[Avon Products Inc.] is optimistic that its new global "Beauty for a Purpose" branding initiative will resonate with consumers, as well as current and prospective sales representatives, providing momentum for the company against continuing macroeconomic headwinds.

Like other U.S.-based beauty players, the firm has been hard hit by currency fluctuations of late, booking $1.8 billion in revenue for its fiscal 2015 second quarter, a decline of 17% compared with the prior-year period. Excluding currency effects, Avon's revenue was flat for the quarter, it reported July 30.

The company's cost-cutting measures are paying off, however. Net income for the quarter reached $30 million, or $0.07 per share, an increase of 52% compared with the same period a year ago, helped by soft comparables.

While the direct seller's active-representative base contracted 2% overall, the firm says it sees promising developments across key markets. Sales reps in North America declined 16%, driving the total result, but the company sees "strong active-representative trends" in two-thirds of its top markets," CEO Sheri McCoy noted during a same-day earnings call.

McCoy said Avon has not yet explored whether its sales reps in Brazil, which sell Coty celebrity and lifestyle scents under a 2014 deal, will have access to Dolce & Gabbana, Hugo Boss and other fragrance brands Coty is acquiring for P&G.

Avon expects Beauty for a Purpose, its new global "brand statement" announced June 15, to fuel continued improvements, strengthening its bond with existing fans and sales reps while introducing the Avon brand to a new generation of women.

The initiative, which highlights the company's commitment to empowering its sales force and women around the world through beauty and financial independence, will leverage paid media and the firm's digital platforms to "tell the whole Avon story," according to the recent release.

The firm has created a new site, BeautyforaPurpose.com, featuring a photo gallery of Avon reps, as well as articles on beauty, lifestyle trends and women's empowerment.

The campaign "expresses how Avon empowers women by offering them real earnings opportunity selling beauty products of demonstrable value," McCoy explained during the call.

Moreover, "as an authentically purpose-driven company, Avon has the opportunity to tap into today's consumer sentiment that favors brands with a deeper meaning," she said.

According to McCoy, the company is receiving positive feedback in markets where Beauty for a Purpose has rolled out on a limited basis to date. "Telling the whole Avon story has already become a source of energy for our representatives," she said, noting that the message will be a unifying theme across upcoming sales conferences.

"This is a position that aligns well with the word-of-mouth nature of our business and our evolution to a more social selling model," she added.

Avon re-launched its U.S. e-commerce website in fall 2014, better equipping its sales representatives to engage consumers in the virtual dimension and earn commissions from sales transacted online. Reps using the platform can set up their own eStores, customized with blogs, special offers and product highlights ([A#02141013006]).

The firm views the development as a modernization of its direct-selling model to "social selling."

McCoy said the new site is doing "quite well," driving double-digit growth in what remains, however, a small portion (less than 10%) of Avon's overall business.

"We're still working with our representatives to get them to shift over and order more online," the exec said, noting that Avon will continue pushing for the transition at sales conferences in the coming months.

Stabilizing Avon Brazil

According to McCoy, Avon's Q2 results were in line with its expectations, but were impacted by challenges in Brazil, its biggest market.

Consumer spending slowed, contributing to a 32% drop in reported revenue, or 6% decline in constant currency terms. The result also reflects a May 1 change in the country's Industrial Production Tax (IPI) that weighed on Avon's color and skin-care performance in particular.

"I'm confident that our team in Brazil has a solid plan in place and is doing a good job of managing the business in a very challenging environment," McCoy said. "We're actually making sure that we have that personal connection and doing other things in terms of retention, giving incentives so that [representatives] stay in the business and sell consecutively so that helps them with earnings."

While management was upbeat regarding Brazil – which represents approximately 20% of the firm's total sales – Morningstar senior equity analyst Erin Lash is skeptical that such steps will be sufficient.

"Competitive pressures are unlikely to abate, and we anticipate that the local cosmetics tax-law change will disproportionately weigh on Avon's results over the next several quarters, given the firm's large color business in the country," she said in a July 30 note.

In a July 31 note, analyst Bill Schmitz of Deutsche Bank said he believes Avon can still grow despite the tax situation so long as the direct seller focuses on fundamentals.

During the call, he raised a point that could have bearing on the company's sales in Brazil down the road. "Have you talked to Coty at all about getting licenses to Dolce & Gabbana and Gucci and Hugo Boss and Lacoste yet?" he asked Avon's leadership.

