Avon Income Declines 36.5% in Quarter

Currency effects hit profits for Avon.

Avon Products Inc.’s recruiting efforts built its sales force to its highest level ever, and those representatives are finding more potential customers at home because of the stalled economy. But they’re also finding consumers clutching their wallets more tightly than ever, prompting the direct seller to emphasize lower-priced goods to help boost the bottom line after seeing profits fall in the first quarter.

This story first appeared in the May 6, 2009 issue of WWD.  Subscribe Today.

Avon launched the largest recruitment effort in its history at the end of the period, nearly doubling its advertising budget for that purpose during the three months, Andrea Jung, chairman and chief executive officer, told analysts during the company’s earnings call Tuesday.

The direct seller boosted its sales representative base by 30 percent in March and 20 percent for the three months. “We exited the quarter with more than 9 million representatives on board,” said Jung. “That’s one million more than we had at the end of the first quarter last year. It is an all-time high for this business.”

However, currency fluctuations and the recession sent the company’s net income down 36.5 percent to $117.3 million, or 27 cents a diluted share, from $184.7 million, or 43 cents, in the year-ago period. Excluding charges, EPS was 29 cents, 4 cents below what analysts had expected. Sales for the quarter ended March 31 fell 12.9 percent to $2.18 billion from $2.5 billion, but were up 3 percent on a local currency basis.

Avon shares ended Tuesday’s trading session at $23.08, down $2.14 or 8.5 percent.

The company continues to tap into consumers’ money concerns by emphasizing lower-priced “smart value” products in its brochures and by stepping up efforts to recruit representatives. In the quarter, Avon shifted a greater percentage of its $78 million advertising budget — as it did in the prior quarter — to attract new reps. The number of active representatives, or reps who sell product, grew 7 percent in the quarter.

During the earnings call, Jung told analysts one TV ad line, in particular, seems to have resonated most with potential representatives: “I can’t be laid off.”

Avon also is finding consumers’ money consciousness is not just a phase. Jung pointed to research that indicates consumers are buying less, paying more attention to price and switching to less-expensive options. Avon’s “smart value” initiative aims to tap into what Jung dubbed “the new normal” of restrained consumer spending.

The company said about 70 percent of the items in its portfolio are priced under $5, and that sales of those items have gained 12.5 percent over the prior year since Avon introduced its smart value message at the end of the quarter.

Still, Avon’s beauty sales in the quarter declined 12 percent to $1.96 billion, but increased 5 percent in local currencies. Beauty units gained 2 percent, and overall units were flat with 2008. By category, color cosmetics, fragrance, personal care and skin care fell 9 percent, 10 percent, 9 percent and 17 percent, respectively, on a reported basis.

By region, first-quarter revenues in North America declined 11 percent, or 10 percent in local currency, and units were down 9 percent, compared with the year-ago period.