Morningstar

Avon's CEO Shakeup No Surprise

With the firm failing to stabilize sales and profit, we aren't shocked that CEO Sheri McCoy is stepping down.

Second-quarter results were another indication of no-moat

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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About the Author

Erin Lash, CFA

Sector Director
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Erin Lash, CFA, is a sector director, AM Consumer, for Morningstar*. In addition to leading the sector team, she covers packaged food and household and personal care companies. Beyond managing a team of nine analysts and associates covering an array of consumer firms, Lash also conducts fundamental analysis of 13 multi-billion-dollar market capitalization firms in the packaged food and household and personal care space.

Before joining Morningstar in 2006, Lash spent four years as an investment analyst covering retail, transportation, and technology firms for State Farm Insurance. In this capacity, Lash analyzed financial statements, business strategy, and fundamentals of owned companies and potential investments, presenting her recommendations based on this analysis to State Farm portfolio managers for ownership consideration.

Lash holds a bachelor’s degree in finance from Bradley University’s Foster College of Business. She also holds a master’s degree in business administration, with concentrations in accounting and finance, from the University of Chicago Booth School of Business. Lash has completed the Chartered Financial Analyst® designation. She ranked second in the food and tobacco industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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