Natura and Avon Integration in Latam Continuing to Drive Healthier Profitability

Rhea-AI Summary

Natura & Co's Q1 2024 financial results reveal a mixed performance. Consolidated net revenue hit BRL 6.1 billion, showing a 1.1% rise in constant currency but a 5.7% decline year-on-year in Brazilian Reais. Natura Latam excelled, with revenue growth of 3.1% YoY in CC, led by Natura Brazil's 11.3% increase. This was driven by strong retail sales and the launch of the 'Perfumada' fragrance campaign. However, Avon Latam reported declines of over 11% in Brazil and Hispanic Latam due to fewer representatives.

Avon International faced a 4.7% revenue drop in CC despite efforts to enhance gross margins and explore new distribution channels. Consolidated profitability improved thanks to a 90 bps increase in gross margin, reaching 65.2%. Adjusted EBITDA was BRL 683 million, with a margin expansion of 110 bps YoY.

However, the reported net loss widened to BRL 935 million, impacted by discontinued operations, higher taxes, and FX losses. Excluding one-offs, the underlying net income was BRL 116 million. CEO Fabio Barbosa highlighted the positive impact of the Natura-Avon integration but acknowledged ongoing challenges.

Positive

• Consolidated net revenue reached BRL 6.1 billion in Q1 2024.
• Natura Latam showed a 3.1% YoY revenue growth in constant currency.
• Natura Brazil reported an 11.3% YoY revenue increase.
• Gross margin expanded by 90 bps to 65.2%.
• Adjusted EBITDA reached BRL 683 million.
• Adjusted EBITDA margin expanded by 110 bps YoY.
• Successful launch of 'Perfumada' fragrance campaign.
• Improved trends in Avon's top-line performance in Brazil.

Negative

• Consolidated net revenue decreased by 5.7% YoY in Brazilian Reais.
• Avon Latam reported revenue declines of 11.3% in Brazil and 11.8% in Hispanic Latam.
• Avon International's revenue dropped by 4.7% YoY in constant currency.
• Reported net loss widened to BRL 935 million.
• Higher taxes and FX losses impacted net results.
• Discontinued operations contributed to financial losses.
• One-off BRL 137 million loss related to transferring cash out from Argentina.

Insights

Financial Analyst

Financial Performance Analysis: Natura &Co's Q1-24 results reveal a nuanced financial picture. Despite a 5.7% decline in net revenue YoY in BRL terms, the company managed a 1.1% increase in constant currency. This subtle but positive growth trajectory suggests resilience amidst currency fluctuations. A standout is the BRL 6.1 billion in consolidated net revenue, buoyed significantly by the thriving performance of Natura Brazil, which saw an impressive 11.3% revenue increase YoY. Retail expansion with 132 new stores and the successful 'Perfumada' fragrance campaign played pivotal roles here.

In contrast, Avon’s performance was mixed. Avon International witnessed a revenue dip of 4.7% YoY in constant currency, reflecting ongoing challenges in the direct selling channel, though steps towards diversification via retail partnerships are promising. The company's gross margin expansion to 65.2%, up 90 bps YoY and adjusted EBITDA margin growth of 110 bps YoY signal effective cost management and operational efficiencies.

Notably, despite improved underlying net income of BRL 116 million, the reported net loss of BRL 935 million due to discontinued operations and FX losses highlights ongoing financial pressures. Investors should stay cautious about these variables. Rating: 1

Market Research Analyst

Market Dynamics and Strategic Integration: The integration of Natura and Avon in Latam, referred to as 'Wave 2', has shown measurable success in enhancing profitability through a richer country and brand mix. The 170 bps gross margin expansion in Latam underscores the synergy benefits. However, the 11.3% revenue decline for Avon in Brazil and 11.8% decline in Hispanic Latam suggest the integration process is still maturing.

Avon International’s pivot towards retail channels in the UK, Italy and Turkey demonstrates strategic diversification efforts to counteract challenges in the direct selling model. This adaptation could yield long-term gains as consumer preferences evolve.

From a market perspective, the gradual stabilization of Avon's revenue and the expected positive trend in Q2-24 should be monitored. The potential separation of Avon and Natura could unlock further value by simplifying the corporate structure, albeit with execution risks. Overall, the company's strategic initiatives are positively contributing to its market position. Rating: 1

Retail Industry Expert

Retail Expansion and Consumer Trends: Natura's retail strategy in Brazil demonstrates a well-executed expansion plan. Opening 132 stores in the last year, with a significant portion being franchised, reflects an effective growth model. This approach not only enhances market penetration but also aligns with consumer trends favoring physical retail experiences combined with robust same-store sales growth.

