After posting a dismal performance in its third quarter, Avon
) reported plans of halting the global rollout of its $125 million
order management system project. The company's decision comes after
Avon posted a 7% and a 1% decline in reported and constant dollar
revenues, respectively, in its recent Q3FY13 earnings. The decline
in revenues was a result of adverse currency fluctuations along
with severe employee relationship disruptions caused by the new
order management system.
In this article, we look at the disruption made through the
implementation of Avon's Service Model Transformation (
) project and its implications for the fourth quarter.
See our complete analysis for Avon Products
New Consumer Proposition Model Deleverages Growth
Avon has been planning a tectonic shift from its current
paper-based order model to an omnichannel experience for the past
four years, as part of its $400 million cost-savings initiative.
The new omnichannel experience leverages various social and digital
media channels to provide multiple touch points for the consumer.
Additionally, the company has targeted an improvement in its
consumer service by providing more relevant and locally positioned
products. While this Service Model Transformation (
) project provides Avon with a faster order processing system and
reduced operating expenses through online and mobile order
channels, the resistance of its sales representatives has
restricted the rollout since 2009.
The company pushed forward with the SMT implementation by
launching a pilot program in Canada. The model continued to have
very low representative adoption and disrupted
employee-representative relationships. Additionally, the One Simple
Sales model launched within the U.S. in 2011, which consolidates
field operations and presents leadership positions to its
representatives, continued to lose traction. In its Q3 transcript,
Avon reported further disruption between its field representatives
and employees. These disruptive instances within the North American
region resulted in a 3% drop in Avon's active representative count,
which is critical to Avon's growth.
We expect Avon' revenue to encounter significant downward
pressure going forward as a result of the disruption caused by the
SMT implementation. Additionally, continued weak performance in the
U.S. and China is also expected to weigh on results for Avon in
coming quarters. During Q4FY11 and Q4FY12, Avon posted revenues
between $3.00 - $3.05 billion, compared to last quarter's $2.32
billlion. Given the disruption in the North American market, we
expect revenues lower than the $3 billion mark for Q4FY13, in line
with the consensus estimate of $2.75 billion. Operating profits
during Q4FY11 and Q4FY12 were approximately $13 million and $11
million, due to goodwill impairment charges of approximately $263
million and $207 million respectively. The charge-offs have
continued, albeit at much lower levels.
For the forthcoming Q4, the company expects to write down the
remaining part of the SMT software amounting to $100 - $125
million, which could negatively impact operating margins for Q4 on
a sequential basis. However, on a year-on-year basis, we could see
an expansion in operating profit margins as the lack of goodwill
impairment charges for the quarter offsets write down charge. That
said, management must stabilize the business model and achieve
updated selling tools and processes its representatives can use to
go to market.
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