AVON TURNS IN STRONG 2ND QUARTER
Byline: Evan Clark
NEW YORK — Earnings calling.
Avon Products Inc. posted a 10.3 percent increase in second-quarter earnings, meeting expectations in a market braced for disappointing earnings reports. The direct marketer of beauty products, based here, also projected an acceleration in its U.S. sales for the second half.
Net income for the quarter totaled $137.7 million, or 57 cents a diluted share, from $124.9 million, or 52 cents, a year ago. Earnings per share were on target with Wall Street’s expectations.
Revenues for the quarter ended June 30 rose 5 percent, to $1.46 billion from $1.39 billion a year ago. Sales rose 10 percent for the quarter, excluding the impact of foreign currency translation.
Wall Street responded by pushing the stock up 86 cents, to close Thursday at $44.68 on the New York Stock Exchange.
A 10 percent increase in unit volume and an 11 percent uptick in active Avon representatives drove the increased sales. Worldwide sales of its beauty products rose 6 percent and have continually outpaced the firm’s overall sales for the last two years. The Anew brand saw a 40 percent sales increase.
Avon has experienced some setbacks, though. Sears, Roebuck & Co., as reported, earlier this month pulled the plug on a deal to carry Avon’s pioneer retail brand BeComing in 125 of its doors. The brand will now be launched solely in 75 J.C. Penney Co. locations.
The company was able to temper the letdown with an as-of-yet undisclosed settlement from Sears that has been estimated to be around $17 million before taxes. The cash settlement, for lost profits over the next year-and-a-half and incremental expenses, is expected to add 4 to 5 cents to Avon’s third-quarter earnings per share.
On a conference call with analysts, Andrea Jung, chief executive officer, said there’s been “a lot of interest” in filling Sears’s shoes to carry BeComing. “At least 10-plus major retailers” have made inquiries to Avon, which is in “active dialog with management” of those firms, according to the ceo.
“Certainly the 125 fixtures that have now been supplied by Sears, at Sears’s cost — so no cost from either Avon’s point of view and no cost from either Penney’s or a potential new partner’s — are an incredibly attractive financial incentive to accelerate rollout in Penney’s case or get into a new partnership at a faster speed and far more economic model,” said Jung.
The settlement from Sears provided Avon with a fixture windfall and has already given Avon funds equivalent to the anticipated profits from the partnership through the end of fiscal 2002. Even with this insulation in place, Jung said she wasn’t expecting to enter into a major new partnership in time for the 2001 holiday season.
Jung said she was “especially encouraged” by acceleration in the U.S. business, where sales increased 6 percent on a 5 percent rise in beauty sales and the launch of the new Avon Wellness business. Active representatives in the mature market rose 4 percent in the quarter, the highest growth rate in more than five years. “We expect the U.S. momentum to continue in the third and fourth quarters,” said Jung.
Citing the company’s high unit growth and strong representative count, William Steele, an equity analyst with Banc of America Securities, said: “They’re really clearly running on all cylinders.” Underscoring that the firm’s strength in the U.S. were a 40 percent increase in hair product sales, a 32 percent increase in skin care and a 9 percent rise in color cosmetic revenues.
Europe saw sales rise 12 percent, or 18 percent in local currency. Unit sales increased 16 percent in the region and representatives were up 21 percent. Central and Eastern Europe, along with Russia, continued to grow sales at a double-digit clip. Sales in Latin America increased 7 percent, or 15 percent in local currency. Mexico saw sales rise 15 percent, on 8 percent unit growth. Declines were seen in the Pacific region, which posted a 7 percent sales drop in U.S. dollars, but a 5 percent increase in local currencies. In Brazil, sales were down in the single digits, but rose in the double digits in local currency.
For the six months, income was up 16.3 percent, to $219.4 million, or 91 cents a diluted share, compared to $188.6 million, or 79 cents, in the year-ago period. The first half of 2000 included a $6.7 million, or 3 cents, negative effect due to an accounting change. First-half revenues increased 4.1 percent, to $2.82 billion against year-ago results of $2.71 billion. In local currencies, sales were up 9 percent over a year ago.