By  on May 3, 2005

NEW YORK — Despite softer sales in key markets, Avon Products Inc. delivered a 16 percent increase in net income for the first quarter on sales that rose 7 percent.

Avon posted net earnings of $172 million, or 36 cents per diluted share, up from $148.1 million, or 31 cents, in the prior year on sales that climbed to $1.86 billion from $1.74 billion.

The company beat Wall Street’s estimates for the first quarter by a penny, and also raised its full-year earnings outlook to a range of $2.12 to $2.17 per share up from $1.95 to $2 per share, due to tax-audit settlements.

Even as total sales showed strength, though, the U.S. and the U.K. remained weak spots for the company, dampening strong sales internationally.

In the U.S., beauty sales declined 10 percent. Beauty Plus sales increased 10 percent, and Beyond Beauty Sales were down 12 percent, reflecting Avon’s repositioning strategy in the country. The company is optimistic that new products will jump-start excitement in the U.S. market in the coming year.

“Overall, the innovation pipeline is a lot stronger, and our merchandising platforms are better,” said Susan Kropf, chief operating officer, on a conference call. “Between the field and our marketing plan, I do think that the second half will be considerably stronger than the first half for the U.S.”

In the U.K., skin care sales declined in the double digits, dragging down the total revenue in that market by 3 percent in the quarter. Andrea Jung, chairman and chief executive officer, said a weak consumer economy and major product launches in 2004 contributed to its sales difficulties.

“[The U.K.] is being impacted by high interest rates and rising fuel prices,” said Jung. “In fact, March retail sales were reported to be the worst since 1992.”

Central and Eastern Europe and the Asia-Pacific, however, continued their strong sales growth. In Russia, revenue increased 24 percent, and the company expects it will reach its goal of $800 million in revenues in 2007. In Asia, China was the biggest contributor to growth, with a 40 percent increase in revenue.Like other major beauty companies, Avon is counting on China to be one of its major expansion opportunities. In April, the Chinese government approved Avon to be the first company allowed to use direct selling in China. Avon is testing a selling model in Beijing, Tianjin, and in two cities in the Guangdong Province.

“We believe that the test gives us a first-move advantage at whatever time the final regulations are issued [by the Chinese government],” said Jung. “We’re optimistic, we always have been, about the long-term substantial growth we see coming from China in the years ahead and now even more so in light of the recent developments.”

Avon does not expect the testing of the new Chinese selling model to materially affect sales right away, but expects to establish a partnership with the Chinese government to build a hybrid model of retail sales and direct sales. The company plans to invest roughly $7 million in building business in China in 2005.

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