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Avon restructuring wins applause from investment world

By Simon Pitman , 21-Mar-2006

As Avon continues to make major cut backs, analysts and market experts are being won over as the company's position starts to look stronger following a difficult two year period.

Sliding sales, particularly in the company's mainstay domestic market have hit profits significantly, causing CEO Andrea Jung to instigate a sweeping restructuring program that aims to get the company back on its feet and into profit.

Although the program has led to some painful cut backs and job losses, some analysts current assessment of the company suggest they might be over the worst of it.

According to Citigroup analyst Wendy Nicholson, Avon's restructuring has put them in a much stronger position, which should see a marked turn around in the company's performance by 2007.

Speaking about the company's share prospects, which are currently trading at $30 per common share, Nicholson said that she thought they currently represented a definite 'buy' as a longer term investment.

Avon's latest round of restructuring has led to a series of cut-backs on a global basis that have most recently culminated in the loss of 300 jobs at the company's Springfield, Illinois call center.

Currently the Springfield center employs around 600 people, where some manufacturing, packaging and shipping operations also take place.

But the $500m program will probably hardest hit the management of its global operations. Jung and her executive team have identified that its management structure is currently convoluted and over-manned.

That management structure is now made up of 15 different levels, but the new plans will see that figure reduced down to 7 or 8, providing significant savings and ultimately leading to a more cohesive management.

Most recently Avon announced a 37.4 per cent drop in its fourth quarter profits, which stood at $183m. The company blamed fierce competition, particularly in the US market, as well a significant rise in costs.

However, it said that the main reason for the drop was a $22m charge associated with the closure of its unprofitable Indonesian operations - another reason to believe that the company's position will look stronger in the future.

Another reason for a more positive outlook in Asia is the company's recent announcement that it will resume direct sales in the all-important China market, where sales of cosmetics products have seen some of the largest gains on the global market.

"With a challenging 2005 behind us, we are now aggressively moving forward with the turnaround plan we outlined at our investor update meeting last November," said CEO Andrea Jung when the results were announced at the beginning of February.

"We are aggressively addressing costs through our restructuring program, while at the same time stepping up the level of investment behind our brands with innovation and a planned 50 per cent increase in advertising spend in 2006," she added.

The company says that a significant amount of the increased spend will go in to the US market, where the company is aiming to regain some of its lost market share.

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