AVON TOPS THE FORECASTS IN THIRD PERIOD

Byline: Evan Clark

NEW YORK — Weak European currencies weren’t sufficient to stop Avon Products Inc. from exceeding earnings estimates by a penny and its prior-year performance by a nickel in the third quarter.
The New York-based direct seller of beauty products posted earnings of $93 million, or 39 cents a share, for the period, beating estimates by a penny.
Results topped last year’s third-quarter earnings of $88.2 million, or 34 cents, by 5.4 percent.
Sales for the period ended Sept. 30 increased 7.4 percent to $1.34 billion compared to $1.25 billion a year ago. Excluding the effects of foreign currency exchange, the company said sales rose 10 percent for the quarter.
Andrea Jung, chief executive, said during a conference call that the company remained comfortable with the consensus earnings estimate of $1.87 a share for the year.
Analysts noted that Jung’s assessment for the full year created some confusion. Because the third quarter came in ahead of estimates, Avon’s earnings in the fourth quarter would be a penny below current estimates for yearend estimates to be matched.
After several questions from analysts on the company’s outlook, Jung reassured that “operationally, nothing has changed. The momentum is continuing.”
Heather Murren, an analyst with Merrill Lynch, said that the confusion resulted from a mathematical rounding issue raised by Robert Corti, the company’s chief financial officer.
Although shares of the company closed down 6 cents to close at $43.94 on the New York Stock Exchange, confusion about the earnings outlook, coupled with a precipitous drop in the Dow Jones Industrial Average early on Wednesday, led Avon’s stock to drop as low as $42.81.
Murren reaffirmed that the results were positive and the stock’s dip was attributable to confusion during the call. “This is a market that moves on minutiae,” she said.
In fiscal 1999 Avon earned $1.64 cents a share.
Jung noted in a release that “increased spending to strengthen the core business — approximately $60 million so far this year — is clearly paying off.”
Murren said that compared to their competitors, such as Gillette and Procter & Gamble, “they’re doing exceptionally well.”
Sales of Avon’s U.S. operations — which significantly increased advertising, Internet and image-building expenses — picked up 5 percent. Total sales of cosmetics, fragrance and toiletries were up 9 percent for the period, which saw product launches including Retroactive, a skin care product under the company’s Anew brand.
Susan Kroph, chief operating officer of Avon North America and global business operations, noted during the call that fourth-quarter U.S. sales growth would be in the mid-single digits and profit growth would be slightly ahead of sales.
The company said 11,000 personalized Web sites have been set up though myavon.com, launched in late September and designed to help representatives conduct their Avon and personal businesses online. “With myavon.com the Internet should quickly become a valuable business building for our representatives,” Jung told analysts.
While acknowledging it was still too early to clearly discern trends, Jung said that representatives using the Internet posted orders approximately one-third higher than representatives not using the Web site.
Sales in Europe, hurt by currency weaknesses, declined 3 percent.
The company said that, excluding foreign currency exchange, sales for the region were up 9 percent and were propelled by continued rapid growth in Poland and other Central and Eastern European countries.
About two-thirds of Avon’s European business comes from western Europe with the balance coming from the continent’s central and eastern portions. On a local currency basis, central and eastern Europe grew faster, at a rate of 40 to 50 percent during the quarter, while the more established western European business grew 10 to 12 percent for the period.
Latin America posted Avon’s strongest gains as sales increased 15 percent. Mexico led the pack with Brazil, Venezuela and Central America also posting solid gains. Weakness in Argentina caused by poor economic conditions was offset by strength in the rest of the region.
The Pacific region saw sales increase 9 percent for the quarter. Japan reported sales and unit growth in the double-digits. Results also improved in China and the Philippines.
For the nine months, net income rose 81.9 percent to $292.3 million, or $1.23 a share, against $160.7 million, or 61 cents, a year ago. The year-ago results include a one-time charge of $46 million for inventory write-downs.
Sales for the period rose 8.7 percent to $4.05 billion compared to $3.72 billion a year ago.

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