Avon 2015 Annual Report Download - page 22

PART I
recession, cost or wage inflation, commodity cost pressures, economic or political instability (including fluctuations in foreign exchange
rates), competitive pressures or other market pressures in one or more particular regions.
Failure to reverse declining revenue, margins and net income and to achieve profitable growth could have a material adverse effect on our
business, prospects, financial condition, liquidity, results of operations and cash flows.
Our business is conducted primarily in one channel, direct selling.
Our business is conducted primarily in the direct-selling channel. Sales are made to the ultimate consumer principally through direct selling
by Representatives, who are independent contractors and not our employees. As of December 31, 2015, we had nearly 6 million active
Representatives. There is a high rate of turnover among Representatives, which is a common characteristic of the direct selling business. In
order to reverse losses of Representatives and grow our business in the future, we need to recruit, retain and service Representatives on a
continuing basis. Among other things, we need to create attractive Representative earning opportunities and transform the value chain,
restore field health and sales force effectiveness, successfully implement other initiatives in the direct-selling channel, successfully execute
our digital strategy, including e-commerce, improve our brochure and product offerings and improve our marketing and advertising. There
can be no assurance that we will be able to achieve these objectives. Additionally, consumer purchasing habits, including reducing purchases
of beauty and related products generally, or reducing purchases from Representatives through direct selling by buying beauty and related
products in other channels such as retail, could reduce our sales, impact our ability to execute our global business strategy or have a material
adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows. Additionally, if we lose market
share in the direct-selling channel, our business, prospects, financial condition, liquidity, results of operations and cash flows may be
adversely affected. Furthermore, if any government such as Brazil, bans or severely restricts our business methods or operational/commercial
model of direct selling, our business, prospects, financial condition, liquidity, results of operations and cash flows may be materially adversely
affected.
We are subject to financial risks as a result of our international operations, including exposure
to foreign currency fluctuations and the impact of foreign currency restrictions.
We operate globally, through operations in various locations around the world, and derive all of our consolidated revenue from our
operations outside of the United States (“U.S.”).
One risk associated with our international operations is that the functional currency for most of our international operations is their local
currency. The primary foreign currencies for which we have significant exposures include the Argentine peso, Brazilian real, British pound,
Chilean peso, Colombian peso, the euro, Mexican peso, Peruvian new sol, Philippine peso, Polish zloty, Romanian leu, Russian ruble, South
Africa rand, Turkish lira and Ukrainian hryvnia. As the U.S. dollar strengthens relative to our foreign currencies, our revenues and profits are
reduced when translated into U.S. dollars and our margins may be negatively impacted by country mix if our higher margin markets, such as
Russia, experience significant devaluation. In addition, our costs are more weighted to U.S. dollars while our sales are denominated in local
currencies. Although we typically work to mitigate this negative foreign currency transaction impact through price increases and further
actions to reduce costs, we may not be able to fully offset the impact, if at all. For example, in 2015, our revenues declined 19% compared
with 2014 due to unfavorable foreign exchange, and grew 2% on a Constant $ basis (as defined in “Non-GAAP Financial Measures” within
MD&A on page 30). Our success depends, in part, on our ability to manage these various foreign currency impacts and there can be no
assurance that foreign currency fluctuations will not have a material adverse effect on our business, assets, financial condition, liquidity,
results of operations or cash flows.
Another risk associated with our international operations is the possibility that a foreign government may impose foreign currency
remittance restrictions. Due to the possibility of government restrictions on transfers of cash out of the country and control of exchange
rates, we may not be able to immediately repatriate cash at the official exchange rate. If this should occur, or if the official exchange rate
devalues, it may have a material adverse effect on our business, assets, financial condition, liquidity, results of operations or cash flows. For
example, currency restrictions enacted by the Venezuelan government in 2003 have become more restrictive and have impacted the ability
of our subsidiary in Venezuela (Avon Venezuela) to obtain foreign currency to pay for imported products, which in turn has reduced our
product offerings in Venezuela and negatively impacted our sales. Unless foreign exchange is made more readily available, Avon Venezuela’s
operations will continue to be negatively impacted as it will need to obtain more of its foreign currency needs from non-government sources
where the exchange rate is less favorable than the official rate. In 2011, the Argentine government introduced restrictive foreign currency
exchange controls. In December 2015, the Argentine government began the process of removing foreign currency exchange controls;
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