Avon Reports Weak 3rd Quarter

Avon Products Inc. (AVP - Analyst Report) reported third-quarter results with earnings of 36 cents per share. Earnings were below the Zacks Consensus Estimate of 39 cents and down 30.8% from 52 cents reported in the prior-year period.

Total revenue declined 3.5% year over year to $2.6 billion, attributable to an 11% negative impact from foreign-currency exchange, which was partially offset by a 5% benefit from volume. The number of active representatives grew 10% during the quarter.

Sales of Beauty products declined 3%, primarily due to the negative impact of foreign exchange and declines across three of the four categories. Skin Care declined 8%, Fragrance declined 4% and Personal Care declined 4%, these were partially offset by a 4% growth in color cosmetics.

In North America, sales fell 8% as units sold declined 5% while active representatives were up 4%. In Latin America, sales grew 5% as units sold rose 10% and active representatives grew 13%.

Revenue in the Western Europe, Middle East & Africa dropped 6%, despite a 22% growth in units sold and 9% growth in active representatives. The decline was primarily due to adverse currency translations along with increased recessionary pressures. Sales in Central and Eastern Europe fell 18% as units sold were flat year-over-year, while active representatives grew 8%. In addition, adverse currency translations also impacted sales.

Quarterly sales growth in Asia Pacific increased 1%, as units sold were up 4% year over year and active representatives rose 6%. Sales in China decreased 11% primarily due to a 19% decline in units sold. However, active representatives for the quarter increased 52%.

Gross margin for the quarter contracted 56 basis points (bps) to 62.6% versus 63.1% in the comparable prior-year quarter. Productivity gains, benefits from the company's Strategic Sourcing Initiative, and price increases were fully offset by 140 basis points of unfavorable foreign-exchange impact. The operating margin also declined 110 bps to 10.1% from 11.2% in the comparable prior-year quarter.

Year-to-date, net cash provided by operating activities was $247 million. At the end of the quarter, Avon's total debt increased by $272 million from the year-end level, to $2.8 billion.

Avon has six ongoing restructuring programs targeting a total of $1.08 billion in annualized cost savings. Its major programs include the 2005 Turnaround Plan (targeting $300 in cost savings), PLS - Product Line Simplification initiative ($200 million), SSI - Strategic Sourcing Initiative ($250 million) and 2007 Additional Restructuring Plan ($130 million).

Recently, the company rolled out a New Restructuring Plan expecting to save $200 million in costs upon full implementation by 2013. The new program targets increasing levels of efficiency and organizational effectiveness across Avon’s global operations, primarily in three areas: global supply chain, sales support and a reduction of overhead.