain restructuring efforts, including 25% decrease in Stock Keeping Units (SKU), 15% reduction in inventory levels and 10% job cuts.

As part of its efforts to reduce inventory and SKUs, the company expects to record one-time inventory obsolescence expenses of nearly $88 million. This, in turn, will help the company to simplify operations and improve cost savings by reducing raw material and buying expenses. This should facilitate enhanced focus on products with higher turnover and better margins, resulting in improved income levels for Representatives.

Simultaneously, the company intends to align its workforce with the changes in operating model and its objective of creating a leaner organization. This calls for a 10% reduction in its global headcount. Avon expects to complete the headcount reduction and other actions by 2019 end. It should be noted that 10% job cuts stated above are in addition to the 8% reduction in global workforce carried out in 2018.  

The recent jobs cuts are estimated to fetch Avon annualized pre-tax savings of nearly $97 million by 2019 end. However, the aforementioned actions are likely to attract total charges of about $100 million before tax. These charges will be an addition to the nearly $51 million charges expected to be recorded as part of the actions approved under the ‘Open Up’ Avon strategy so far.

Notably, the ‘Open Up' Avon strategy is focused on bringing Avon back on the growth trajectory by reviving its direct selling business, renovating the brand, enhancing e-commerce and other capabilities. By 2021, management expects to generate total cost savings of $400 million through this strategy backed by optimization of manufacturing and distribution; outsourcing efficiencies; zero-based redesigning of back-office functions; and managing revenues, interest and tax. Additionally, it expects to plough in roughly $300 million in commercial, digital & IT infrastructure projects. Avon expects to achieve revenue growth in a low-single digit and margins in low-double digits by 2021.

Backed by the company’s efforts to spring back to growth with the ‘Open Up’ Avon strategy, it has gained 36% in the past six months against the industry’s 8.8% decline.

However, the company still carries a Zacks Rank #4 (Sell) on account of the sluggish Representatives growth, which has been hurting its quarterly performance. Further, the company is plagued with higher supply chain and raw material costs as well as increasing investment costs to replenish Representatives. Though management remains on track to reboot its direct selling model, higher cost of investments toward Representatives growth might continue to impact near-term profitability.

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