Avon sales up but profit hit by restructuring

By Simon Pitman

- Last updated on GMT

Related tags Percent United states dollar

Avon has reported a healthy 12 percent leap in its second quarter
sales turnover, but the good news was overshadowed by a 25
percent drop in profits as restructuring charges related to its
turnaround plan hit hard.

The company said that sales grew from $2.08bn in the same quarter last year, to reach $2.33bn for the current quarter, which represented a jump of 7 percent in local currency, the figure being positively impacted by the weakness of the US dollar against global currencies. However, net profits fell from $150.9m in the second quarter of 2006, to reach $112.7m for the current period, reflecting $82m of pretax costs relating to restructuring and the simplification of certain product lines. This figure included restructuring costs of $21m, alongside further costs of $61m for the company's product line simplification initiative, which aims to create a clearer branding and category strategy across the company's products lines. News of the fall in profits caused the company's share price to slide by around 7 percent at the close of trading yesterday, with a closing NYSE share price of $36.01. Although the sales figures were marginally above analysts' expectations, restructuring charges and ad spend ate into the bottom line more than expected, causing concern as operations margins were eroded. However, despite the lack of returns from an increased ad spend, Andrea Jung said that the company would continue to invest significantly in advertising. "Clearly their growth investment are paying back, as evidenced by our 14 percent growth in beauty sales and 9 percent growth in active representatives,"​ said Jung. "We continue to track toward our planned $100m of incremental investment in the representative value proposition this year. Given the success we are seeing in our business, we decided to increase our full-year advertising investment to $375m, 50 percent above 2006's level, versus our earlier plan of a 35 percent increase." ​ On a geographical basis, the company reported that sales in the all-important North America market continue to hold the company back, with volume sales remaining flat and operating profits decreasing by 32 percent. Indeed sales were level-pegged with the corresponding quarter in 2006, at $619.8m. However, the picture was far rosier in the company's international markets, with sales in Latin America leading the pack, growing 22 percent to reach $798.1m, led by gains of over 30 percent in Colombia, Brazil and Venezuela. In Western Europe sales grew 13 percent to reach $310m, mainly driven by a 30 percent increase in Turkey and a 10 percent increase in UK sales; while sales in Central and Eastern Europe grew by 15 percent to reach $332.9m, mainly due to continued growth in Russia. Results for the Asia Pacific market were not as dynamic as the other international markets, with sales revenues growing 3 percent to $203m. The figure reflected flat sales in Japan, counterbalanced by a 36 percent growth in the China market. Avon is expected to reveal its outlook for the rest of the financial year during a press conference later today, but industry experts are wondering whether plans to maintain current advertising spend on top of hefty restructuring can be sustained.

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