By  on August 1, 2007

Despite a hefty sales gain, Avon Products Inc.'s second-quarter earnings fell 25 percent year-over-year due to numerous items and expenses related to its ongoing restructuring plan.

"We continue to aggressively implement our four-point turnaround plan," said Andrea Jung, Avon's chief executive officer, in a conference call. "Active representatives grew 9 percent in the quarter, the largest increase in two years as our Representative Value Proposition initiative began to take hold."

Jung referred to Avon's RVP, its employee recruitment and retention program. In November 2005, Avon launched a multiyear restructuring program focused on driving revenue growth through organizational changes; a global manufacturing strategy; supply chain procurement and distribution; and outsourcing to low-cost countries.

For the quarter ended June 30, Avon posted net income of $112.7 million, or 26 cents a share, down from income of $150.9 million, or 33 cents a share, in the year-earlier period on sales that swelled 12 percent to $2.3 billion from $2.06 billion.

The quarter's results include a $61 million charge for Avon's product line simplification plans, a $21 million restructuring charge and $71 million pretax funding for advertising and other programs.

According to Yahoo Finance, analysts expected second-quarter revenue of 42 cents a share on revenue of $2.3 billion. Shares closed Tuesday at $36.01, down by $2.84, or 7.31 percent.

Avon said second-quarter revenue for its North American region was flat year-over-year as the average size of orders decreased due to "last year's strong product innovation in the skin care category." The company noted that this year's skin care launches are planned for the back half of the year.

"With deal momentum going into the second half but the strong product pipeline backed by continued higher levels of advertising, we anticipate third-quarter revenue growth in North America should be more consistent for that represented growth," Jung said on the call.

Bear Stearns analyst Justin Hott noted that, in general, when a company restructures, top-line improvements are usually seen first, with income growth following. But Hott warned not to discount Avon's restructuring plan based on the numbers — as the company made substantial second-quarter investments in advertising.

However, Hott said, "the 2008 margin story becomes less compelling."Hott pointed to Avon's comments on the conference call alluding to the company's 2008 margins, which will "approach" 2005 levels — instead of Wall Street's hope that margins would exceed Avon's pre-restructure levels.

"This is a margin story," Hott said. "The worry right now is that they are going to have to spend more to attract more reps; the business may require a long-term fix of a long-term investment."

Goldman Sachs analyst Amy Low Chasen said not all Avon news was bad. "Sales were better on foreign exchange, with mixed regional performance, but there were encouraging signs in Mexico and a notable rep recovery in the United States," said Low Chasen in a research note. "On the flip side, advertising and RVP investments were much higher than expected and likely to remain so for the remainder of the year, which could delay the expected operating margin recovery."

During its second quarter, Avon repurchased $280 million of stock. To date, the company has repurchased $758 million of stock. Its current buyback authorization is $1 billion.

Ferrovial Said Looking to Sell Airport Retail Network

LONDON — It seems that Ferrovial is shopping around its World Duty Free airport retail network.

The Spanish infrastructure group, which last year bought the British Airports Authority and World Duty Free, BAA's retail division, may sell the chain of 65 stores, according to press reports Monday citing Ferrovial's finance director, Nicolás Villén.

"Following its acquisition by Ferrovial in June 2006, all BAA's noncore airport activities, in which World Duty Free sits, were placed in a strategic review," said a statement from World Duty Free. "This review is ongoing and no announcements are planned. It remains very much business as usual for World Duty Free, with its program of growth and investment continuing apace."

A Ferrovial representative could not be reached for comment at press time.

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