After a tough end to 2010, Avon Products Inc. regained its footing in the first quarter with profits increasing more than threefold.
This story first appeared in the May 4, 2011 issue of WWD. Subscribe Today.
For the three months ended March 31, net income attributable to Avon was $143.6 million, or 33 cents a diluted share, compared with $42.5 million, or 10 cents a share, in the prior-year period. Adjusted profits of 37 cents a share topped Wall Street estimates by 6 cents.
Total revenue gained 7.5 percent to $2.63 billion, from $2.45 billion a year earlier, boosted by a weak dollar and acquisitions. Revenue in constant dollars increased 4 percent, while total units dipped 1 percent. The number of active representatives declined 1 percent. Gross margin rose 210 basis points to 63.9 percent of sales.
Avon’s pricing mix rose 5 percent, which includes sales of premium-priced products and price increases taken during the quarter.
In fact, price increases helped improve operating profit in certain regions, namely Central and Eastern Europe, where it was up 12 percent, and Western Europe, the Middle East and Africa, up 54 percent.
Beauty sales in the quarter gained 8 percent with gains across all categories: fragrance rose 10 percent; color cosmetics, 6 percent; skin care, 7 percent, and personal care, 8 percent.
The company also outlined plans to reignite sales in Russia and Brazil, two of its key growth markets.
“We are squarely focused on restoring growth in Brazil and Russia in the second half, and ensuring execution in gross margin improvement and cost control,” said Andrea Jung, Avon’s chairman and chief executive officer.
Revenue in Latin America grew 11 percent in constant dollars, while Brazil gained 2 percent. In Central and Eastern Europe, revenue declined 1 percent in constant dollars, with Russia up 1 percent. The North American market remained challenged, with revenue down 2 percent. Revenue in Asia Pacific declined 12 percent, as Avon suffered lower sales as it transitioned to a pure direct selling model in China.
In February — shortly after the company reported that poor performances in Russia and Brazil dragged down fourth-quarter profits — Avon made sweeping changes to its management structure. The firm reorganized its six commercial business units into two major business groups: the Developed Market Group and the Developing Market Group.
Stifel Nicolaus analyst Mark Astrachan wrote in a research note Tuesday, “Overall, while Avon remains a show-me story, we believe the better than anticipated first-quarter result will be favorably received by investors as a step in the right direction, particularly given negative sentiment. Additionally, while there remains work left to do — for example, stem continued sales declines in China and North America — we believe the quarterly result indicates bearish investor expectations regarding share losses for the direct selling industry are unfounded in the near term. As a result, we continue to anticipate an acceleration in sales growth through 2011, led by improving performances in Brazil and Russia.”
During the quarter, Avon continued to shift spending away from advertising and toward its Representative Value Position initiatives. As part of this “rebalancing,” advertising was $82 million for the quarter, down 15 percent from a year ago, particularly as it has halted advertising in China until the direct selling model is fully up and running. Avon invested an incremental $30 million in RVP, or initiatives designed to make selling more streamlined for representatives.
Shares finished the day at $30.91, up $1.34, or 4.5 percent.