Avon Fourth Quarter Net Hits $232.4M

Pressured by the recession, Avon Products managed to boost profits by 80.3 percent.

A gust of economic headwinds at the end of 2008 pressured Avon Products Inc.’s fourth-quarter sales, but the direct seller still managed to boost profits by 80.3 percent.

This story first appeared in the February 4, 2009 issue of WWD.  Subscribe Today.

“The story of 2008 is a tale of two chapters: A very strong first half and a tougher finish,” the company’s chairman and chief executive officer Andrea Jung told analysts Tuesday.

Net income for the three months ended Dec. 31 rose to $232.4 million, or 54 cents a diluted share, from $128.9 million, or 30 cents, in the year-ago period. Net revenue declined 8.7 percent to $2.81 billion from $3.08 billion, hampered by unfavorable foreign exchange and the weakened economy. Selling, general and administrative expenses, however, fell faster than revenues, declining 11.2 percent to $1.38 billion.

“It is prudent to assume these pressures will continue for the foreseeable future, and we therefore anticipate that 2009 will be a challenging year,” said Jung.

Earnings for the full year gained 64.9 percent to $875.3 million, or $2.04 a diluted share, on revenue growth of 7.6 percent to $10.69 billion.

The results helped lift shares of Avon $1.66, or 8.6 percent, to $21 in New York Stock Exchange trading Tuesday.

To tap into consumers’ growing money concerns, Jung said Avon has levered up representative recruitment, shifting a greater percentage of its advertising budget to these efforts, which include attending job fairs and mining Web sites for job-seekers. For instance, Avon ran recruitment TV ads in the lead-up to the Super Bowl on Sunday. A similar effort is under way in the U.K.

Jung said, “With unemployment increasing dramatically in the United States and with recessionary fears spreading, promoting Avon’s income-generating opportunity will be our most critical focus in 2009.”

Avon’s number of active representatives grew 4 percent and 7 percent in the fourth quarter and full year, respectively.

She added Avon’s increased advertising budget will help buffer the direct seller from continued economic headwinds. Avon’s advertising spending reached $391 million in 2008, nearly three times the level in 2005.

Beauty sales in the quarter declined 7 percent to $1.96 billion, dragged down by the impact of foreign exchange. In local currencies, sales increased 4 percent, as all categories gained, particularly fragrance and skin care. For the year, beauty sales rose 10 percent to $7.6 billion, or 7 percent in local currency. Color cosmetics gained 11 percent; skin care was up 10 percent; personal care rose 8 percent, and fragrance increased 9 percent, boosted by high-profile alliances and endorsements. Jung noted that Avon’s Bond Girl and Ungaro scents performed particularly well, and together generated $100 million in revenue in the fourth quarter.

By region, fourth-quarter revenue in North America declined 11 percent, or 9 percent in local currency, to $681.3 million and units were down 6 percent, compared to the year-ago period. Active representatives ticked up 1 percent.

In Latin America, revenue dipped 5 percent to $944.3 million, as unfavorable exchange more than offset an 11 percent gain in local currency, driven by double-digit gains in Brazil, Venezuela and Mexico, which was once a troubled market for Avon.

In Central and Eastern Europe, revenue declined 14 percent $482.9 million, or 3 percent in local currency, as consumers tightened their purse strings while Avon rolled out a holiday strategy focused on more premium price points. In Western Europe, the Middle East and Africa, revenue dropped 16 percent to $364.3 million, as foreign exchange offset a 2 percent gain driven by the U.K. and Turkey. In Asia-Pacific, revenue declined 6 percent to $225.2 million and was flat in local currency. China, once again, was a bright spot. Revenue gained 27 percent to $109.6 million, or 17 percent in local currency, and active representatives rose 88 percent, giving Avon a base of nearly one million reps in a three-year time span, said Jung.

The ceo reiterated Avon is in “a constant turnaround mentality.” Three years into its multiyear restructuring program, the company’s cost-cutting efforts are expected to result in savings of $300 million this year. Once restructuring initiatives are fully implemented by 2011 to 2012, Avon reiterated it expects to achieve $430 million in annualized savings.

“There is no doubt that 2009 will be one of the most difficult years in business history,” said Jung. “Our commitment here at Avon to shareholders is to manage what we can manage and manage it well. We are going to keep on doing all the right things for the business just as we have done. Opening new doors and bringing in new representatives and customers into the store. We will build on our 123-year experience and our bold turnaround over the past three years.”