By  on July 20, 2005

NEW YORK — Touting the triumphs and opportunities in emerging markets within Asia and Central Europe was more difficult than usual for Avon Products Inc. executives Tuesday.

They reported a 19 percent revenue decline in China. The company had expected sales in the region to rise 30 percent.

Management attributed the shortfall to a difficult transition from Beauty Boutiques to direct selling. The hiccup ended up shredding $30 million off of Avon's second-quarter sales. However, the company had plenty else to crow about.

For the three months ended June 30, Avon's net earnings soared 41 percent to $328.6 million, or 69 cents per diluted share, from $232.3 million, or 49 cents, in the prior year on net sales that climbed 6 percent to $1.96 billion from $1.84 billion the prior year. In local currencies, sales rose 2 percent.

Avon beat consensus analysts' estimates for earnings of 66 cents per share, but revised its guidance downward for the second half of the year in order to address weak performance in China as well as Central and Eastern Europe. The company expects revenue growth of 7 to 8 percent, or 6 to 7 percent in local currency, for the full-year period with earnings per share coming in between $2.03 to $2.08.

Despite the softness in China, Andrea Jung, chairman and chief executive officer of the company, said she is optimistic about the direct selling model in the country.

"We intend to aggressively leverage this opportunity [to be the first company to test direct-selling in China]," said Jung on a conference call. "[But] given some of the natural uncertainties surrounding the change, the announcement of the direct-selling test triggered the Beauty Boutique owners to react by reducing their overall volume, moving into a wait-and-see mode. And while our forecast for China assumed some sales impact related to the transition to direct selling, the magnitude of this event was totally unexpected."

Strategically, China as well as Central and Eastern Europe remain the top market priorities for the company. In the fourth quarter of this year, Avon will introduce a comprehensive Beauty Plus business for the first time in Russia, and plans to increase its advertising spending in the country by 40 percent in the second half of the year, compared with the first six months. As a result, it expects a more than 20 percent revenue increase in Russia for the second half of the year.From here, Avon also has the global rollout of the Mark brand — to which it just appointed former Stila executive Claudia Poccia as president — and an aggressive expansion of Avon Wellness into a $1 billion sales machine of its own, in its sights.

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