The Makeover Avon Needs After Coty Breakup

Others agree, even if a turnaround may take longer than shareholders would want. "We agree that Avon is fixable, however we believe Avon's board and shareholders missed a good opportunity to be acquired by Coty," wrote UBS analyst Nik Modi in a Tuesday note to clients. "While Sheri McCoy and Kimberly Ross seem like capable executives, we believe the issues at Avon will take time and lots of money to fix: In fact, given our view on Avon's issues, we believe it may take 2-3 years to sustainably fix."

New York-based Avon Products shares are off nearly 40% in the last 12 months. This month, Fitch Ratings and Standard & Poor's downgraded Avon Products' credit to near junk status, citing weaker than expected earnings and questions on how quickly a turnaround can be executed.

Avon is the world's largest door-to-door cosmetics merchant, which made it a compelling takeover candidate for Coty, but the company's size also comes with a host of accounting and management challenges.

The biggest issue for Avon Products to fix, according to Ferrara, is its persistent cash shortfall when comparing the company's net income to its reported free cash flow. From 2009 through 2011, Ferrara calculates that there is a $1 billion gap between the company's $2.3 billion in pro-forma net income and its $1.3 billion in reported free cash flow.

"We believe the most challenging issue for investors to gain comfort with is the persistent gap between Avon's ex-charges net income and free cash flow," the analyst wrote. A discrepancy in the company's capital expenditure to its depreciation, amortization and inventory accounted for 81% of Avon's free cash flow gap, calculates Ferrara.

While Avon Products has reported slowing sales and profitability, Ferrara noted that in recent analyst calls Ross has recognized a lack of accountability throughout the company. Ross has also targeted improving the timeliness of fulfilling orders, forecasting of input costs and inventories, and bolstering non-U.S. processes. Still, Avon's first quarter earnings fell short of Ross's forecasts, signaling a continued need for improvement.

In Ross' prior role as CFO of privately-owned foods giant Ahold, the company posted growth in its cash management metrics. "Ms. Ross has been no stranger to turnarounds, overseeing numerous structural/fundamental changes at Ahold," adds Ferrara.

Meanwhile, aside from improving purely financial metrics, McCoy needs to address accountability within the organization and misaligned compensation, while improving the company's direct sales performance, which has lagged peers.