By  on October 30, 2006

NEW YORK — As Avon Products Inc. posted a steep drop in third-quarter profits Friday, Andrea Jung, chairman and chief executive officer, outlined a new strategic plan to clean house and bolster earnings by slimming down the direct seller's product assortment.

Called "Product Line Sim­plification," the initiative is designed to reduce the company's total stockkeeping units by a range of 25 percent to 40 percent to allow Avon to focus more resources on less product.

For the three months ended Sept. 30, the company said net income fell 47 percent to $86.4 million, or 19 cents, from $163.8 million, or 35 cents, in the year-ago period as overall revenue increased 9 percent to $2.06 billion. Revenues were boosted by stellar sales growth in Brazil.

Operating profit for the quarter fell 32 percent, to $168 million, pulled down by $16 million in costs related to its restructuring program and $40 million in inventory expenses related to its product trimming.

"I'm confident that our turnaround plan is the right one, said Jung. "We are investing back in the business at higher levels than we had planned."

With the company's de-layering initiative, or layoffs, behind it, Jung said the "organization has settled down," and that its restructuring actions would yield about $100 million in savings this year. Avon expects the cost-cutting effort to reap $300 million in annualized savings.

"This is an important first step," Charles Cramb, Avon executive vice president of finance and technology and chief financial officer, said of the de-layering in previous quarters. "It has a quick financial payback," he said, adding that Avon has adopted, "a mind-set where we continue to evaluate what we can do and at what cost."

Jung noted the firm will unveil a major color cosmetics initiative next year, saying, "We are reenergizing our largest global brand for Avon, Avon Color, in 2007."

For the nine-month period, net income dropped 56 percent to $293.5 million, or 65 cents a share, from $664.4 million, or $1.40, in the prior year, on revenues that gained 7 percent to $6.14 billion from $5.75 billion from a year ago.By region, sales in North Am­erica dipped 1 percent to $570.2 million with a 2 percent decline in active representatives, despite Avon's investments to improve incentives for its sales force. Meanwhile, Latin America saw sales surge 28 percent in U.S. dollars to $707.5 million, fueled by 40 percent top-line growth in Brazil and offset somewhat by softness in Mexico, where revenues decreased 4 percent.

Backed by aggressive advertising and a push to recruit representatives, China saw sales grow 9 percent in U.S. dollars (and 7 percent in local currency) to $49.3 million. Jung reported Avon had recruited 236,000 certified sales representatives, each registered with the government, by the end of the quarter.

Sales in Western Europe, the Middle East and Africa rose 8 percent to $261.3 million, and sales in Central Europe ticked up 2 percent to $269 million. Revenue in the Asia-Pacific region fell 3 percent to $201.3 million, as Avon closed Indonesian operations.

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