By  on February 3, 2006

NEW YORK — Avon Products' fourth-quarter profit fell almost 37 percent, hurt by restructuring costs and higher-price discounting.

Citing restructuring initiatives, including halving the number of management layers, chairman and chief executive officer Andrea Jung said during a conference call with Wall Street analysts Thursday that the focus will be on fortifying the company's midtier brands, such as Avon Solution and Avon Color. The former will include antiaging technology, while the latter will receive a "360-degree brand makeover" this year. In addition, advertising expenditures are anticipated to rise 50 percent, with the U.S. market representing the biggest increase.

"The company's totally committed to making the changes that will be necessary to strengthen our business for the long term," Jung said on the call. "In recent months, I think we've made a good start on this journey. As we begin 2006, we do so with a clear-eyed view of our current challenges, but also a clear plan to address them and a continuing sense of the opportunities ahead."

For the three months ended Dec. 31, income fell by 36.7 percent to $183.2 million, or 40 cents, compared with $288.8 million, or 61 cents, in the same year-ago quarter. Excluding restructuring costs, earnings per share would have been 50 cents. Total revenues rose by 3.8 percent to $2.40 billion from $2.31 billion, with sales gaining 3.9 percent to $2.37 billion from $2.29 billion. The earnings-per-share consensus estimate was 43 cents on sales of $2.33 billion, according to a poll of analysts by Thomson First Call.

For the year, income was essentially flat at $847.6 million, or $1.81 a diluted share, versus $846.1 million, or $1.77, last year. Total revenues were up 5.2 percent to $8.15 billion from $7.75 billion, while sales rose by 5.3 percent to $8.07 billion from $7.66 billion.

"While [fourth-quarter] sales and EPS were ahead of our estimates, we still believe 2006 will be a difficult year with lots of moving parts," Goldman Sachs analyst Amy Low Chasen wrote in a research note. "We see challenges in China, [central and Eastern Europe], Mexico, [United Kingdom] and the U.S. Further, margins will be hampered by the combination of significant restructuring charges as well as a significant ramp in marketing spend and other investments,"Shares of Avon Thursday fell 30 cents on Thursday, closing at $28.06 in New York Stock Exchange trading.

Jung told analysts that the company increased the number of operating business units to six from four and renamed them Commercial Business Units. China has become a CBU, as well as central and Eastern Europe, joining other units such as North America and Latin America. Under the new model, the six CBUs join two global business units, which are responsible for brand marketing and the global supply chain. She also said Avon has more layers of management than its competitors, and that the company is in the "process of streamlining and flattening the organization, actually cutting the number of management layers virtually in half."

Restructuring costs in the quarter were $56 million, mostly for severance items.

The company projected full-year 2006 revenue to be flat to slightly higher than 2005's base of $8.1 billion. Avon will incur further costs during the year as it proceeds with the restructuring.

By geography, U.S. fourth-quarter revenue declined 7 percent. Sales of beauty products were 9 percent lower year-over-year, with decreases in all categories, the company said. Beauty Plus sales rose 8 percent, while Beyond Beauty sales fell by 21 percent. Revenue in Europe rose 2 percent, but grew by 27 percent in Latin America. Revenue in Asia Pacific fell 7 percent, hurt in part by a 22 percent drop in China as Avon's Beauty Boutique owners placed smaller orders in connection with the anticipated resumption of direct selling.

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