Avon Products, Inc. (NYSE: AVP), a globally recognized leader in direct selling of beauty and related products, today announced its results for the quarter ended March 31, 2018.
Jan Zijderveld, Avon CEO, said,
“Avon’s first-quarter results were unsatisfactory and do not represent the underlying potential of the business.
During my first 90 days, I have been deeply engaged in a comprehensive review of the Company’s operations, including on-the-ground visits to many of our top markets where I have met with many of our direct selling Representatives.”
“While we are focused on the formulation of Avon’s longer-term plans, we are already implementing near-term fixes that support the success and satisfaction of our Representatives–starting with actions to improve service delivery.
Our long-term mission is clear, to return Avon to a competitive market position, and we are moving with deliberate urgency to design our turnaround plan.”
Highlights for First Quarter of 2018:
Total Revenue increased 5% to $1.4 billion, or 2% in constant dollars1, both including a 6% reporting benefit due to the impact of adopting the new revenue recognition standard required by generally accepted accounting principles in the United States (“GAAP”)
Active Representatives and Ending Representatives declined 4% and 1%, respectively, largely due to declines in Brazil.
Operating Margin increased 100 bps to 3.2% and Adjusted1 Operating Margin increased 100 bps to 4.0%, both including a benefit of 120 bps due to the impact of the new revenue recognition standard
Diluted Loss Per Share From Continuing Operations of $0.06 and Adjusted Diluted Loss Per Share From Continuing Operations of $0.02, both including a $0.03 benefit due to the impact of the new revenue recognition standard
During the first quarter, the Company adopted the new GAAP revenue recognition standard, which had a significant impact on the presentation of sales incentives and Representative fees and associated costs, primarily for brochures. The Company adopted the standard as a cumulative-effect adjustment as of January 1, 2018, therefore, comparative information for prior periods has not been restated. Where appropriate, the impact from adopting the new standard has been separately quantified in this release.
New Revenue Recognition Standard (Accounting Standards Codification Topic (“ASC” 606), Revenue from Contracts with Customers)
As further discussed in Avon’s Form 10-Q for the quarter ended March 31, 2018, the Company adopted ASC 606, as a cumulative-effect adjustment to retained earnings, as of January 1, 2018. The impact of the cumulative-effect adjustment to the Company’s Consolidated Balance Sheets is primarily driven by sales incentives and Representative fees and associated costs, primarily for brochures.
Historically, the cost of sales incentives was presented as other accrued liabilities and prepaid expenses and other and recognized in selling, general and administrative expenses (“SG&A”) over the period that the sales incentive was earned. Under the new standard, the portion of sales incentives or prospective discounts that are associated with a distinct performance obligation are initially deferred on the balance sheet and recognized in net sales and cost of sales when the performance obligation is satisfied.
Historically, brochure costs were initially deferred to prepaid expenses and other and charged to SG&A over the campaign length. Under the new standard, the revenue associated with brochures is recognized in other revenue when delivered to the Representative and the related cost is recognized in cost of sales, except in the case of costs for free brochures which are recognized in SG&A. In addition, other fees paid by Representatives to the Company for items such as late payments and payment processing are now reported as revenue, rather than as a reduction of SG&A. The other changes resulting from the new revenue recognition standard were not material.
The impact of the change in accounting for revenue recognition on first-quarter 2018 performance is summarized on pages 13-14 of this release.
First-Quarter 2018 Income Statement Review (compared with first-quarter 2017)
Total revenue for Avon Products, Inc. increased 5% to $1.4 billion, or 2% in constant dollars, both including a benefit of approximately 6% due to the impact of adopting the new revenue recognition standard.
Active Representatives declined 4% primarily due to decreases in South Latin America and North Latin America.
Average order in constant dollars increased 6%, including a benefit of approximately 6% due to the impact of adopting the new revenue recognition standard. Growth in South Latin America was offset by a declines in the other segments, primarily Europe, Middle East & Africa.
Ending Representatives declined 1% primarily due to declines in South Latin America and North Latin America that were partially offset by growth in Europe, Middle East & Africa.
Gross margin and Adjusted gross margin each decreased 280 basis points to 58.4%, including a decline of approximately 310 basis points due to the impact of adopting the new revenue recognition standard. The change in gross margin was primarily due to the favorable net impact of price/mix partially offset by higher supply chain costs.
Operating margin was 3.2% in the quarter, up 100 basis points, while Adjusted operating margin was 4.0%, up 100 basis points, both including a benefit of approximately 120 basis points due to the implementation of the new revenue recognition standard. The operating margin and Adjusted operating margin year-over-year comparisons were both unfavorably impacted by higher Representative, sales leader and field expense, partially offset by lower bad debt expense, primarily in Brazil.
The provision for income taxes was $32 million, compared with $30 million for first-quarter 2017. On an Adjusted basis, the provision for income taxes was $24 million, compared with $31 million for first-quarter 2017.
Net loss was $21 million, or $0.06 per diluted share, including a benefit of $0.03 per diluted share due to the impact of the new revenue recognition standard, compared with a loss of $37 million, or $0.10 per diluted share, for first-quarter 2017. Adjusted net loss was $3 million, or $0.02 per diluted share, including a benefit of $0.03 per diluted share due to the impact of the new revenue recognition standard, compared with a loss of $28 million, or $0.07 per diluted share, for first-quarter 2017.
About Avon Products, Inc.
Avon is the Company that for 130 years has proudly stood for beauty, innovation, optimism and, above all, for women. Avon products include well-recognized and beloved brands such as ANEW, Avon Color, Avon Care, Skin-So-Soft, and Advance Techniques sold through approximately 6 million active independent Avon Sales Representatives. Learn more about Avon and its products at www.avoncompany.com.