Stronger dollar, weak sales weigh on Avon 2Q

AP News
Posted: Aug 01, 2012 5:58 PM
Stronger dollar, weak sales weigh on Avon 2Q

NEW YORK (AP) — Avon Products said Wednesday its second-quarter net income fell 70 percent, hurt by the stronger dollar and lower demand globally for its makeup and skin care products.

The maker of beauty products including Skin So Soft lotion and mark cosmetics also said it has begun talks with federal investigators to possibly settle a long-running probe into allegations of bribery overseas.

The results announced Wednesday showed yet another lackluster performance for the direct-selling company, which has struggled for three years to turn around results. The slump led to the ouster of longtime CEO Andrea Jung and the hiring of Sheri McCoy, a former Johnson & Johnson executive, in April.

"Avon's second-quarter financial results are not good and they reflect the complex challenges that Avon faces," said McCoy. "It will take time, but I am confident that we can turn the business around and reach a point of sustainable growth."

Its shares briefly fell to their lowest level in more than 3 years.

In a call with investors on her 100th day as CEO, McCoy said she was ready to get down to fixing the company and outlined some priorities, although she did not set any specific targets or timelines for improving growth.

"Our immediate focus is on stabilizing the business, reducing volatility in the short term and then delivering and posting consistent sustainable performance," she said.

One problem, she said was that the company had moved to selling higher end items, but she felt that was "off target." It also hasn't remained competitive with its sales model, didn't pay its active representatives enough and didn't keep up with technology, she said.

"As the company tried to course correct, multiple restructurings caused energy to become internally focused rather than externally focused on the market and our competition," she added.

To improve results, Avon Products plans to focus more on its independent sellers and buyers of Avon's products, McCoy said. She laid out plans to improve Avon's product lineup, market products more effectively, pay top sellers more, cut costs and invest in technology.

Despite the company's problems, McCoy defended the direct-selling model. Some analysts have questioned if it is still as relevant as it was 50 years ago, pre computers.

"The direct selling model is extremely effective in many markets and growing mid-single digits globally," she said.

For the April to June quarter, net income fell to $61.6 million, or 14 cents per share, down from $206.2 million, or 48 cents per share, a year ago.

Excluding a $40 million charge related to job cuts in the company's corporate headquarters and in the regions, earnings totaled 20 cents per share. Analysts surveyed by FactSet expected 21 cents per share.

Avon spokeswoman Jennifer Vargas said the company would not give details on how many jobs were cut during the quarter or where the cuts were made.

Revenue fell 9 percent to $2.59 billion from $2.86 billion last year. Analysts expected revenue of $2.68 billion.

Active representatives, the independent sellers of Avon's products, dropped three percent globally.

New York-based Avon Products Inc. says revenue fell across all regions, with a 9 percent drop in Latin America, its largest region. Excluding the stronger dollar, however, revenue rose 3 percent in the region, helped by a 26 percent jump in revenue in Venezuela due to price increases.

Revenue in Europe, the Middle East and Africa fell 14 percent, hurt by weakness in Russia, Turkey and the U.K.

In North America, revenue fell 6 percent, hurt by lower representatives and lower revenue from its Silpada jewelry division. Asia Pacific revenue fell 4 percent as problems with transitioning to a direct-selling business in China contributed to a 21 percent drop in revenue.

Meanwhile, the company said it is on the way to settling a federal investigation into possible violations of the Foreign Corrupt Practices Act.

Avon began investigating possible bribery by its employees in China in 2008. That investigation has spread to other countries and the U.S. Securities and Exchange Commission and the Justice Department have gotten involved. Avon's own probe has led to the departure of former vice chairman Charles Cramb in January and four other executives in January 2011.

In a filing with the Securities and Exchange Commission accompanying the earnings release on Wednesday, Avon said it is in discussions with the SEC and the Department of Justice regarding resolving the investigations.

"While these discussions will take time, it is progress," McCoy said.

Separately, Avon declared a dividend of 23 cents, payable on Sept. 4 to shareholders of record on Aug. 15.

Shares fell 19 cents, or 1.2 percent, to close at $15.30 Wednesday after falling as low as $14.82 earlier in the session, its lowest level since March 2009.