Additionally, the 'Perfumada' fragrance campaign's success highlights the importance of targeted marketing strategies in driving product mix enrichment. Such campaigns are important in maintaining brand loyalty and attracting new customers, especially in a competitive beauty market.

While Avon’s performance in the Latam market shows room for improvement, the improving top-line trends in Brazil and the gradual stabilization anticipated in the second half of the year are positive indicators. This suggests consumer acceptance of the integrated brand offerings will improve, albeit incrementally. For investors, these retail dynamics present a mixed yet cautiously optimistic outlook. Rating: 1

Strong performance of Natura Brand in Brazil combined with solid margin results from the Wave 2-implemented countries led to YoY profitability evolution and more than offset Avon International's margin contraction amid sales deleverage

SÃO PAULO, May 14, 2024 /PRNewswire/ -- Natura &Co's (B3: NTCO3) first quarter 2024 financial results (Q1-24), released today, showed increased profitability driven by solid results from Natura &Co Latam, which is benefiting from the integration of Natura and Avon in the region (referred to as 'Wave 2'), coupled with richer country and brand mix. This more than offset the margin contraction at Avon International amid sales deleveraging. Natura &Co's consolidated net revenue reached BRL 6.1 billion in Q1-24, up 1.1% vs Q1-23 in constant currency (CC) and down 5.7% year-on-year (YoY) in Brazilian Reais (BRL).

At Natura &Co Latam, Q1-24 revenues grew 3.1% YoY in CC. Natura Brazil was again the highlight, reporting an 11.3% YoY increase in Q1-24 revenues, attesting strong momentum despite the tough comparative base from Q1-23 when the brand had achieved a 25% YoY growth rate in the region. This performance includes retail sales which showed robust growth in the country, fueled by solid same-store sales and a still strong pace of store openings. The brand opened 132 stores in the last twelve months (13 own and 113 franchised), reaching a total network of 896 stores (115 own and 781 franchised). The results were also boosted by the successful launch of a fragrance sales campaign called "Perfumada", which contributed to a richer product mix.

This strong result in Natura Brazil was offset by Avon Latam, which is still delivering soft top-line, with revenues down 11.3% in Brazil and 11.8% in Hispanic Latam, as a result of the impacts in the regions where Wave 2 was already implemented, including a smaller number of representatives in the base. Worth noting that Avon Brazil already showed improving top-line trends throughout the quarter.

Avon International had a slow start in Q1 in terms of revenue, down by 4.7% YoY in CC. Despite a decrease in revenue, primarily attributed to challenges in the direct selling channel, Avon showed resilience in other areas. Efforts to strengthen Gross Margin and streamline operations led to only a slight decrease in Adjusted EBITDA margin of -60 bps YoY (ex TBS) despite sales deleverage. The company is also actively exploring opportunities from other distribution channels, including retailers. Avon is already being sold in the UK via Superdrug, in Italy via Naima stores and in Turkey via representative's retail franchise stores.

Improved consolidated profitability is principally attributed to the expansion of gross margin that reached 65.2% in Q1-24, up 90 bps vs. Q1-23 driven by the strong gross margin expansion from Latam (+170 bps). Adjusted EBITDA reached BRL 683 million, and adjusted EBITDA margin expanded 110 bps YoY.

Q1-24 reported net loss was BRL 935 million, compared to a net loss of BRL 652 million in Q1-23, impacted by discontinued operations, higher taxes from country mix and FX losses and hyperinflation accounting impacts. The Underlying Net Income, which is net income excluding transformation costs, restructuring costs, discontinued operations and PPA effects, was BRL 116 million (vs. a loss of BRL 373 million in Q1-23 or BRL 260 million excluding TBS and Aesop). Excluding the one-off of BRL 137 million of losses related to transferring cash out from Argentina, Underlying Net Income would be a profit of BRL 21 million in the quarter.

Fabio Barbosa, Group CEO of Natura &Co, commented: "We are encouraged that the first quarter of the year showed positive recurring results with a consolidated margin expansion of 110 bps vs previous year, driven by solid results from Natura &Co Latam, benefiting from the Natura and Avon integration in the region, coupled with richer country and brand mix. This more than offset the margin contraction at Avon International amid sales deleveraging. From a cash conversion perspective, seasonal cash consumption also improved on a YoY basis to BRL-1.0 billion (excluding one-off discontinued operations tax payments), compared to a pro-forma (excluding TBS) of BRL -1.4 billion in the same period last year or BRL -1.8 billion reported in Q1-23.

