Never Underestimate the CEO Quotient
Research Director, Mad Money
From: James Cramer
Sent: Monday, April 11, 2011 2:13 PM
To: Nicole Urken
Subject: RE: AVP
In today’s AVP sell block, let’s include some of the anger toward AVP from the conference call
From: Nicole Urken
Sent: Monday, April 11, 2011 2:18 PM
To: James Cramer
Subject: RE: AVP
<Q - Bill Schmitz from Deutsche>: Hey, there's a paragraph or a sentence in the press release that says the business fundamentals remain solid. Do you guys really believe that? I know you walked through some of that, but why is that in there? Because you want to see some more urgency here….
<Q - Wendy Nicholson from Citigroup>: My bigger picture question is, maybe something more drastic needs to happen, and Andrea, it's great that your problems aren't structural, but if they're all execution, well then shouldn't there be a bunch of people who lose their jobs over such awful execution? Thanks
<Q - Ali Dibadj from Bernstein>: Hey, guys. I'm from Bernstein. So, I guess I'm trying to ask this question in the most, I guess objective, open-minded way possible given what some know as a bias on the stock, and some of the rationale you've given us today. But if I take a longer view and I look at the past 10 plus years, you've had something like three restructurings. We've had Eastern Europe, Mexico and Japan issues. U.S. business has clearly struggled, arguably fallen off a cliff. We've had some Venezuela aggressiveness I'd argue, Foreign Corrupt Practices Act is still an issue. China growth issues, free cash flow productivity issues, clearly increased competition from traditional CPG companies, and the list goes on and on and on. Not to mention your GAAP EPS is the same as it was in 2003. When do you in the aggregate, think that this is actually a structurally-challenged company? Not just a set of one-time issues that can be explained away? And if this is not a structurally challenged – systematically structurally challenged company, what does a structurally challenged company look like?
From: James Cramer
Sent: Monday, April 11, 2011 2:20 PM
To: Nicole Urken
Subject: RE: AVP
Perfect- this makes the piece
If the biting above excerpts from Avon’s February conference call sound familiar, they are. In fact, CEO Andrea Jung was thrown another round of angered questions in Thursday morning’s call after yet another dismal quarter.
Now, back on October 12th, we gave Avon a mulligan on Mad Money. Why would we do such a thing? After all, back in April, we placed the stock in the sell block and emphasized that Jung—who had previously been on the "Mad Money" Wall of Shame—had to leave the company in order for the stock to go higher.
The answer: Even though we had an incredibly low opinion of management, we acknowledged that the drop of the stock from $28 in April to $22 in early October, which brought the dividend yield to over 4 percent, offered some downside protection. Additionally, we also identified potential upside from the company’s sales incentive that launched in July.
However, the dismal quarter reported Thursday morning, which was accompanied by almost a 20 percent shellacking in share price, is a lesson to never get behind a company when you can’t get behind management—no matter how cheap it is. Lesson learned.
How do we know Avon’s issues are management-specific? If you take a look at the cohort—i.e., the comparable companies in the space—they are all doing much better. First off, Estee Lauder and Revlon both have shown strength in sales with expense management to boot.
But the more appropriate companies to look at in comparison to Avon are its direct-selling peers—namely, Tupperware , Herablife and NuSkin . And here, the divergence in results is even more astounding. The direct selling model is currently in a “sweet spot” given the still high unemployment (along with underemployment) domestically and worldwide.
However, while Tupperware, Herbalife and NuSkin have posted strong results—fueled in addition by the middle classification of emerging markets where there is less brick & mortar competition—Avon has lagged.
Avon has been unable to see a benefit from the money they’ve funneled into their restructuring program: After spending nearly $1bn, their margins are actually down. Avon has turned every dollar of operating earnings into under $0.50 of cash flow since 2006—and this low free cash flow generation (because of poor inventory management, high capital spending, and restructuring spending) has limited valuation support. Not to mention that the company has run into struggles in many of the emerging markets where peers are seeing strength (like Brazil). And, many analysts have cited poorly aligned compensation plans for sales leadership and bad incentive structures. On the other hand, Herbalife and Tupperware have focused on incentivizing managers to grow and retain sales base and make them more productive.
In addition to Avon’s inability to optimize its sales force as peers have, it is running into legal problems—another big reason to stay away. Just yesterday, the company received a subpoena from the SEC requesting documents in relation to communication with financial analysts. This only adds to another investigation regarding foreign corrupt practices.
Look, this outrage against Andrea Jung isn’t anything personal. But, frankly, Avon’s announcement earlier this year to replace a large portion of the management team simply hasn’t been enough. And SOMEONE has to be accountable to the shareholders. But the bottom line is that when things aren’t working for too long, you need a change.
Avon’s analyst day is coming up in 1Q. Maybe then we’ll see change. But, the lesson here: don’t count on it.
The Stifel Nicolaus analyst on today’s Avon conference call said it point blank: “Andrea, you're Chairman; given an average Board tenure of over 10 years, I believe, how long can the status quo here remain? I mean, I know we're talking about improvements in North America, but things in Brazil are still tough. I mean, I just don't know what to say at this point.”
And the Deutsche analyst question may have topped them all: “ So when you talk about the brand awareness at Avon, but like there's high awareness of Chernobyl ... So like how do you monetize that awareness?”
Most people have heard of Avon, but how many are buying it? Jung needs to do more than learn a thing or two from Tupperware and Herbalife—she needs to let new management run the show so we can start returning money to shareholders.
To investors: Stick with HLF and TUP. To Jung, listen to your own words that relationship is key for your nearly 7 million representatives in 100+ countries. While we need to be thoughtful, at this point, we need to be reactive too. There have just been too many disappointments in a row.
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