The first chapter of Avon Products Inc.'s ongoing turnaround plan delivered a dramatic ending, with the direct seller on Tuesday reporting a 17 percent surge in fourth-quarter revenue.
However, the costs tied to the turnaround effort — including increased advertising — hampered net earnings for the fourth quarter ended Dec. 31.
Profits declined by 30 percent to $128.9 million, or 30 cents a diluted share, from $184.1 million, or 41 cents, in the year-earlier period. The stepped-up advertising levels, however, boosted revenue by 17.4 percent to $3.08 billion from $2.62 billion in the prior year. Beauty sales increased 20 percent to $2.1 billion, which Jung noted was one of the biggest increases she's seen during her 15-year tenure at Avon.
For the year, net income gained 11.1 percent to $530.7 million, or $1.21 a diluted share, from $477.6 million, or $1.06, a year earlier, on revenue that climbed 13.5 percent to $9.94 billion, from $8.76 billion.
Avon's two-year restructuring effort, implemented in 2005, was marked by several rounds of layoffs and efforts to trim the product line. Chapter two will focus on sustaining top-line growth and fortifying Avon's global brand equity, said chairman and chief executive officer Andrea Jung.
In the quarter, Avon saw the upside of its multiyear turnaround plan, with all six operating regions contributing to the company's double-digit revenue growth, a 20 percent gain in beauty sales and an 11 percent increase in active representatives.
During a conference call with analysts Tuesday morning, Jung declared, "As we close out the year, I am very pleased with the progress we've made in reigniting strong top-line growth. For the full year 2007, revenues for the company increased 13 percent. That's well ahead of where we thought we would be during this first chapter of the turnaround. The numbers tell the story of just how far we've come."
During the year, Avon spent nearly $370 million on advertising, almost triple its 2005 outlay of $136 million. Going forward, Avon's advertising levels will be more in line with its revenue growth, said Jung.
Despite a weakening economy, Avon's attempt to ratchet up the price for certain new products — including the Christian Lacroix Rouge scent for $32 and the Anew Ultimate Age Repair Elixir for $54 — worked, said Jung.She said the company's analytics revealed that Avon can successfully take price increases, particularly in fragrance and skin care. In fact, she attributed about half of the Avon fragrance business' 23 percent growth to the Lacroix scents. Jung also told analysts to expect similar alliances with designers and celebrities in the second half of the year.
Jung reiterated that Avon has entered the final stretch of its more than half-billion-dollar restructuring plan, which includes cutting 2,400 jobs over the next three years. As announced last month, the total cost of the restructuring effort will increase by $30 million to $530 million. The plan is expected to ultimately save the firm $430 million annually by 2011 to 2012, compared with the original forecast of $300 million.
Now that the restructuring phase is largely implemented, Jung said, "The turnaround plan doesn't change. It just becomes an ongoing blueprint to drive continuous changes" across the firm.
Separating Avon's fourth-quarter results by region, revenues in North America increased 2 percent to $766.5 million, on active representative growth of 3 percent. Revenue in Latin America climbed 28 percent to $989.7 million, driven by double-digit growth in the markets of Brazil and Colombia. Mexico showed strides in terms of revenue growth and the addition of active representatives. "We said that we would stabilize the business by this year and we did that," said Jung, referring to Mexico.
Revenues in western Europe, the Middle East and Africa gained 22 percent to $434.2 million due to strength in Turkey, where revenue increased by more than 50 percent, and revenue growth of more than 10 percent in the U.K.
In central and Eastern Europe, revenue rose 22 percent to $558.6 million, with Russia contributing growth in the high teens. In Asia-Pacific, revenue increased 8 percent to $239.9 million (decreasing 2 percent in local currency), and revenue in China gained 29 percent to $86.6 million.
Turning to the year ahead, Jung said, "We anticipate that revenue growth will be solidly in line with our long-term target of midsingle-digit growth."
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