AVON STOCK SOARS AFTER PLANS FOR REALIGNMENT ARE UNVEILED
Byline: Diane E. Picard
NEW YORK — Shares of Avon Products Inc. stock surged 6 7/8, or 10.3 percent, to 73 3/4 on the New York Stock Exchange Friday after the company raised its long-term growth targets for sales and earnings in connection with a major reengineering program.
The reengineering, which was announced late Thursday, will result in pretax charges of $150 million to $200 million. About half the charges are expected to be recorded during the first quarter of 1998, with the balance to be recorded early in 1999.
The charges include severance costs and potential inventory charges that could result from new inventory management methods for its nonbeauty products, as well as reductions in the depth of some lines.
Avon also raised its growth estimates of earnings per share to 16-18 percent from 13-15 percent and upped its sales growth rate to 8-10 percent from 6-8 percent.
Avon’s plan calls for a reduction in costs of up to $400 million annually by the year 2000. Avon said that $200 million will be reinvested in advertising and marketing programs to raise consumer awareness of the brand.
Avon currently spends 1.4 percent of revenues of advertising and is planning to double that ratio by the year 2000. In addition, Avon is evaluating a range of options to provide easier access for its U.S. customers, including an expansion of its direct mail list, and establishing facilities where sales representatives and consumers can purchase products.
To fund these new marketing programs, Avon outlined a series of steps designed to steadily improve gross margins over the next three years, including a 30 percent product-line reduction in cosmetics, fragrance and toiletries; savings from global sourcing, and less price discounting.
Additional savings are expected to come from expense reductions in shipping and distribution as well as lower administrative overhead, Avon said.
As a result of Avon’s new growth initiatives, PaineWebber Inc. analyst Andrew Shore raised his investment rating to “attractive” from “neutral.”
Shore also trimmed his fourth-quarter earnings estimate to $1.13 from $1.15, reflecting the difficult environment in Asia. It earned 99 cents last year.
Shore lowered his 1997 estimate to $2.67 from $2.70, but raised his 1998 estimate to $3.10 from $3.05. Avon earned $2.38 in 1996.
“We believe the company is now setting the stage for it to grow to the next level,” Shore said. “Our skepticism remains, although Avon now will have enormous cushion that it didn’t have in the past.”
Smith Barney analyst Holly B. Becker raised her rating to “buy” from “outperform.”
Separately, Avon said earlier on Thursday that third-quarter earnings gained 9.7 percent to $68.6 million, or 52 cents a share, from $62.5 million, or 47 cents last year, as its U.S. performance was outpaced by international operations.
Sales for the three months ended Sept. 30 increased 6.1 percent to $1.25 billion from $1.17 billion. Excluding the effect of foreign currency translation, sales were up 10 percent.
U.S. sales were up 3 percent in the quarter and pretax profits declined 8 percent, due mainly to the expected seasonal loss at Discovery Toys, which was acquired early in the year.
Overall, international operations reported an 8 percent increase in sales. In the Americas, sales increased 11 percent, driven by double-digit gains in every market except Brazil.
Mexico delivered sales and pretax profit growth of over 30 percent, with continuing increases in the number of sales representative, units and customers, Avon said.
In Brazil, sales in local currency terms were up slightly but restrained by weak consumer spending.
In Europe, sales were up 4 percent in dollar terms and ahead 13 percent in local currencies.
The United Kingdom and the emerging markets of central Europe and Russia showed particularly strong sales growth.
In the Pacific, sales were up 4 percent in dollar terms and up 14 percent in local currency. Avon noted that China sales were flat, reflecting the lengthy license renewal process for direct selling companies that is delaying Avon’s expansion and hurting existing operations.
James E. Preston, Avon’s chairman, president and chief executive, said in a statement that the company’s strong results came despite economic turmoil in Asia and challenges in several major markets. “We’ve been able to offset these challenges and are confident that Avon will post its ninth consecutive year of increased sales and earnings in 1997.”
For the nine months earnings were ahead 10.3 percent to $205.1 million, or $1.55 a share, from $185.9 million, or $1.39. Sales rose 7.2 percent to $3.56 billion from $3.32 billion.