Avon growth falls as restructuring hits profits

By Simon Pitman

- Last updated on GMT

Related tags Cent Net income Eastern europe

Avon Products has announced a significant drop in its profits as
restructuring charges hit the bottom line and the company's
performance in most markets, including the US, came in below

The company said that during its second quarter, net income dropped 54 per cent to reach $150.9m on the back $2.1bn in sales, up 5 per cent on the same period last year.

The company said that it incurred a $49m charge, as part of its massive restructuring programme, introduced in the last quarter of 2005. These costs included organisational realignments and a reduction in the workforce, particularly in its middle management.

Avon CEO Andrea Jung said that the company has now eliminated more than 25 per cent of its management positions and lowered the number of management tiers from 15 to eight. This means that to date the company has eliminated 10 per cent of its 43,000 workforce worldwide.

Analysts had expected the drop in profits, but the performance was not as good as average forecasts had expected.

Morgan Stanley said that there could be a limited amount of negative reaction on the stock markets in response to weak top line growth in all markets except China.

The North American market remains flat, although that reverses the steady decline in sales experienced last year. The company said that sales volume were down by 5 per cent, in conjunction with a 7 per cent decline in sales representatives that the company said was exacerbated by rising fuel costs.

Although sales were up by 2 per cent in Europe as a whole, many of the established markets have proved to be tough in the face of stiff competition. The exception has been Turkey, which had proved to be a strong performer on the back of good retail conditions.

In the Central and Eastern European region sales were up 4 per cent, representing a decrease in volumes. The company said that this was due to a fall in colour cosmetic sales throughout the Central European market.

This performance was boosted by stronger results in Russia, which helped to offset a poorer performance in Poland.

Outside of Europe, Asia was particularly disappointing, with sales down 10 per cent, mainly caused by a down-turn in the Japanese market.

In Asia the one shining light proved to be the China market, where sales grew by 8 per cent, in line with expectations. The company said that this figure came about from the resumption of direct sales at the beginning of this year.

In Latin America sales were up 17 per cent, boosted by last year's acquisition in the Colombia market and the continued growth of the Brazilian market. However, the company said that the Mexico market had proved to be 'soft' contributing to lower underlying growth.

Avon's restructuring scheme aims to save the company around $100m a year, but will have to be fed by top line growth that, judging by the last quarter's result, is not happening.

In the longer-term results will almost certainly be cushioned by significant savings, but top line growth will have to resume if the company is to sustain the estimated $500m total restructuring costs.

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