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.

Tags: AAPLAVPGE
117Comments
Dec 14, 2011 2:05PM
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OK ... I'll open things up here. 

Maybe I am wrong ... but considering the state of the American economy, the typical American female may be more concerned with feeding herself or her family -- and either getting to work to keep a job -- or continue looking for work ... versus looking good/feeling fresh & trendy, yada yada yada.

Oh, I know ... there are ladies out there who might argue with me and say they'd rather not eat than go without makeup -- but I am afraid, before it was all over with, they may find themselves opting out in favor of daily nourishment versus rouge, eyeliner and blush.

Yes, there are plenty of women who will always be able to afford makeup -- but that number within the "typical" ranks may be dwindling somewhat.  Discretionary income just ain't what it used to be.  Not in the US, anyway.
Dec 14, 2011 4:46PM
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SPRINGDALE,OHIO WAS WORLDS LARGEST AVON MANUFACTURING PLANT,SHE COMPLETELY SHUT IT DOWN THIS YEAR   AND MOVED THE COMPANY TO MEXICO AND CHINA.THE SPRINGDALE.FACILITY WAS 110 PERCENT PRODUCTION, NOTHING BUT CEO GREED.EMPLOYEES WERE ASKED TO SACRIFICE COST OF LIVING RAISE FOR FIVE YEARS PRIOR TO HELP SAVE SPRINGDALE FACILITY,AND TO GIVE UP THEIR VIP INCENTIVE, SHE SHOULD OF HAVE LEAD BY EXAMPLE.SHE COST HUNDREDS IF NOT THOUSANDS OF JOBS IF YOU INCLUDE LOCAL BUSINESES AND TRUCK DRIVERS.  THEIR LIVLEY HOOD,AND DAMAGED THE LOCAL ECONOMY GREATLY.WHAT WAS AVON FOUNDED ON .DOOR TO DOOR SALES I HOPE THE MEXICAN WOMAN AND CHINESE WOMAN WILL SUPPORT THE COMPANY AS WELL AS AMERICAN WOMEN HAVE. FOR 125 YEARS.WHAT ARE THE FDA GUIDLINES IN THESE FORIEGN COUNTRIES IF ANY.WONDER IF FOUNDER OF THE COMPANY IS ROLLING OVER IN HER GRAVE MRS ALBEE GOD BLESS YOU SORRY FOR THE CEO GREED. 50 PLUS MILLION A YEAR TOTAL.CEO OF P&G MAKES A FRACTION OF THAT

Dec 14, 2011 4:37PM
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over 30 yrs. ago i was an avon representative and made 40%.  i paid my way through college. now  they make 10%.  somebody is pocketing the money.  no wonder they cant get sales reps. , because they are not the ones pocketing the money.
Dec 14, 2011 2:44PM
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faith 717: Sorry oh uninforned one..Ms'ung is NOT from China...
Jung was born in 1959 in Toronto, Ontario, Canada. Her family moved to Wellesley, Massachusetts, when she was only two years old.
 this may come as a shock, but not all americans are white  and have  anglosaxon names..welcome to the real world.
Dec 14, 2011 3:46PM
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Whew!  I thought they were ousting her because she used Mary Kay!!!
Dec 14, 2011 3:19PM
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Quoted Text from S. Metz:

Here is a quote taken from Wikipedia - "While CEO of Avon Products in 2009, Jung received a total compensation of $6,997,015, which included a base salary of $1,375,000, a cash bonus of $3,043,906, options granted of $2,395,162, as well as $182,947 in other compensation."

 

In my opinion no 1 person (CEO) of any company is worth this type of compensation.  Besides, I would think if you are making that type of salary you would have virtually no free time to do anything but eat, sleep & drink Avon but she found the time to sit on the Boards of Apple & General Electric. 

I would think a far more practical way to run a large company would be to have a "team" of Executives at the "Top" where there could be multiple ideas & troubleshooting rather that just one person's as well as you would be creating more jobs & probably fall well bellow the compensation package of $6,997,015 that Miss Jung had made for just 1 year.

