Avon expects significant margin growth in 2008

By Guy Montague-Jones

- Last updated on GMT

Related tags Avon Cost

Avon is looking to almost double its margins in 2008 and achieve
mid-single figure sales growth despite macroeconomic worries and
high oil prices.

Speaking at the Consumer Analyst Group of New York (CAGNY) conference in Florida, Avon's vice chairman Chuck Cramb told investors the benefits of its comprehensive restructuring program would be seen next year. Higher margins ​ Despite higher oil prices and raw material costs, Avon expects to increase its operating margins to 14.1 percent in 2008 from 8.8 percent last year. Cramb said higher prices and less discounting would contribute to margin growth but the greatest gains would be achieved through the firm's restructuring efforts. Avon began its restructuring program three years ago when executives said the company was bloated and misdirected. However, the costs of the program have so far weighed heavily on the company's bottom line. Reducing its range to focus on profitable products, Avon was forced to write-off inventory worth $110m in the fourth quarter of 2007 leading to a 30 percent fall in net profit compared to the same period last year. Although the total cost of Avon's restructuring program is a heavy burden at $530m, the annual savings generated from it are expected to more than compensate for the initial outlay. The direct selling firm has forecast savings of $270m for 2008 to be followed by savings of $430m in 2011-2012 when its initiatives have been fully implemented. Savings from a slimmer bureaucracy are expected to be particularly high as it reduces its management layers down to 8 from 15. A total of 2,400 jobs will be cut and there will be 25 percent fewer employees in management positions. Maintaining sales growth ​ As well as targeting margins Avon is looking to maintain its focus on top line growth. Sales increased 13 percent over 2007 to $3.05bn and while this level of growth is not predicted to continue next year, given the grim economic forecast, the company nonetheless expects to achieve mid-single figure growth. In particular Avon is looking to reignite its skin care business, which achieved only modest growth last year. The company also expects to benefit from high sales in emerging markets and its increased expenditure on advertising which rose to $368m in 2007 from $136m in 2005.

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