Moody’s downgrades Avon on concerns over operating performance

Moody’s downgraded Avon Products’ corporate family rating from Ba1 to Ba2 on last Friday, when it also took the decision to change the probability to default rating as well as lowering the speculative grade liquidity rating that resulted in an overall negative rating.

Moody’s analysts said the downgrade of the most important corporate family rating came amidst concerns that efforts to improve operating performance are not sufficient to offset the headwinds that the company is currently facing.

Headwinds​

One of the major problems facing a cross section of US-based international consumer goods players right now is currency translations, which are overwhelmingly negative in the face of a very strong US dollar currency.

"It may be difficult for Avon to turn around its performance given the competitive and macroeconomic challenges the company is facing in key markets -- particularly since it is happening against a backdrop of significant FX volatility that is diminishing operating cash flow,"​  said Nancy Meadows, a Moody's senior analyst and vice president.

Avon has been getting a bad rap from financial analysts as it continues to see sliding revenues and profits.

Most recent quarter​

Last week the company published its first quarter results and it did not make a good reading.

Reported sales were down 18% to $1.8bn for the first quarter, a figure that resulted from the double impact of currency headwinds and weak North American sales.

Underlying results looked healthier though, with constant dollar sales increasing by 1%, underlining the hefty impact of currency translations against the strong US dollar as well as the fact that there was strong growth in Europe, Middle East and Africa.

Thanks to the significant restructuring program that has cut back on costs significantly, the net loss was reduced, down from $167m to $146m, but adjusted net income was $17m compared to a figure of $52m, underlining the impact of restructuring costs.

Turnaround still not here​

This is not the first time that Moody’s has downgraded the direct sales cosmetics player in recent months.

Back in October, Moody’s downgraded the ratings for Avon Product’s senior unsecured notes from Baa3 to Ba1, and also downgraded Avon Capital Corporations commercial paper rating to Not Prime, from Prime-3, reflecting the fact that its financial performance had continued to weaken in recent quarters.

“The downgrade reflects Moody's concern that competitive and structural challenges associated with Avon's direct selling model are creating pressure on representative levels, revenue and cash flow. The rating outlook is stable,” ​Moody's stated at the time.

However, at this time, industry experts were expecting that a significant restructuring program would soon take effect and that a real turnaround for the Avon business would be seen at some point in 2015.