Charges Bite Into Avon Net

<?XML:NAMESPACE PREFIX = CS /><CS:BOLD>NEW YORK -- With its fourth-quarter profits zapped by special items, Avon Products Inc. said that in 2002 it will pause its retail expansion of BeComing and may take more charges to realign its...

NEW YORK — With its fourth-quarter profits zapped by special items, Avon Products Inc. said that in 2002 it will pause its retail expansion of BeComing and may take more charges to realign its business.

The direct marketer of cosmetics, based here, had a rosy outlook for the longer term, though, with operating profit margins picking up 250 basis points, for about $150 million in additional profits, by 2005.

Net income for the three months ended Dec. 31 sunk 44.2 percent, to $110.3 million, or 46 cents a diluted share, compared with $197.5 million, or 81 cents, a year ago. Results included a $94.9 million pretax charge, two-thirds of which was for facility closures and severance, while the remainder covered organization realignment costs. The 2000 period also included a $34.7 million, or 14 cents per share, one-time benefit. Operating profits before special charges grew 9 percent, to $285.5 million from $261.9 million.

Sales for the quarter were up 5.6 percent, to $1.75 billion from $1.66 billion a year ago. On a constant currency basis, sales advanced 9 percent, in tandem with identical increases in units and active representatives.

“The key to this story is unit volume growth. Where else do you get 7, 8 or 9 percent increases?” Banc of America Securities analyst William Steele asked, noting that The Estee Lauder Cos. and Procter & Gamble have been unable to reach that level recently. “Avon is the unit volume leader,” asserted Steele.

U.S. sales gained 10 percent, with a 12 percent uptick in operating profits, excluding year-ago asset write-downs. Although there was strength elsewhere in the world as well, Argentina’s sales and profits were down “significantly” due to that country’s recession.

Overall cash flow increased $82 million over year-ago levels. For the full year, cash flow was up $291 million, excluding special items, well beyond the $100 million to $150 million expected at the beginning of the year.

As reported, Avon on Friday said that it would close its jewelry manufacturing plant in San Sebastian, Puerto Rico, and will now purchase finished jewelry from Asia. The move will eliminate 320 jobs and marks the firm’s exit from jewelry manufacturing.

The closure was part of the firm’s business transformation initiative, which may also effect $100 million to $150 million in additional pretax charges in 2002. Some savings may come from more closures and an increased use of outside vendors.

Steele said the initiative was “wringing cost out of the system and investing it to drive future unit volume growth. It’s really an evolutionary process that started in 1998.”

Savings from the program during the year are projected at $50 million, which will be partially offset by transition costs of $15 million to $20 million. By 2004, though, Avon expects to be saving $80 million to $90 million. Operating margin improvement related to the business transformation initiative is projected to total 50 basis points this year and 100 additional points in both 2003 and 2004.

In the immediate future, however, Avon will be focusing on its core direct business and keeping a close eye on Argentina, while the fledgling BeComing retail business, currently in 92 J.C. Penney Co. doors, sits on the back burner.

On a conference call, chairman and chief executive officer Andrea Jung noted: “The brand is great, our timing in this retail environment has not been great.” Sales, although still encouraging, were “a little bit slower than expected,” said Jung.

Avon was planning to roll out the program with a new retail partner, since Sears, Roebuck & Co. dropped out last year, and expand in Penney’s, but the ceo said Avon would be more “conservative” with the concept instead.

For the year, net income dropped 10.1 percent, to $430 million, or $1.79 a diluted share, against $478.4 million, or $2.02, in 2000. Special charges drove down net income for 2001 by $73.4 million, or 30 cents a diluted share. Sales for the 12 months were up 4.9 percent, to $5.99 billion from $5.71 billion, but were up 10 percent on a constant currency basis.