By  on October 31, 2007

Avon is moving full-steam ahead on its turnaround track.

The direct seller, which will soon enter the third year of its multiyear restructuring plan, reported that net income for the third quarter ended Sept. 30 soared 61 percent to $139.1 million, or 32 cents a diluted share, from $86.4 million, or 19 cents, in the year-ago period.

Increased advertising spending fueled revenue growth of 14 percent, to $2.35 billion from $2.06 billion. Operating profit gained 33 percent to $223.5 million, from $167.5 million, offset somewhat by costs related to advertising, incentives for representatives and a $33 million charge tied to Avon's previously announced Product Line Simplification program.

For the year, net income gained 37 percent to $401.8 million, from $293.5 million, on sales that increased 12 percent to $6.86 billion, from $6.14 billion in the year-ago period.

During a conference call with analysts Tuesday, Avon chairman and chief executive officer Andrea Jung said, "Most important for us at this juncture in the turnaround is that we continued to gain traction reigniting the top line."

Avon accelerated its advertising spending during the quarter by 44 percent to $96 million, and is on pace to spend $375 million in advertising this year, up from $136 million in 2005, when the restructuring plan was introduced.

Jung said that in 2008, Avon's investments will roughly grow in line with sales, and will therefore be more modest than this year's levels.

Bear Stearns analyst Justin Hott said Avon's sales growth is not solely dependent on advertising spending alone, given the direct seller relies on representatives to make the sales pitch to consumers. He added that a pullback in advertising levels will help boost profits.

In the quarter, sales of beauty products gained 16 percent and the number of active representatives increased 10 percent, boosted by Avon's global Hello Tomorrow marketing campaign and the firm's efforts to improve the value proposition for its direct sales force.

To offset the pinch of rising gas prices, Jung said Avon continues to roll out Web-based sales tools and in the quarter distributed free brochures to its direct sales force. "This rep economic switch where we've been able to increase their value proposition is really very sustainable," said Jung, adding that the firm found the reps who received free brochures began purchasing more of them after seeing a sales lift.Hott of Bear Stearns said a slowing U.S. economy may benefit Avon's North American representative base, given the direct seller offers women, and on occasion men, a means to pad their household incomes. He added that while he finds Avon's growing representative ranks encouraging, he is looking for two years of growth on that front. The key, said Hott, "is convincing women that direct selling is a good way to make a living."

He nodded to Avon's increased advertising efforts, saying, "You have to get people believing in the brand." Referring to Avon's third-quarter strides, Hott said, "They are making the right moves for stable growth."

Separating Avon's third-quarter results by region, revenue in North America gained 6 percent, to $605.2 million in local currency, on active representative growth of 6 percent. Revenue in Latin America increased 13 percent, to $854.8 million, bolstered by Brazil's 30 percent revenue growth. Revenue in Western Europe, the Middle East and Africa increased 3 percent, to $292.8 million, while revenue in Central and Eastern Europe rose 12 percent, to $327.4 million, helped in part by more frequent product brochure cycles, which moved to every three weeks from four weeks. Revenue in China — where Avon has 677,000 licensed sales promoters registered with the government — gained 17 percent, to $60.8 million, while Asia-Pacific's revenue dipped 2 percent, to $208.1 million.

Avon's vice chairman, chief finance and strategy officer, Charles Cramb, said the firm is successfully executing its overall restructuring program, which has resulted in $230 million in savings this year.

He noted that the company will continue to implement its Product Line Simplification program. Several analysts said Cramb, who prior to Avon was Gillette's chief financial officer, was successful with a similar effort at the razors and blades firm, and that they expect Avon's plan to follow a similar pattern and reap similar benefits provided the destocking is not too extreme.

Jung declared, "The road map for sustainability is in place. We are using this opportunity to truly write Avon's business model for the future and deliver sustainable, profitable growth going forward."

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