Times are tough, but they have not rocked the resolve of Avon Products Inc. to advance its nearly three-year-old turnaround plan, the company’s chairman and chief executive officer Andrea Jung told analysts Thursday.
This story first appeared in the October 31, 2008 issue of WWD. Subscribe Today.
The direct seller reported that net earnings for the third quarter surged 60 percent to $222.6 million, or 52 cents a diluted share, up from $139.1 million, or 32 cents a share, in the year-earlier period.
“There is no change to the thesis of our business,” Jung told analysts during the company’s earnings call, referring to Avon’s reaction to the macroeconomic environment. “After 11 consecutive quarters of outstanding progress with our turnaround, the fundamentals of our business have never been stronger. We are a far healthier company overall than we were three years ago.
“We will stay the course in terms of our turnaround plan,” she continued. “It’s working. Our strategies are more relevant than ever in this environment.”
Jung added that Avon will continue its strategy of investing in its brand and the direct selling channel to achieve “sustainable, profitable growth.”
For the quarter ended Sept. 30, increased advertising and product pricing helped boost revenue by 12.6 percent to $2.64 billion, from $2.35 billion, with beauty sales increasing 15 percent to $1.91 billion. By category, color cosmetics gained 19 percent; fragrance rose 18 percent, driven by premium-priced introductions like U by Ungaro; skin care increased 9 percent, boosted by the expanding Anew franchise and personal care gained 13 percent.
In the quarter, Avon increased its advertising spending by 11 percent to $106 million, which supported product introductions like Pro-to-Go Lipstick and Anew Rejuvenate, as well as representative recruitment.
Jung acknowledged that a souring economy is generally an opportune time to recruit sales representatives: “In general, we would recruit more representatives when times get tough.”
Asked by an analyst about representatives’ reaction to Avon’s moves to increase prices, Jung said the sales force welcomes the price increases as the rises boost their earnings without requiring additional effort. She added decisions on pricing are based on product type and product category. “It’s very surgical,” she said. “It’s the right thing to do in the short term and the long term.”
Jung said the company is in the process of finalizing its ad budget for next year, but hinted recruitment ads may dial up the message that Avon offers the possibility of “wealth creation.” That message “is obviously more relevant than ever,” she noted, adding that so far the economic crisis has not had a measurable impact on the firm’s performance outside North America.
The company reiterated that advertising spending will continue to grow in-line with sales growth.
By region, third-quarter revenues in North America declined 3 percent, on a reported basis, to $584.5 million, dragged down by a 23 percent decline in non-beauty sales, as consumers pulled back on discretionary items, said Jung. The number of active representatives in North America ticked up 1 percent.
By contrast, in Latin America, revenue increased 25 percent to $1.06 billion with 30 percent growth in Brazil, 40 percent in Venezuela and nearly 10 percent in Mexico, a once troubled market for Avon.
In Central and Eastern Europe, revenues gained 17 percent to $382.4 million, which continued to be driven by Russia; in Western Europe, the Middle East and Africa revenues rose 8 percent to $315.8 million; in Asia-Pacific, revenues increased 6 percent to $221.4 million, with the Philippines contributing 20 percent growth, and revenues in China gained 25 percent to $75.8 million on active representative growth of 98 percent.
For the nine months, net income grew 60 percent to $642.9 million, or $1.49 a diluted share, from $401.8 million, or 92 cents. Revenues were up 14.9 percent to $7.88 billion.
The company continues to expect long-term revenue growth in the midsingle digits, excluding the impact of foreign exchange.
“We won’t de-invest in this business,” said Jung. “We’ve worked too hard for too many quarters. We won’t change the course now.”