Weak results, investigations, and corporate uncertainty see Avon rating downgraded

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Global cosmetics firm Avon Products has had its corporate credit rating lowered amidst weak results by Standard & Poor's Ratings Services, which has also stated that Avon’s outlook is negative due to uncertainty over the company’s long term strategy.

The analyst lowered its corporate credit rating on Avon Products to 'BBB' from 'BBB+'. At the same time, it also lowered its ratings on the company's senior unsecured notes to 'BBB' from 'BBB+', citing weak operating results and continued operating disruptions.

Avon has sustained its good market share in the direct sales channel; however disruptions in the organisation, such as the ongoing bribery investigation in China, are damaging the company.

Investigations, uncertainty and weak performance

Federal prosecutors are investigating whether US executives at the company broke foreign-bribery laws, in a case that ultimately saw vice chairman at the time, Charles Cramb, get fired.

A new head of its China operations was then appointed in February in a move that aims to smooth over the heavy burden of the ongoing investigations and poor financial results.

On top of that, Avon also has the task of appointing a new CEO, with Andrea Jung, who currently holds the position, set to leave.

Damaging Q4

This has left even more uncertainty hanging over the cosmetics manufacturer who also had to deal with a poor financial performance in the fourth quarter, and announced that it will be focusing solely on the short term and planning job cuts as it enters a transitional period.

As it looks to recover its margin as soon as possible, Jung announced last month that the company is close to completing the first phase of identifying cost opportunities focused on headcount, announcing that the extent of this will be revealed in the near future.

Other decisions are also being deferred, such as who will replace the outgoing Jung, and this has damaged the stability of the company and prompted S&P’s decision to lower its rating.

Without a clear longer-term strategy in place, it is uncertain whether Avon can execute an operating turnaround over the next year, and although not ruling it out the analyst has stated the cosmetics firm faces a challenge to turn it around.

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