Dec 14, 2011 2:36PM
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As a current AVON representative and having the struggles I have had trying to sell in S. Mpls area, it is unbelievable to me that they would chugg all the blame on her for the dropping sales.  This is clearly another example of the rich being out of touch with the rest of the functioning world.  And yes as a representative it is very distrubing and irritating to have them continually discontinue items people continually buy and then bellyache because sales are down.  Someone needs to get on the ball.
Dec 14, 2011 2:08PM
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Well once again we have a board of directors who don’t know jack about running a company except into the ground.  As an investor, do you really care if your CEO is charismatic?  Think not.  I wouldn’t care if the CEO told me I sucked as an investor as long as they produced in the stock price and dividends department.  So why the hell are they leaving her as chairman?  Can you spell bankruptcy?

Dec 14, 2011 4:22PM
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I returned to Avon after several years and was shocked to see the decline in Rep appreciation. A push to make more money selling catalogs and samples to Reps instead of giving them a reason to sell their products was shocking. I remember the kind and encouraging environment just 15 years ago when I was trying to make some family money to compensate our income because I wanted to stay at home with my new baby. Now, they treat the reps more like customers than the consumers and they don't treat them very well!! I am no longer a rep because of that. I don't think they even have a clue to the real problem...

Dec 14, 2011 2:27PM
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Avon consistently stops selling products people want as they develop higher priced and less or similarly effcetive products...maybe they woudl have better fortunes if they did not  stop making and selling products people like. Their lack of a makeup line suitable for older woman is one example, and their cessation of popular products such as lighten up and  others...they also put  fragrance in almost everything-which many people can not abide...they need to listen to their customers and develop some niche lines, not only  what sells to  masses of people..not  versatile enough-will fail in today's eclectic world.
Dec 14, 2011 2:19PM
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..The issue actually is the underlying premise of door-to-door sales. This is an aspect of American culture that has gone. It is dangerous to go to work for door-to-door sales. It is dangerous to answer the knock of alleged door-to-door sales. ...And it is not just about Avon. The parents of Girl Scouts and Cub Scouts do not allow their child to do the same door-to-door solicitations which were routinely done 45 years ago. This business model is as dead as `Ozzie and Harriet'.
Dec 14, 2011 3:19PM
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Maybe if she wasn't  sitting on the board at Apple and at GE she could have focused on the company she was supposed to be running.
Dec 14, 2011 4:58PM
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Avon has great lipsticks, probably the moist moisturizing and great colors I've ever tried. I just wish they would get the chemicals out, but they produce so much so quickly, that I'm sure that isn't on their mind. A shift toward natural and organic, paraben-free, and heavy-metal free makeup/lipstick would be great (that's what we're moving towards isn't it?). I can't believe that they have support for breast cancer, but turn around and sell a chemical-laden lipstick and makeup that is known to cause cancer (contradictory).

 

Anyway, they offer so many new things all the time, they need to have a section that is just the "usuals" and then offer new products. Take some advice from customers...they have good ideas. It's hit or miss with Avon product-wise and with their inexpensive gifts. Some are great and so is some of the jewelry but then sometimes it's awful. Sometimes they offer a great product, but it's gone the very next catalog like a great highlighter for cheeks or sparkly eyeshadow, trends for younger folk.

