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Feb 9, 2011
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Avon misses, another blemish for CEO to clean up

By
Reuters
Published
Feb 9, 2011

Feb 8 - Avon Products Inc executives are taking a hard look in the mirror after posting disappointing profits for the second consecutive quarter, the latest in a series of blemishes for the cosmetics firm.

Avon
Avon

Poor performance in Brazil and Russia were the latest missteps for the company, which has also been pouring tens of millions of dollars into an international bribery investigation and is trying to ignite growth in a sluggish U.S. market.

Those problems were largely to blame for Avon's missing Wall Street's profit and revenue expectations, pushing shares of the world's largest direct seller of cosmetics down 4.4 percent.

Chairman and Chief Executive Andrea Jung put the blame squarely on the company, leading analysts to question how 125-year-old Avon will fix itself.

"Avon has unfortunately become a broken record of promises and disappointments, followed by more promises and more disappointments, over the past decade," said Sanford Bernstein analyst Ali Dibadj.

Jung, Avon's CEO since 1999 and its chairman since 2001, defended the work being done to address the company's issues, including linking executive compensation to an operating margin target that Avon shares with the public.

"Maybe something more drastic needs to happen," Citigroup analyst Wendy Nicholson said during Avon's conference call. "Andrea, it is great that your problems aren't structural, but if they are all execution, well then shouldn't there be a bunch of people who lose their jobs over such awful execution?"

Jung said the company's structure might need to change. She did not say whether anyone would be fired.

Avon overhauled its operations and cut thousands of jobs under a restructuring laid out in November 2005 and updated in February 2009. Its business units have reported directly to Jung since 2006, when president and chief operating officer Susan Kropf retired and her position was eliminated.

Shares of Avon were down $1.30 at $28.05 after falling to $27.34, their lowest level since July.

BRAZIL AND RUSSIA WOES

Tuesday's comments marked the latest admission by Avon that it needs to pay closer attention to its business in emerging markets, where it faces increasing pressure from competitors such as Procter & Gamble, Unilever and Beiersdorf as they sell more cosmetics in stores.

In China, still a tiny market for Avon, it continues to deal with the fallout from a bribery investigation that began there and the slow process of moving to a direct sales model.

Latin America is by far Avon's largest market, accounting for more than 42 percent of sales in 2010, followed by North America with nearly 21 percent and Central and Eastern Europe with more than 14 percent.

In the fourth quarter, revenue rose 11 percent in Latin America on a constant currency basis but just 2 percent in Brazil.

Problems in Brazil stemmed largely from a June 2010 government-mandated switch to electronic invoices that pressured Avon's already outdated systems, Jung said.

In Russia, where constant dollar revenue rose 1 percent, one problem was a new tax rule that cut profits for representatives who reached a certain level in the company, reducing their motivation to recruit. A new compensation plan was put in place at the end of January, Jung said.

PROFIT, SALES MISS EXPECTATIONS

Avon spent about $96 million in 2010 on its investigation into bribery allegations, just above a target of $85 million to $95 million, and plans to spend a similar amount on that probe this year, said Chief Finance and Strategy Officer Chuck Cramb. It spent about $35 million on the investigation in 2009.

The company also spent $83 million, up from $56 million in 2009, to study and improve its direct-selling model and rewards for representatives.

"We want to make sure that they're investing for the long term and that they're ultimately driving sustainable improvements," said Morningstar analyst Erin Lash.

Avon does not issue earnings forecasts. The company expects revenue, in constant dollars, to rise in a mid-single digit range this year after increasing 6 percent in 2010.

It also expects improving operating margins, which it forecast at a mid-teens range by 2013. Operating margin fell 1.8 percentage points to 11.2 percent in the fourth quarter.

Avon earned $229.5 million, or 53 cents per share, in the quarter, down from $269.4 million, or 62 cents per share, a year earlier.

The company recorded restructuring charges of $58 million, or 9 cents per share, in line with what it said last week.

Adjusted earnings from continuing operations fell to $259 million, or 59 cents per share, from $293 million, or 68 cents per share, a year earlier. Analysts had expected a profit of 67 cents per share, according to Thomson Reuters I/B/E/S.

Revenue rose 1.3 percent to $3.18 billion, missing the $3.28 billion estimated on average by analysts.

By Jessica Wohl
(Editing by Maureen Bavdek, Dave Zimmerman and Steve Orlofsky)

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