By and  on October 28, 2010

Both Avon Products Inc. and Revlon Inc. generated earnings that fell shy of Wall Street’s expectations, and both attributed at least some of the bottom-line shortfalls to their increased investments in advertising to benefit the top line.

Net income attributable to Avon rose 6.7 percent to $166.7 million, or 38 cents a diluted share, from $156.2 million, or 36 cents, a year earlier. The earnings fell 9 cents short of the 47 cents expected by analysts.

Revenues for the quarter ended Sept. 30 gained 3.9 percent to $2.66 billion from $2.56 billion. Beauty sales increased 5 percent in constant dollars.

“Third-quarter revenues were softer than we had expected,” said Andrea Jung, chairman and chief executive officer. “However we maintained our commitment to strategic growth investments. The third quarter was always planned to be a heavy investment quarter, although the lower-than-expected revenues added further pressure to operating margin. We continue to expect sales growth for the full year of at least midsingle digits in constant dollars, but now expect operating margin to be roughly flat.”

Avon spent $115 million in advertising during the quarter, up 36 percent from $84 million in last year’s period. Analysts pressed Avon about why accelerated advertising levels had not lifted sales higher. But, Jung said, where Avon advertised, sales growth followed. For instance, advertising behind the scent Outspoken by Fergie boosted fragrance sales by 12 percent in constant dollars; marketing for Advance Techniques Frizz Control Lotus Shield grew the hair care business by 17 percent, and buzz around a new acne treatment range “significantly” lifted skin care sales, said Jung.

Chuck Cramb, Avon’s vice chairman, chief finance and strategy officer, noted that several of these categories, including hair care and acne skin care, represent Avon’s aim to address white space in its portfolio. “Those are categories that we are definitely interested in long-term. So we’re excited to build those businesses now,” he said.

For the nine-month period, net income attributable to Avon gained 5.7 percent to $376.8 million, or 87 cents a diluted share, from $356.4 million, or 83 cents a year earlier. Revenues rose 8.5 percent to $7.83 billion from $7.22 billion.

Avon’s shares ended the day at $31.01, down $1.85, or 5.6 percent.

Meanwhile, Revlon’s shares fell $2.95, or 20.8 percent, to $11.21 after the company reported third-quarter net income dropped 45.9 percent. Sales were off 2.2 percent as increases in global markets were unable to offset a 9.3 percent drop in U.S. sales.

Net income landed at $12.5 million, or 24 cents a share, from $23.1 million, or 45 cents, a year earlier. Sales slid to $319 million from $326.2 million and were essentially unchanged when unfavorable currency shifts were excluded. U.S. sales pulled back to $166.7 million from $183.7 million in the 2009 quarter, with color cosmetics under the Revlon and Almay brands accounting for most of the descent.

Recent launches with strong performances included Revlon Grow Luscious mascara and Just Bitten lip stain.

Alan Ennis, president and ceo, noted increases in its advertising were primarily responsible for a $13.9 million increase in selling, general and administrative expenses to $169.3 million. “That’s consistent with what we said during our second-quarter conference call,” he told WWD. “We said we would increase our spending.”

The SG&A increase pulled down operating income, but the operating income margin for the nine months was 13.9 percent of sales, which Ennis characterized as competitive.

He indicated that the U.S. business and efforts to improve the mix between advertising and other marketing activities should benefit from the recent appointments of Julia Goldin as global chief marketing officer and John Collier as senior vice president and general manager for the U.S. “It comes down to people and product, and we’re pleased with both right now,” he said.

In the nine months, net income contracted 13.6 percent to $31.1 million, or 60 cents a diluted share, from $36 million, or 70 cents. Sales ticked up 0.1 percent to $952.2 million from $951.3 million.

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