Dec 14, 2011 5:42PM
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the problem here is greed! the avon manufacturing, team worked very hard ,went on a pay freeze for 5 years, was offered  stock options in place of a raise which the employees never received a dime, because stock price were inflated from the start. avon springdale was considered the best, most efficient plant because productivity was at 110%.  all the mandatory overtime, with no appreciation for all the long hours, and endearing service. now you have tons of older workers out of a job, or broken down. so so sad! loyalty is not both sided these days, we live in a world where, loyalty, hard work, and the pay it forward philosophy isn't honored, or respected, and the values that these large companies say are so dear to them are just lip service.
Dec 14, 2011 4:12PM
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I've been a rep for going on 3 years and because AVON has been so publicized it seems like we have a rep for every 5 streets in town and now those of us who had a decent business can't make it because there are so many reps now.  I'm looking to quit because I'm not even making a quarter of what I used to.
Dec 14, 2011 3:07PM
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I'm in my 18th year of selling Avon. I continue to get new customers every year. Avon is a surprisingly big draw, so I disagree with the commenter that said no one even knows Avon exists anymore. And Mary Kay is so expensive, no one can afford it. That said, I've never been as embarrassed to be an Avon rep as I have been in the last few years. I may get new customers every year, but I lose just as many. Avon will introduce a new product in the brochure, and it will immediately become unavailable. Not on backorder, which is bad enough, but completely "sold out", and /or simply "no longer available". No explanation is ever given. My personal faves are when items in our Demo books (products not for sale in the national brochure yet, offered to reps to demo to customers) are not available. Yes, they sold out before it even went on sale. And then there are the endless backorders. I love telling my Christmas customers, "Your gift items are on backorder....but never fear! They'll be arriving in February!" Avon stopped listening to reps' complaints years ago, preferring to send a stock answer, typed in broken English (I sh*t you not), for whatever complaint we've lodged. And I've discovered recently that they don't reply to customers' inquiries anymore, either. And the economy isn't entirely to blame for slumping sales...I live in Pittsburgh (not exactly Beverly Hills), and people are spending just as much as they always have. At least they're TRYING to, but those backorders and sold outs save them tons.

SOMETHING needed to happen at the executive level. I hope to God this is it.

Dec 14, 2011 2:26PM
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@ Yapz,

I think you are probably the only one who has hit it.  I totally agree with the way the economy is that  yes, people are not going to buy from their "Avon" Rep.  If it means putting food on the table for my family versus other things in life, Food, will take precedent.  I wonder how many other business that are in the "personal care" or consumables that individuals have cut back to make ends meet?  How many people stretch out their haircuts now and don't go every 4 weeks to get their hair cut or colored.  How about those manicures and pedicures that women get, I bet there are many who have cut them out or eek, learned how to do it themelves?

Just saying, if one has to make cuts it their individual situation, they will do whatever they have to, I think it is called "Survival"

Dec 14, 2011 3:41PM
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I sold Avon twice.  I love the Avon products, but I got tired of all the back orders.  When a client ordered something for specific occasion - especially Christmas - most of the time it was back ordered.  I love the hair care line, but they discontinued the hair spray, gel, and moose I liked.  I love the new line of face cream for older women and I don't mind paying $38.00 a jar for it, but I have so many of the previous skin care lines, that I'll never have to buy it again.  As far the clothes, the sizes are so off it's ridiculous and the shoes aren't comfortable.  Most of the jewelry is nice.  I agree with the comment that they should stick to make-up, skin care, and hair care and leave the clothes, toys, and accessories to someone else.
Dec 14, 2011 2:22PM
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They need to solve more than one internal problem. They have many problems ahead for them. One, is billing errors with their reps. While reps are ordering products on sale at the whole sale sale price, they are being billed at the regular wholesale catalog price. Some reps are seeing less than one dollar in profit on any particular area. This leads to despondant reps that will not tolerate the mismanagement of their potential. The turn around on reps, that have knowledge of the products that they sell will eventually spell doom for a company all ready doomed . I for one am glad that a change has been made, however , she should have been let go instead of surviving in a cushy little title, and remaining employeed with probably a good six figure salary and perks as well.
Dec 14, 2011 5:25PM
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I would guess they have a problem with respect and motivation, and the decline in sales and stock prices have nothing to do with product line, or marketing.  The CEO should go, and take most of top management with her and then you'll see a real change.

 

They have forgotten about the importance of their employees (the reps), and focused their attention in the wrong area.  Avon's success has always been a direct result of the people in the field, and from what I understand, that has changed dramatically over time.

 

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