Avon Products’ turnaround plan is firing on all cylinders, chairman and chief executive officer Andrea Jung told analysts Tuesday.
For the first quarter ended March 31, Avon’s net income soared to $150 million, or 34 cents a diluted share, from $56.2 million, or 12 cents, in the year-ago period. As in the last quarter, accelerated advertising spending fueled revenue growth of 9 percent, to $2.19 billion from $2 billion, with all six of the company’s operating regions contributing to the growth. Operating profit nearly tripled, to $237.8 million from $86.2 million, offset somewhat by about $10 million in costs tied to the restructuring program.
During the quarter, the direct seller of beauty products bolstered its advertising spending 80 percent, to $71 million. The sum included the global launch of Avon’s marketing campaign, Hello Tomorrow, an effort that includes new advertising, recruiting materials and products.
The previously announced cost-cutting measures include “delayering” top management ranks, streamlining the U.S. distribution network and reducing stockkeeping units through Avon’s Product Line Simplification program and Strategic Sourcing Initiative.
Despite Avon’s strong quarter, the market’s reaction wasn’t completely congratulatory. Several analysts scratched their heads over Avon’s new fragrance deal with Christian Lacroix, declaring the luxury brand too esoteric for Avon’s mass market customer base. During the conference call Tuesday, Lehman Bros. analyst Lauren Lieberman said she understood Avon’s decision to sign actress Jennifer Hudson to front its Imari fragrance brand, but did not get how Christian Lacroix resonates with Avon’s customers.
Jung noted Avon’s link with Christian Lacroix fits into the firm’s tiered pricing strategy. The upcoming scents, Noir for men at $28 and Rouge for women at $32, are at the high end of Avon’s pricing structure, she said.
“Slowly, we are moving the price tiers up, backed by advertising and innovation,” said Jung.
After the call, Credit Suisse analyst Filippe Goossens, referring to the Christian Lacroix deal, commented, “I don’t think it will meaningfully move the needle in North America because it does not target Avon’s core customer. The positioning of the brand is too high for Avon’s customers.” He added that Avon’s core did respond well to the Derek Jeter Driven fragrance. The scent, which taps into Americans’ fondness for baseball, contributed $10 million in sales last quarter. “A new brand like Driven will likely resonate more with the U.S. consumer.”Separating Avon’s first-quarter results by region, North America’s revenue gained 3 percent, to $630.6 million. Revenue in Latin America increased 7 percent, to $656.3 million, offset by Mexico, where revenue slid 9 percent. Revenue in Western Europe, the Middle East and Africa increased 17 percent, to $271.6 million, fueled by the U.K. and Turkey, and in Central Europe, revenue gained 17 percent, to $358.9 million. Asia Pacific revenue increased 5 percent, to $199.8 million. Revenue in China grew 44 percent, to $68.1 million. At the end of March, Avon had more than 500,000 licensed sales promoters registered with the government. Jung commented, “We continue to believe China is going to be a big success for this company with this hybrid model” of licensed sales promoters and beauty boutiques.
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