UPDATE 1-Avon CEO sets sights on basic fixes, not a big overhaul

Thu Feb 21, 2013 6:35pm EST

By Jessica Wohl and Phil Wahba

BOCA RATON, Fla./NEW YORK Feb 21 (Reuters) - Avon Products Inc's path to restoring its former luster will be a series of unglamorous but important steps like updating computer systems, reducing its use of paper and air freight and improving the lighting in its stores in China.

In her most detailed comments yet about her plans, Chief Executive Sheri McCoy on Thursday said the world's largest direct seller of cosmetics would not be shy to exit unprofitable markets, was working on improving sales representatives' compensation, and will keep innovating in areas where Avon is lagging rivals, such as skin care.

"Avon has been underperforming for years, our financial health has eroded, and unfortunately we disappointed stakeholders," McCoy said less than five minutes into the company's hour-long presentation at the Consumer Analyst Group of New York meeting, or CAGNY, in Boca Raton, Florida.

McCoy has kept a low profile in her first year as CEO and sought to first stabilize the company. Last year, she told Wall Street the last thing Avon needs is another restructuring, hinting at the failed attempts of her predecessor, Andrea Jung, to fix Avon through big master plans.

Avon's shares rose more than 20 percent last week after fourth-quarter results showed signs the business is improving as McCoy's first actions kicked in. Avon's profit and global beauty market share have been declining for years.

On Thursday, the shares closed down 0.1 percent at $20.41.

McCoy admits a lot more needs to be done to reach the goal she set out last year of achieving mid-single-digit percentage revenue growth by 2016. In 2012, revenue fell 5 percent.

McCoy aims to improve in fast-growing emerging markets while also revitalizing the market where Avon began in 1886. If she had to pick one market to fix first, McCoy would choose the United States, even though it trails Brazil and other markets in revenue.

"It's so visible and the U.S. market is important, that's sort of the heritage of where the brand came from, that's the area I would cite as the area of opportunity," McCoy said in an interview after her presentation. "Although I worry about all of them for different reasons," she added with a quick laugh.

Another area of focus is trying to improve how Avon uses its "very strong" science and technology expertise that has allowed it to innovate, though not always in ways that spur sales growth, McCoy told Reuters.

"What we need to do is make innovation work harder for us," she said. In some launches, products were too similar and "people don't understand that differentiation. So while we're innovating, we're not getting the incremental sales because people are saying, 'Well, I'll trade one off for the other.'"

Avon will try to improve innovations for its key markets, rather than pushing products that do not find favor with consumers. McCoy gave the example that a fragrance desired in the United Kingdom or United States might fall flat in Brazil.

"It's listening to the markets and then developing the portfolio, versus developing the portfolio and giving it to the markets," she said.

McCoy and her financial chief, Kimberly Ross, went over each Avon category and market in an almost surgical manner, giving examples of how to spur growth and simultaneously cut costs.

For example, its classic Far Away fragrance for women generates about $200 million a year in sales, one of its biggest hits. McCoy said she wants to tap Avon's significant research and development abilities to make the fragrance longer lasting and give it a higher-end aura.

"The presentation reinforced our stance that management is committed to making the hard decisions that are necessary for the long-term health of the business. That said, we don't expect things to turn around overnight," said Morningstar analyst Erin Lash, who attended the presentation that was also webcast.

In China, a market where Avon has fallen dramatically behind rivals, Avon has outfitted roughly 3,300 stores that women run on their own with a more premium look and better lighting.

The company is also investing up to $200 million by 2016 to update computer systems to make inventory management and ordering more efficient and improve the social media tools sales reps can use to drum up business. It is also investing in demand-forecasting software.

Analysts praised how frank McCoy and Ross were, though some wondered how they will cut costs and make pricey improvements.

"These financial targets are inevitably limiting Avon's reinvestment levels," said Consumer Edge Research analyst Javier Escalante. "The issue is what is the cost of implementing whatever strategies they'll come up with."

On the cost-reduction side, Ross said there were no sacred cows, from travel expenses to using air freight to how much paper is used.

"Everything is under review," Ross said.

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