New corporate structure calling at Avon

By Reuters
Posted Feb. 24 at 2:16 p.m.

Avon Products Inc. is splitting itself into two units, focusing on developed and developing markets and shaking up its management weeks after the world’s largest direct seller of cosmetics took the blame for problems in markets such as Brazil.

Avon said it would move its six commercial business units into two major business groups.

The shakeup shows that Avon “recognizes change is needed to put the company on better footing,” said BMO Capital Markets analyst Connie Maneaty, who maintained her “market perform” rating on the company’s shares.

This month, during a tense quarterly conference call, Chairman and Chief Executive Andrea Jung said the company’s structure may need to change.

Jung, Avon’s CEO since 1999 and its chairman since 2001, will remain in her job, while many of the executives who report to her are moving into new roles.

Jung, speaking at an industry conference Thursday afternoon, called the new management structure Avon’s most significant reorganization since 2005.

Some questioned whether it was enough.

“Investors are concerned only with results,” said Stifel Nicolaus analyst Mark Astrachan. “And while we believe the realignment may better utilize management, this is effectively the same team that produced underperformance in the business in recent years.”

If the new structure does not lead to better results, the credibility of Avon’s managers and its board could become “permanently impaired, in our view,” he said.

Shares of Avon, which laid out its new structure hours before its presentation to a large group of Wall Street analysts and investors, fell 0.5 percent, at $27.80.

During the conference, Jung outlined plans such as new products including Avon Care, a value-priced line launching in emerging markets.

The company said it still expects revenue to rise in a mid-single digits this year. Margins should fall in the first half of the year and then pick up, leading to overall margin growth of 0.5 percent to 0.7 percent, it said.

Avon is trying to grow operating margins to a mid-teens range by 2013. Operating margin fell 1.8 points, to 11.2 percent, in the fourth quarter.

Chuck Cramb, who was vice chairman, chief finance and strategy officer, was named vice chairman of the developed markets group. Avon launched an external search for a new CFO.

Avon is also looking outside for a leader for its Latin America region, the company’s largest, with more than 42 percent of sales in 2010.

Brazil, a key market in Latin America, was a big disappointment in the fourth quarter. A June 2010 government-mandated switch to electronic invoices pressured Avon’s already outdated systems, leaving sales representatives unable to get some of the items they had ordered.

Cramb said the company expects gradual recovery in Brazil and Russia this year and that North America is not expected to stabilize until the end of the year.

Avon overhauled its operations and cut thousands of jobs under a restructuring laid out in November 2005 and updated in February 2009. Its business units have reported directly to Jung since 2006, when president and chief operating officer Susan Kropf retired and her position was eliminated.

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