Avon Rings Up Record Earnings

NEW YORK — Robust volume growth coupled with lower interest expense allowed record earnings to come knocking at Avon Products Inc.’s door in the second quarter of fiscal 2002.<br><br>For the three months ended June 30, the New York-based...

NEW YORK — Robust volume growth coupled with lower interest expense allowed record earnings to come knocking at Avon Products Inc.’s door in the second quarter of fiscal 2002.

This story first appeared in the July 22, 2002 issue of WWD.  Subscribe Today.

For the three months ended June 30, the New York-based direct beauty seller reported net income swelled 12.5 percent to $154.9 million, or 64 cents a diluted share. That compares with last year’s profits of $137.7 million, or 57 cents. Earnings per share beat Wall Street forecasts by a penny.

Consolidated total revenues for the quarter gained 4.1 percent to $1.53 billion from $1.47 billion in the year-ago period. Excluding the impact of foreign currency exchange, sales increased 10 percent, driven by a 12 percent increase in unit volume and a 10 percent rise in the number of Avon representatives.

Also adding to profits was a 31.7 percent reduction in interest expense, to $12.9 million from $18.9 million a year ago.

“Our performance reflects 10 consecutive quarters of strong unit growth,” said chief executive officer Andrea Jung in a conference call with analysts, calling unit growth “broad-based, coming from all our regions. We are very confident in our outlook for the rest of the year. The operating momentum is in fact accelerating from the first half, and we expect local currency sales growth to accelerate in the third and fourth quarters, increasing in the range of 12 percent in the second half. I have never been more optimistic about the health of the company or its long-term prospects.”

Despite the strong showing, Avon’s shares followed the rest of the market down, closing at $43.72, in New York Stock Exchange trading, off $1.20, or 2.7 percent, for the day.

Breaking down the performance by region, in the U.S., Avon’s largest market, sales increased 6 percent as unit volume grew 8 percent and the number of sales reps notched up 2 percent. The sales increases resulted from high-single-digit growth in color cosmetics and personal-care products, as well as high-teen percent increases in jewelry sales and a more than 20 percent surge in apparel and accessories sales. All of that allowed U.S. operating profits to add 11 percent over last year for an operating margin gain of 100 basis points to 21.7 percent.

In Europe, sales rose 20 percent in dollars and 18 percent in local currencies. Units increased 24 percent and the number of representatives advanced 22 percent. Central and Eastern Europe, including Russia, posted sales growth of almost 50 percent. The U.K. also chipped in a 6 percent sales increase to allow the overall European region’s operating profit to expand 21 percent as operating margin increased 20 basis points to 18.3 percent.

In the Pacific region, which includes China, Australia and Taiwan, sales grew 11 percent in both dollars and local currencies. Unit growth amassed to 8 percent, while the number of representatives increased 9 percent. The Pacific region’s operating profits expanded 18 percent, while margins gained 100 basis points to 16.2 percent.

Only the Latin American region missed the party as exchange rates and economic instability caused sales for the quarter to fall 8 percent. However, excluding the impact of foreign currency translation, sales were actually up 10 percent on an 11 percent increase in unit volume and an 8 percent increase in salespeople. But economic turmoil in Argentina hurt the region’s overall performance as operating profits dropped 11 percent and operating margins declined 60 basis points to 22.7 percent.

“This was a quarter that was very much on track and as advertised,” said Jim Gingrich, a Bernstein analyst. “They had very good growth in the States led by their new marketing initiatives and improvements in their catalog and product lines. Eastern Europe is proving to be a big growth area. The only major issue they have is with Latin America, but I like the fact that they are being very conservative there and understand the situation.”

Avon said it was comfortable with the consensus estimate of 47 cents for the third quarter and that it is on track to achieve its full-year target of $2.30.