With the firm failing to stabilize sales and profit, we aren't shocked that CEO Sheri McCoy is stepping down.
By Erin Lash, CFA | 08-03-17 | 11:20 AM | Email Article

Second-quarter results were another indication of no-moat  Avon Products  succumbing to intense competition and its own internal missteps. Organic sales slipped 4% and adjusted operating margins eroded 230 basis points to 5%.

Erin Lash, CFA, is a director of consumer sector equity research for Morningstar.

In light of its persistent struggles to ignite sustainable gains, Avon announced CEO Sheri McCoy will step down from her role and board seat at the end of March 2018 after five tumultuous years. While we think a fresh perspective could be beneficial, we’ve viewed McCoy's strategic roadmap as prudent: Reinvest in the training and retention of the representative base and extract excess costs from operations to fuel further reinvestment in the business.

While we never anticipated this endeavor would yield improvement overnight, the lack of progress to date is far from a positive, and we aren’t surprised by the decision to make a change at the top. In line with its past moves, we think the board could look outside the organization or tap a recent external hire (such as COO Jonathan Myers or global president Miguel Fernandez) as her successor.

We are likely to trim our near-term assumptions--which had already called for a 5% reduction in sales and 20 basis points of operating margin erosion to 6.5% in fiscal 2017--to account for the dismal performance through the first six months of the year. This will probably result in a low- to mid-single-digit decline in our $5.30 fair value estimate. The shares trade at a discount to our valuation after tumbling around 10%, but we think tepid performance could persist over the next few quarters. While traction has been slow, we ultimately believe the plans in place should prompt modest gains over time. We haven’t wavered on our long-term forecast (1%-2% annual sales growth and operating margins holding at a mid- to high-single-digit level, which is below the firm’s outlook for mid-single-digit annual top-line gains and low-double-digit operating margins).

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Erin Lash, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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