Avon's stock jumps as CEO is shoved aside

Once considered a young star, Jung has been ousted after years of faltering operations.

By Melly Alazraki Dec 14, 2011 11:50AM

Avon Products (AVP), the 125-year-old cosmetics company, has finally ousted CEO Andrea Jung. Investors were relieved to hear Tuesday that Jung is leaving executive management. Shares rose by nearly 10% Wednesday morning.

The company calls the move a separation of the the roles of chairman and CEO, saying Jung will be named executive chairman, while the board of directors "will work with" her to search for a CEO. Until they find one, Jung will continue in her dual role. But no matter how you call it, the message is clear.

"I believe the time is right to separate the chairman and CEO roles," said Jung, who has been Avon's CEO since 1999. "A new CEO will provide a fresh lens and additional operational and executive leadership."


The crux of the matter is in that last sentence. When Jung started, she was the one providing the fresh lens. She helped the company push into emerging markets and has been credited for much of Avon's growth at the beginning of the century. In the first half of her tenure, the stock indeed nearly tripled.

 

But Jung, who also sits on the boards of Apple (AAPL) and General Electric (GE), has faltered in recent years. The troubles began more than five years ago, and the door-to-door-sales company has continued to stumble ever since.

This year alone, Avon's share price has sunk about 45%, a far worse performance than the overall market. The S&P 500 has declined only 2.5% year to date. It gets even worse when it comes to competitors, such as Estee Lauder (EL) and Revlon (REV), whose stocks are up 33% and 47% so far this year. The stock price reaction was a direct result of recent poor earnings.

The pressure on the board to change top management increased after recent third-quarter earnings disappointment -- the fourth quarter in five recent ones in which the company has disappointed investors. It was magnified by the company's saying it no longer expects to meet its 2011 goals.

Worse, the company also revealed an SEC probe about the company's contact with analysts and other Wall Street executives. This was on top of the previous bribery charges regarding foreign officials. The stock sank 19% that day.

Is the eventual change in top management a buy signal, then? No doubt there are positive outcomes as a new CEO, combined with other recently appointed top managers, such as CFO Kimberly Ross, could breathe new life into the business. The stock is also much cheaper than its competitors, trading at a much lower multiple, which adds to current attraction.

However, several problems remain. Avon's board has been long criticized for allowing the situation at the company to deteriorate this long. As Morningstar explains, the average tenure of a director at Avon is 10 years, which means the board could be too set in its ways and may not allow needed changes. The turnaround, therefore, may be slow to come, even after Jung's exit.


-- Melly Alazraki is a freelance financial writer.

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