Tough Quarter at Avon

Profit drops 37%.
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Avon (AVP) - Get Report said fourth-quarter earnings fell 37% from a year ago despite a 4% sales gain.

The New York-based cosmetics giant made $183 million, or 40 cents a share, for the quarter ended Dec. 31, down from $289 million, or 61 cents a share, a year ago. Revenue rose to $2.4 billion from $2.31 billion a year earlier.

The latest quarter included a dime a share in restructuring charges. Analysts surveyed by Thomson First Call were looking for a 43-cent profit on sales of $2.32 billion.

"With a challenging 2005 behind us, we are now aggressively moving forward with the turnaround plan we outlined at our investor update meeting last November," said CEO Andrea Jung. "We are aggressively addressing costs through our restructuring program, while at the same time stepping up the level of investment behind our brands with innovation and a planned 50% increase in advertising spending in 2006."

Representatives grew 7% and units increased 5% vs. the prior year. Total Beauty sales in the quarter rose 5% (4% in local currency).

Operating profit decreased 28% to $297 million, due to significant costs of $56 million associated with the early phases of the company's previously announced restructuring initiatives. Specifically, Avon said that the quarter included costs associated with an organizational downsizing in all regions and at the corporate level to reduce layers of management to move closer to its markets, representatives and customers. Additionally, several regions commenced other cost-cutting initiatives. Higher price discounting combined with higher operating expenses and unfavorable product mix also negatively impacted profits.

Operating margin was 12.4% vs. 17.8% in the prior year. Interest expense more than doubled, reflecting a higher level of borrowing to fund the company's share repurchase program. The quarter's effective tax rate of 35.7% was significantly higher than that of the 2004 quarter due to unmatched one-time tax benefits in the 2004 quarter, as well as the negative impacts of certain restructuring costs and unfavorable country mix in the 2005 quarter.

The company said it expects 2006 revenue to be flat to slightly above the 2005 total of $8.1 billion.