McCoy noted during the call that celebrity and lifestyle fragrances from [Coty Inc.], which Avon reps have been selling in Brazil under an agreement announced in February 2014, continue to deliver strong results Also see "In Brief: N.Y. Eyes Triclosan Ban; Avon To Sell Coty Scents In Brazil; More" - HBW Insight, 24 February, 2014..

Now that Coty's acquired more than 40 beauty brands from Procter & Gamble Co. under a deal announced in early July, there could be opportunity to get the mentioned fragrance brands into the hands of Avon reps in Brazil, though McCoy said the firm has not explored any options yet.

EVP and CFO Jim Scully said during the call that while Brazil's environment has been challenging, Avon's business in another key developing market, Russia, has seen continued improvements.

Sales declined 24% on a reported basis in Russia, but were up 15% in constant dollars, driven by growth in Avon's local sales base, he said.

North America Profitable

Meanwhile, North America, which continues to drag on Avon's top-line performance, achieved "modest profitability" in the quarter.

Revenue in the region was down 15%, or 14% in constant dollars, but Scully said profitability trends should continue for a positive result on the full year, reflecting recent cost-reduction efforts.

McCoy said she is pleased with the performance of the ANEW skin-care line in North America, following investments in developing ANEW Vitale, a spinoff range aimed at younger women, and strong sales of ANEW Men and ANEW Ultimate.

"It's encouraging to see these results, and I believe it's a testament to the resiliency of both the Avon and ANEW brand in the United States," she remarked.

She acknowledged that representative engagement has been challenging in North America with sales representatives down 16% in the quarter.

However, she is confident that the revamped Avon.com website and other recent initiatives will help reverse the trend.

In his note on Avon, titled "What doesn't kill you makes you stronger," Schmitz maintains that more moves need to be taken to improve Avon's business in its home market.

"In North America, hard choices still need to be made to lift and shift the business to higher price points and products better aligned with the assisted sale attributes of the direct-selling model," he says.

The analyst suggests that Avon focus on embracing Hispanic consumers – "where the brand equity is considerably stronger" – and bringing in more third-party brands to attract new customers.

Last year, Avon said it would make Hispanic consumers a strategic priority going forward, as the demographic dominates the firm's top 10 sales districts in the U.S. ([A#02140224007]).

Analysts Divided On Firm's Prospects

During a Q&A portion of the analyst call, Steve Powers of UBS questioned Avon's next steps for righting a business that's been struggling for some years now. "Things didn't get worse and that's definitely good. But it's still hard from the outside to see where the true future improvement will be sourced from?"

In response, McCoy said the firm "feels good" about expected sales-rep increases over the next 12 months, which will help buoy sales.

Deutsche Bank's Schmitz is confident that patience will pay off and Avon will start moving forward again. From his perspective, the firm's management understands the challenges with currency fluctuations and is being proactive about adjusting pricing in response.

"The story really isn’t about 2015 but what the company can earn once they get through this hellish currency environment," according to Schmitz.

Lash is not as optimistic about the firm's prospects. She suggests that the firm has lost its competitive edge, and moreover, it "faces a number of sizable headwinds (including macroeconomic headwinds, competitive pressures, unfavorable FX, and righting its own internal missteps), which could continue to weigh on its sales and profits longer-term."

Lash predicts that unfavorable currency conditions will continue to negatively impact the firm in 2015, and that excluding them, sales will only grow approximately 1% to 2% on the year.

"We have little confidence in the firm's ability to generate consistent improvement at home or abroad," she says. "From our perspective, the sizable challenges facing Avon's operations warrant drastic actions, which could include exiting underperforming regions in a more pronounced fashion and taking an ax to the cost structure."

The analyst also believes a takeover could be favorable for the direct seller. Avon rebuffed takeover bids from Coty in 2012, a move many analysts questioned at the time, and was rumored to be in discussions with private investment firm TPG Capital earlier this year ([A#02120521004]andAlso see "Analysts On Avon Buyout Rumor: Easier Turnaround ‘Outside The Public Eye’?" - HBW Insight, 27 January, 2015.).

McCoy promised investors that more details on the firm's strategy will be discussed at its Fall Analyst Day, which will likely be held in November.

Avon Counting On 'Beauty For A Purpose' To Inspire Reps, Consumers

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