Shares of Avon Dive on News of SEC Probe

Beauty company received a subpoena Wednesday related to its contact with Wall Street analysts.

NEW YORK — The pressure is growing on Avon Products Inc. and its chairman and chief executive officer Andrea Jung.

This story first appeared in the October 28, 2011 issue of WWD.  Subscribe Today.

Shares of the beauty company sank 18.3 percent in trading Thursday after the company disclosed in a regulatory filing that the U.S. Securities and Exchange Commission had issued a subpoena Wednesday requesting information regarding its contacts with Wall Street analysts. It is the second SEC investigation into the company’s activities.

The news coincided with Avon reporting disappointing third-quarter results.

The company’s shares fell $4.20 to close at $18.81 in trading on the New York Stock Exchange. More than 31.5 million shares traded, versus a three-month average volume of nearly 4.6 million shares.

Avon said Thursday in its quarterly filing with the SEC, or Form 10-Q, that it received a subpoena for documents and information in connection with an investigation of the firm’s “contacts and communications with certain financial analysts and other representatives of the financial community during 2010 and 2011.”

The filing also said the SEC issued a formal order of investigation of the matter, as well as an earlier disclosed probe from June 2008 regarding compliance issues on its international operations. The initial internal investigation was of Avon’s Chinese operations’ compliance with the Foreign Corrupt Practices Act. The law prohibits the bribing of foreign officials. Four executives were fired in May, and the investigation, which Avon voluntarily disclosed to the SEC, then spread to its operations in other countries.

Avon said in the filing the company “intends to cooperate fully with the SEC’s investigation.”

The company on Thursday posted third-quarter results for the period ended Sept. 30 that showed income attributable to Avon declined 1.5 percent to $164.2 million, or 38 cents a diluted share, from $166.7 million, or 38 cents, a year ago. Total revenues rose 5.7 percent to $2.76 billion from $2.61 billion. Revenues included a 4.9 percent gain in sales to $2.71 billion from $2.58 billion.

For the nine months, income attributable to Avon rose 36.4 percent to $514 million, or $1.18 a diluted share, from $376.8 million, or 87 cents, a year ago. Revenues rose 7.3 percent to $8.25 billion from $7.69 billion.

Some analysts who participated in Avon’s third-quarter earnings call Thursday morning described the results and news of the SEC probe as “unfortunate” and “frustrating.”

Jung, in response to a question from an analyst during a conference call on why investors should believe that management has control over the business, said, “Right now, our focus is to fully review every aspect of this business market by market and role by role. All of the next steps are going to be based on facts and we’ll be done with the review to what’s right for enterprise for Avon long term. That’s what we’ve got to do.”

As for the probe, Jung said it was her understanding that “it’s not uncommon to have a formal order in connection with an SEC investigation.”

Connie Maneaty, analyst at BMO Capital, said, “Earnings misses have been going on for longer than seems reasonable and every quarter there is an explanation but also retroactive. It seems it’s always a look back as to what went wrong as opposed to being able to anticipate.”

Maneaty pointed to other beauty firms who she said have fared better, including the Estée Lauder Cos. Inc., Procter & Gamble Co. and Revlon Inc., and that other direct sellers have had positive results. “That says that there is a management issue at Avon,” she said.