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Avon Products Inc., which reported a first-quarter profit decline due to restructuring costs and the devaluation of Venezuela’s currency, addressed the company’s internal investigation into allegations of bribery during an earnings call with analysts Friday.
Avon chairman and chief executive officer Andrea Jung said the voluntary investigation into the alleged bribery of Chinese government officials, which it first disclosed in October 2008, currently includes all of Avon’s international regions. “The allegation that triggered our investigation was in China only,” emphasized Jung.
“The allegations came in the form of a letter written directly to me,” said Jung. “I immediately turned the letter over for proper handling and we began an internal investigation under the oversight of our audit committee and conducted by outside counsel. Most importantly, we voluntarily self reported the allegations to the U.S. Securities and Exchange Commission, as well as the Department of Justice.”
Avon said costs related to the investigation are between $7 million and $8 million a month.
Net profits attributable to the company fell 64 percent to $42.5 million, or 10 cents a diluted share, from $117.3 million, or 27 cents, a year earlier. Adjusted earnings came in at 33 cents a share and beat Wall Street’s estimate by a penny.
Revenues for the three months ended March 31 rose 13.9 percent to $2.49 billion from $2.19 billion. Beauty sales gained 14 percent to $1.78 billion, compared with the year-ago quarter, on active representative growth of 6 percent, with includes gains in all regions but China.
In regards to Avon’s business in China, Jung also outlined plans, over the next 18 months, to shift away from beauty boutiques and more fully toward the direct-selling model. She said there are approximately 5,000 beauty boutiques in China, and one-third of them engage in direct selling. Avon estimates its transition efforts will prompt another one-third to convert to direct selling, as well. Avon named René Ordóñez as general manager, Avon China, where the company has more than one million sales promoters. Ordóñez was formerly general manager of Southern Latin America, where Jung said Avon has eight representatives for every 1,000 customers.
During the quarter, Avon increased its advertising spending — which includes efforts to recruit sellers — by 23 percent, to $96 million, compared with the prior-year period. It also completed the acquisition of Liz Earle Beauty Co., which manufactures the Liz Earle Naturally Active Skincare brand. By region, Latin America’s revenue was up 22 percent on a reported basis, and the number of active representatives grew 7 percent.
In North America, revenue, dragged down by lower average order sizes, declined 2 percent, while active rep growth gained 2 percent. Nonbeauty sales declined 6 percent, as Avon continues to retool its U.S. mix away from these categories toward hair care, skin care and baby care. “As long as we are not taking things out and not putting things back in [the sales channel], the basket size will continue to grow,” said Jung.
In Central and Eastern Europe, revenue climbed 28 percent, as active rep growth gained 12 percent, and in Western Europe, Middle East and Africa, revenue increased 23 percent, on a 17 percent increase in reps. Asia-Pacific revenue gained 10 percent, on rep growth of 6 percent.
In China, revenue slid 31 percent, and active rep growth declined 25 percent. Asked by several analysts if China’s challenges were tied to negative publicity surrounding allegations of bribery, Jung reiterated its performance was the result of the transition away from a hybrid model of beauty boutiques and sales promoters toward one of direct selling.