More than two years into its restructuring plan, Avon Products Inc. has begun to reap the rewards of its labor, reporting that its second-quarter profit more than doubled.
This story first appeared in the July 31, 2008 issue of WWD. Subscribe Today.
“Following 10 quarters of heavy lifting, the second quarter is what it looks like when it all comes together: A business that is healthy and growing on both the top and bottom line,” Andrea Jung, Avon’s chairman and chief executive officer, told analysts during the company’s earnings call Wednesday. “We are doing what we said we would do to turn Avon’s business around.”
She declared the second-quarter performance was the strongest the direct seller has delivered since launching its turnaround plan in late 2005.
Profits for the quarter ended June 30 surged 109.1 percent to $235.6 million, or 55 cents a diluted share, from $112.7 million, or 26 cents, in the year-earlier period.
Increased advertising support helped boost revenue by 17.5 percent to $2.74 billion from $2.33 billion a year ago, with beauty gaining 19 percent to $1.96 billion. By category, color cosmetics gained 26 percent, aided by the refreshed Hello Tomorrow campaign fronted by celebrity spokeswoman Reese Witherspoon; fragrance grew 17 percent; skin care rose 15 percent, and personal care gained 17 percent.
Avon’s upcoming fragrance introductions include Bond Girl 007, Patrick Dempsey Unscripted and U by Ungaro, which Jung said is modeled on the Christian Lacroix launch.
In the quarter, Avon upped its advertising spending by 10 percent to $103 million. Jung said the firm has leveraged analytics to determine appropriate advertising levels, which the company anticipates will be more in line with sales going forward.
Having steadily ratcheted up its advertising over the last two years, Jung said Avon will selectively increase prices by 5 to 10 percent on key innovations. She noted that in the U.K. the company increased prices across its Anew brand by 7 percent. The increase coupled with new product introductions resulted in an 18 percent sales lift.
Avon continues to weed out underperforming items from its mix through its Product Line Simplification initiative. Charles Cramb, Avon’s vice chairman and chief finance and strategy officer, noted that in the U.K. the company trimmed foundation stockkeeping units by 19 percent, while boosting sales 26 percent.
To deal with rising commodity costs, Avon said it will use analytics to support pricing, taking increases where appropriate; continue to create a product pipeline that encourages consumers to trade up, and cut underperforming products.
During the quarter, costs related to its restructuring program were $13 million. Avon maintained the multiyear effort, when fully implemented by 2010 to 2011, is on track to yield annualized savings of $430 million. To date, the cost to implement the plan totals $482 million.
Separating Avon’s fourth-quarter results by region, revenues in North America increased 2 percent to $633.3 million, on active representative growth of 5 percent. Revenue in Latin America climbed 27 percent to $1.01 billion, passing the $1 billion mark for the first time.
Revenues in Western Europe, the Middle East and Africa gained 14 percent to $354.6 million, buoyed by strong growth in Turkey and the U.K. In Central and Eastern Europe, revenue rose 30 percent to $432.6 million, driven by double-digit growth in Russia. In Asia-Pacific, revenue increased 12 percent to $227.2 million, with the Philippines contributing growth of more than 20 percent, and revenue in China gained 20 percent to $77.7 million, on active representative growth of 36 percent.
Cramb declared, “Our second-quarter performance is further, solid evidence that our turnaround plan is working.”