Avon Products: Andrea Jung v. Wendy Nicholson

I spent a little time in 2011 following the saga of Avon Products and its CEO, Andrea Jung. By way of quick synopsis, over the span of a few years Avon whirled from darling to dumbkauf multiple times. Stories told by the financial media and the analyst cabal tracked close to the volatile swings of its stock. Andrea Jung engineers a turnaround, the story went, with her brilliant management technique. The stock ticks up high. Andrea Jung fails to inspire Avon sales rep, the stories read shortly thereafter, strategy must be reconsidered as earnings sag.

Jung and her management team were willing participants, playing the expectations game over and over again with the analyst cabal. They contributed guidance, tried to influence where the roulette wheel of The Consensus Estimate would land each quarter, and spun the most positive message to the investment world whenever Avon released its financial results.

Jung said it well in a 2006 interview with BusinessWeek’s Stephen J. Adler. (here)  “How do you deal with criticism?” Adler asks.

“I think you’re never as good as they say and you’re never as bad. The truth is somewhere in between,” was Jung’s reply.

So it is with the story being told about the performance of the business, the qualities that lend it strength or create vulnerabilities, and the future that lies ahead. The story gets bright and optimistic; the story swings low and pessimistic. The truth lies somewhere in the muddy middle.

By late-2011, the story being told about Avon was unequivocally bad, and not without merit in this case. The company was reeling from a bribery scandal in China and an IT implementation gone so wrong in Brazil that the company could hardly service its salespeople or customers. These markets were important to Avon’s growth, and the effects of the snafus were showing up on financial statements. The company was missing The Consensus Estimates on revenue and operating profit.

On its own, each of these was certainly a problem, but also containable. Occurring together as they did, however, the events catalyzed each other and accelerated into a full-scale blaze. In an October earnings announcement and conference call with the analyst cabal, Jung had attempted to describe what her team was doing to fix the problems and orchestrate another turnaround. She was now taking questions, when Wendy Nicholson of Citigroup came up in the queue.

(The conference call is here.)

Conference Call Operator: Your next question comes from Wendy Nicholson.

Ms. Nicholson: With Citigroup. My first question is, are there any more ERP implementations that have to come around the world in big markets or is Brazil the last one? And then my second question goes to this: whatever update, outlook thing that you're going to have in the first quarter. And I guess my question is, I know you know you guys are probably eager to hold our hands and to give us a message and just set a strategy just so the people have some direction to march towards, if you will, maybe internally as well. But it strikes me that you guys need to do a tremendous amount of work, probably change a bunch of people in management, probably change your capital structure, maybe take another restructuring charge, maybe exit a market like what you did in Japan. But I think it took a decade to come to that decision. Maybe you'll come to that decision about some other markets. That strikes me as a humongous amount of work. And unless you're planning on handing this off to the new CFO December 1 and saying, "Hey, you got 6 weeks to figure this out," it strikes me that saying it's a first quarter solution could be really premature. So have you thought about the idea -- go back and hire McKinsey again. Go back and really go to the drawing board. Think about taking the company private.? I mean, it strikes me that you guys are so totally screwed up in so many ways. The change has to be radical, and I don't know if saying, "Hey, we're going to come out in February with financial targets" is enough. That's it.

Sure enough, the financial media lead their stories with the quote from Wendy Nicholson that is meant to represent the frustration of the entire analyst cabal, “it strikes me that you guys are so totally screwed up in so many way…”

Ms. Nicholson had supported Avon, and at one time endorsed it to the salesman and clients reading her research notes. Now Avon had failed her with these operational blunders and these misses against The Consensus Estimate. Andrea Jung had failed her. Ms. Nicholson’s fury was peaked, and she wasn’t going to let an opportunity slip by to scorn the object of her previous affection; to insert herself into the story.

Andrea Jung was replaced as CEO the following April, a personnel move with plenty to justify it. She had made big mistakes. And she engaged in the expectations game, playing hard in an attempt to keep the Avon stock price up. In the end, she could not satisfy the analyst cabal. She lost the game. And she lost her job.