By  on May 1, 2006

NEW YORK — Hurt by expenses from its previously announced three-year restructuring program, Avon Products Inc. reported first-quarter net earnings fell by two-thirds, despite sales that increased 6.5 percent to just over $2 billion.

"We are pleased that as the year began we came out of the gate with a great sense of energy and urgency," Andrea Jung, chairman and chief executive officer of Avon, said on a post-earnings conference call with Wall Street, referring to the firm's turnaround efforts. Belt tightening will also include the closing of the company's iconic Trump Tower Avon Salon & Spa, which opened in 1998 at 725 Fifth Avenue.

Jung said on the call, referring to the spa closure, that the company wants to "focus our investment to drive the kind of return in which ways that are globally going to take the brands to the next level."

She added: "We [are] committed to restoring Avon's sustainable growth as we go forward. That's our destination. We have got one quarter behind us, but I think we are taking good first steps on the journey."

For the three months ended March 31, Avon earned $56.2 million, or 12 cents a share, down 67.3 percent from $172 million, or 36 cents, a year ago. Analysts had been calling for a profit of 27 cents.

Operating profit fell 67 percent to $86.2 million, negatively impacted by $12 million due to the adoption of stock option expensing. In addition, the operating profit was hurt by $120 million in costs related to implementing the restructuring, which included such initiatives as outsourcing customer service transactions and exiting certain unprofitable operations.

As a result, operating margin in the quarter significantly declined to 4.3 percent from 13.9 percent a year ago. Also part of the restructuring efforts, the company upped by 57 percent to $40 million its advertising spending in the first quarter in order to increase brand competitiveness, particularly in skin care.

"Some early proof points confirm our belief that the combined power of improved product innovation and increased advertising are the formula for sustainable growth in this business," Jung said on the call.

First-quarter net revenues were $2 billion, up from $1.88 billion a year ago. By region, sales in North America were up 3 percent at $613.8 million, while Latin America saw sales rise 28 percent in U.S. dollars to $612.6 million. Sales in China were down 27 percent in U.S. dollars to $47.4 million and sales in the Asian-Pacific region dropped 11 percent in U.S. dollars to $190.4 million.In all, New York-based Avon expects to save $300 million annually when the restructuring — which also includes removing layers of management and realigning global manufacturing, procurement and distribution processes — is complete. Restructuring plans were first announced in mid-November following a tough 2005 when net earnings were flat at about $850 million and revenues rose 5.2 percent to $8.15 billion.

Avon reiterated in a filing with the Securities and Exchange Commission last Monday that the estimated cost of the restructuring increased to about $500 million from an initial estimate of $300 million to $500 million, before taxes. In the filing, the company also said its board approved the elimination of an additional 1,300 jobs, which should be completed in 2006. About $70 million in charges were taken the first quarter as a result of the employee terminations, the company said in the filing. Over 3,300 job reductions have been announced since restructuring plans were revealed.

Shiseido Returns to Profitability in '05
TOKYO — Shiseido Group traded in red ink for black when it came to net income for the fiscal year ended March 31.

On a consolidated basis, net income was 14.4 billion yen, or $131.1 million, from last year's net losses of 8.9 billion yen, or $81.1 million. This was "despite reporting an extraordinary loss related to the application of impairment accounting, as well as an impairment loss on a U.S. subsidiary," the company noted.

Sales increased 4.9 percent to 671 billion yen, or $6.11 billion, from 639.9 billion yen, or $5.83 billion, a year ago. Domestic sales were up 2.1 percent to 473.7 billion yen, or $4.31 billion, and overseas sales grew 12.3 percent to 197.2 billion yen, or $1.8 billion.

Income from operations jumped 37.8 percent to 38.9 billion yen, or $354.3 million, compared with the prior year. "In addition to growth in domestic and overseas sales, this was attributable to factors including a decline in personnel expenses associated with the adoption of our Special Early Retirement Incentive Plan in the previous fiscal year," the firm said.

Sales from cosmetics, which represent 79.5 percent of the entire business, were up 5.6 percent to 533.1 billion yen, or $4.86 billion. Toiletries sales, or 9.1 percent of the whole business, inched up 1.1 percent 61.2 billion yen, or $557.4 million.Domestic sales of cosmetics rose 2.2 percent. Shiseido launched its Maquillage makeup assortment and retooled the men's line Uno, positioning them as "megabrands" designed to win in their respective categories. "We made a good start in our effort to seize top market shares for these lines through focused allocation of expenditures and promotional activities," said the group.

Overseas cosmetics sales grew 10.1 percent in local currency terms and 13.3 percent on a yen-denominated basis. During the year, Shiseido's cosmetics business benefited from increased sales in all regions, led by the key Chinese market. The firm cited its namesake brand, fragrances marketed by its Beauté Prestige International arm and the Decléor and Nars brands. Overseas sales accounted for 29.4 percent of total sales volume compared with 27.5 percent in the last fiscal year.

As for performance by geographic segment, sales in the Americas, which account for 6.9 percent of total company sales, increased by 6.8 percent to 46 billion yen, or $419 million. Sales from Europe, which generate 12.7 percent of total sales, were up 7.3 percent to 85.6 billion yen, or $779.6 million. In Asia/Oceana, where 9.5 percent of business was done, sales jumped 27.6 percent to 63.7 billion yen, or $580.1 million.

"Growth in China was particularly prominent." Shiseido noted. "The yen depreciated slightly against the U.S. dollar, euro and Asian currencies on the whole, and sales in yen terms increased in all regions," the firm said, adding, "sales in all regions increased in local currency terms."

Shiseido is reclassifying its industry segment reporting into Domestic Cosmetics, Overseas Cosmetics and Others. In addition to traditional cosmetics, the Domestic Cosmetics and Overseas Cosmetics segments will include the toiletries, professional/salon and health care businesses.

For the next fiscal year, Shiseido forecasts a 2 percent increase in consolidated net sales, to 685 billion yen, or $6.01 billion at current exchange rates; an 11 percent rise in income from operations, to 43 billion yen, or $377.6 million, and a 59 percent jump in net income, to 23 billion yen, or $202 million.
Koji Hirano

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