LESS-THAN-EXPECTED SALES IN PERIOD CAUSE AVON SHARES TO DROP 9.1%

Byline: Thomas J. Ryan

NEW YORK — Shares of Avon Products Inc. skidded 9.1 percent Tuesday after the beauty firm told analysts that third-quarter sales would rise less than expected primarily due to weakness in the U.S. and Brazil.
However, Avon said it remained comfortable with analysts’ earnings forecasts for profit gains in the quarter and year.
As for the top line, Avon projected sales would rise 2 percent, while many Wall Street analysts had projected about a 3 percent gain.
Shares of Avon slumped 4 1/8 to 41 3/16 on the New York Stock Exchange, with about 3.9 million shares traded, versus an average turnover of 852,272.
A stronger dollar against some foreign currencies, particularly the Brazilian real, caused most of the projected revenue shortfall, an Avon spokesman said. International accounts for two-thirds of Avon’s business.
The spokesman also said Avon told analysts that sales in North America would be flat in the quarter versus gains of up to 4 percent predicted by analysts, with the decline due to disappointing fragrance and skin care launches.
Analysts said the stock got clipped because sales continued to disappoint, even though no revision in earnings projections was indicated. Wall Street expects Avon to earn 34 cents a share against 30 cents in the third quarter, and $1.71 a share versus $1.47 for the full year.
“The valuation of the stock to some extent is dependent on management’s ability to generate consistent, steady sales growth in the U.S.,” said Amy Low Chasen at Goldman Sachs, who nonetheless said the stock’s drubbing was “a little bit of an overreaction” considering profit estimates remained the same.
“Despite the sales weakness, I feel extremely confident about the company’s earnings prospects, given their success in executing their aggressive cost-reduction program,” Low Chasen said.
Wendy C. Nicholson, at Salomon Smith Barney, also said she was surprised at the stock’s hit given that estimates weren’t altered and word from management that much of the business, including Asia, Eastern Europe and parts of Latin America, is performing above plan.
“Even in Brazil, where the real is negatively impacting the performance, local currency sales continue to be very strong,” said Nicholson. “Unfortunately, investors are focusing on the U.S. business and, more specifically, the core beauty business, which continues to be weak.”
The spokesman said that in fragrance, the launch of Forever Amber in the latest quarter was not as strong as the Rare Rubies launch in the 1998 third quarter. In skin care, the firm had one Skin So Soft launch versus two the prior year, and its Skintrition launch was not as successful as its Retinal hand complex launch last year, the spokesman said. Fourth-quarter U.S. sales are projected to pick up as a result of “strong promotional campaigns” behind the launch of Perceive fragrance and Luminosity face cream. “So hopefully, U.S. sales will recover in the fourth quarter and the stock recovers as well,” said Nicholson.

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