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Avon Misses as Cost Rise

The company cites its product simplification push.

Avon (AVP) - Get Avon Products, Inc. Report missed third-quarter earnings targets but said its turnaround efforts are on track.

The New York-based cosmetics company made $86 million, or 19 cents a share, for the quarter ended Sept. 30, down from the year-ago $164 million, or 35 cents a share. Revenue rose to $2.03 billion from $1.87 billion a year earlier.

Analysts surveyed by Thomson Financial were looking for a 24-cent profit on sales of $1.99 billion.

Total sales of Beauty products in the quarter outpaced overall sales, growing 10% in dollars and 8% in local currency. These results reflect a 16% increase in skin care sales, as well as strength in the fragrance and personal care categories.

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Third-quarter operating profit of $168 million decreased 32%, or $80 million, from the 2005 level, and operating margin was 8.1%, versus 13.1% in the prior-year quarter.

Operating profit was unfavorably impacted by $40 million of initial costs, principally inventory obsolescence, associated with the company's new Product Line Simplification program. The quarter also included $16 million of costs to implement the current phase of its previously announced restructuring program.

Avon said it is on track with its November 2005 turnaround plan to drive out costs and reinvest to return the company to sustainable growth. Restructuring actions implemented to date are expected to yield nearly $100 million in savings in 2006 alone. These savings have been used to increase advertising beyond levels originally targeted. In total, over the multiple years of the turnaround plan, Avon still projects that annualized restructuring savings will exceed $300 million when fully realized, with total costs to implement its plans in the range of $500 million.

During the quarter, Avon launched two new turnaround initiatives with benefits and costs beyond those anticipated in its previously announced restructuring plan. The company began a Product Line Simplification initiative to go to market with a significantly smaller range of better performing and more profitable products. This undertaking is designed to meaningfully improve brand image and Representative and consumer experiences while also carrying significant cost-saving implications. The quarter's operating profit included expenses resulting from preliminary steps under this effort.

Avon also said it launched a Strategic Sourcing Initiative to reduce direct and indirect costs of materials, goods and services. Under this initiative, the company will shift its purchasing strategy toward a global supplier orientation from one that today is more local and component oriented. The initiative is an outgrowth of the company's recently established Global Supply Chain organization, and will result in far greater leverage with vendors.