Avon stock sinks on SEC probe, pulled 2011 outlook

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Posted: Oct 27, 2011 6:26 PM
Avon stock sinks on SEC probe, pulled 2011 outlook

Avon Products Inc. said Thursday the Securities and Exchange Commission is investigating its contact with financial analysts in 2010 and 2011, the latest roadblock for the cosmetics direct seller that is struggling to turn around its results.

Avon also reported its third-quarter net income slipped a worse-than-expected 1 percent, hurt by complications implementing a business system in Brazil and the uncertain global economy. The New York company said it is reviewing all aspects of its business and withdrew its full year revenue guidance.

Shares _ which were already down 21 percent since the beginning of the year _ dropped another 18 percent by Thursday afternoon.

"Obviously, we're disappointed with our third-quarter results and the slower-than-expected pace of recovery," said CEO Andrea Jung in a conference call with analysts. "We're fully accessing our long-range business plan, and targeting an operational and financial update to investors in the first quarter of 2012."

Analysts are becoming increasingly less confident that Avon can improve its business, however.

Avon, known in the U.S. for its "Avon ladies" going door-to-door selling its cosmetics, has in more recent years focused on expanding overseas, and about 80 percent of its revenue comes from outside of the U.S.

But results have been erratic, with the company frequently missing analyst expectations and posting disappointing revenue in some of its largest markets like Brazil and Russia. It has also been dealing with a bribery investigation since 2008. The investigation started in China and has grown to other countries.

Avon has implemented a restructuring program, cut costs and made executive changes, but results are still falling short.

Stifel Nicolaus analyst Mark Astrachan said Avon was lagging competitors, and it is "unlikely to enact meaningful operating improvements anytime soon." He downgraded the company to "Hold" from "Buy."

The SEC probes add to the uncertainty, he said. The company disclosed in a filing that the regulator is investigating its contact with financial analysts in 2010 and 2011. The SEC also formalized its inquiry into matters related to Avon's own bribery probe.

"One inquiry is bad, two is a major headache," Astrachan said. "The substantially stepped-up SEC woes makes it increasingly difficult for management to focus on a turnaround."

Avon said it was cooperating with the SEC and the investigations but did not disclose any other information about the nature of the probe into its contact with financial analysts. Avon had no further comment on the probe or Astrachan's report.

The New York company's net income was $164.2 million, or 38 cents per share, in the July-September quarter. That's down from $166.7 million, or 38 cents per share, last year.

Revenue rose 6 percent to $2.76 billion. Analysts expected earnings of 46 cents per share on revenue of $2.83 billion, according to FactSet.

Beauty sales rose 8 percent, with gains in perfume, makeup, personal care products and skin care.

In Latin America, which makes up about half of Avon's business, revenue rose 11 percent. Results were boosted by the weaker dollar and strength in Mexico and Venezuela, which helped offset the unexpected weakness in Brazil, where revenue fell 3 percent excluding the effect of the weaker dollar.

Companies that sell goods internationally get a boost from a weaker dollar when they convert revenue in foreign currencies back into the dollar.

The problems in Brazil, usually a stronghold for Avon, stem from implementing an "enterprise resource planning" business management software system, which caused "greater disruptions than we anticipated," said CEO Andrea Jung.

In North America, which accounts for about 18 percent of revenue, sales fell 7 percent.

Total units sold fell 5 percent during the quarter and the number of Avon's direct sellers was flat.

Jung said in the U.S. the company revamped its marketing to focus on value and holiday gifts, and orders have improved in the short term.

Shares fell $4.20, or 18.3 percent, to close at $18.81 Thursday.