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Margin Woes at Avon

A restructuring will delay margin recovery.

Avon Products (AVP) - Get Avon Products, Inc. Report said its efforts to boost profit margins will be delayed by a year as the company expands its restructuring and invests in its brands.

The New York-based cosmetics giant said it expects to get more than $400 million in annualized product line simplification and strategic sourcing benefits. Coupled with savings from its previously announced restructuring program, Avon said total savings and benefits from the combined initiatives are expected to exceed $700 million.

"We are pleased that these incremental benefits will provide us with additional fuel with which to continue to drive our turnaround," said CEO Andrea Jung. "We are seeing strong paybacks from our investments to drive growth, and in 2007 we will again invest in the business at accelerated levels, to build a strong foundation for sustainable growth."

Avon said that it expects to increase advertising by 35% in 2007, to approximately $340 million. This projected increase comes on top of an 83% increase in 2006. In addition, the company plans to step up its level of investment behind various actions to improve its Representative Value Proposition in 2007 and beyond. These investments are designed to tip the balance between earnings and effort in favor of Avon's more than five million independent Representatives around the globe.

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Avon reiterated that revenue growth should average mid-single digits over the long term. But the company said that operating margin recovery would take a year longer than initially planned. While operating margin should expand in 2007 from 2006's level of 8.7%, it is expected to be close to 2005's level of 14.1% in 2008. As the savings and benefits from restructuring, PLS and SSI begin to exceed the incremental levels of investment in advertising and the Representative Value Proposition, operating margin is then expected to further expand beginning in 2009.

"We are making the right investments for this business at this important juncture to set the stage for enhanced profitability in the future," said Jung. "We are managing the business for the long-term and investing to strengthen the foundation and restore sustainable growth."