The ongoing roll-out of Wave 2 is a pivotal step in our transformational process, and although we have experienced expected and unexpected challenges in its implementation, we continue to see sustainable improvements in key metrics such as productivity, cross selling, and better portfolio mix, resulting in gross margin improvement in all countries where Wave 2 was implemented. In Brazil, Avon still experienced headwinds impacting the top-line, but with an improving trend month over month, and we expect Avon's top-line to stabilize in the second half of the year. We also saw significant margin expansion in Peru and Colombia as Wave 2 results start to impact the P&L in full while investments in channel and other one-offs start to fade away.

As expected, our integration initiative is driving improved savings in both G&A and selling expenses, although the latter is being offset by higher marketing investments and other initiatives focused on improving service levels. The solid start to the year gives us confidence that the initiatives we are implementing are beginning to deliver the expected results and we are extremely confident with the potential of the integration of both brands in Latam.

Avon International had a slow start of the year, following a solid Q4 2023 profitability performance. The new management team took office in January and is working on simplifying the market, focusing on key countries, and enhancing our portfolio with superior promotional execution. We believe these steps are crucial to stabilize revenues and keep us on track to improve profitability.

We are also continuing to study a possible separation of Avon and Natura, as we announced in February, in line with our goal of simplifying our corporate structure and giving more autonomy to the business units. We will inform the market as soon as we have news on this subject.

Lastly, but certainly not least, our hearts go out to all those affected by the devastating floods in the Rio Grande do Sul region of Brazil. We are closely monitoring the situation and extending our support to our vast network of nearly 100,000 people in the area, including Beauty Consultants, colleagues and partners. Through telemedicine and our Social Center, we are providing critical medical, social and psychological support. In addition, Natura &Co Latam will replenish lost inventory, forgive debts, defer payments for affected consultants and franchisees, and has designated two spaces as donation hubs for several companies to facilitate logistics. All these initiatives already exceed the amount of BRL 10 million.

With the aim of engaging our network to continue supporting those most affected, we have launched a matching funds initiative to help consultants most affected by the floods to rebuild their homes. For every real donated, Natura commits to matching it with another real. We expect to reach one million reais by May 30th."

The full earning report and financial statements can be accessed at https://ri.naturaeco.com/en/.

About Natura &Co

Natura &Co is a global purpose-driven group uniting Natura and Avon brands. We connect more than 200 million clients worldwide, engaging them through 7 million dedicated Consultants and Representatives, 900 stores and franchises, and 22,000 employees. 

We believe in promoting real positive economic, social, and environmental impact. We believe that the world does not need another big company. The world needs symbols of change capable of blazing new trails and inspiring others to follow. We believe in the power of cooperation, co-creation, and collaboration for a better way of living and doing business. 

We are Natura &Co. 

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SOURCE Natura &Co

FAQ

What were the Q1 2024 financial results for Natura & Co (B3: NTCO3)?

Natura & Co reported consolidated net revenue of BRL 6.1 billion with a 1.1% rise in constant currency but a 5.7% decline YoY in Brazilian Reais.

How did Natura Brazil perform in Q1 2024?

Natura Brazil saw an 11.3% YoY increase in revenues in Q1 2024, driven by strong retail sales and the 'Perfumada' fragrance campaign.

What was the financial impact of the Avon Latam in Q1 2024?

Avon Latam reported revenue declines of 11.3% in Brazil and 11.8% in Hispanic Latam due to fewer representatives.

What was Natura & Co's adjusted EBITDA in Q1 2024?

Adjusted EBITDA for Natura & Co was BRL 683 million in Q1 2024, with a margin expansion of 110 bps YoY.

What was the net loss for Natura & Co in Q1 2024?

Natura & Co reported a net loss of BRL 935 million in Q1 2024, impacted by discontinued operations, higher taxes, and FX losses.

How did Avon International perform in Q1 2024?

Avon International's revenue dropped by 4.7% YoY in constant currency, primarily due to challenges in the direct selling channel.

What were the key drivers for Natura Brazil's revenue growth in Q1 2024?

The key drivers for Natura Brazil's revenue growth were strong retail sales, robust same-store sales, and the successful launch of the 'Perfumada' fragrance campaign.