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Avon Reports Third-Quarter Total Revenue up 9% to $2.1 Billion; Beauty Sales up 10% Driven by 16% Growth in Skin Care Sales

Third-Quarter Earnings of $.19 Per Share

Projected Restructuring Benefits of Nearly $100 Million in 2006; Company Launches Two New Turnaround Initiatives

PRNewswire-FirstCall
NEW YORK
Oct 27, 2006

Avon Products, Inc. (NYSE: AVP) today reported that third-quarter 2006 total revenue rose 9% year over year (7% in local currency) to $2.1 billion. Active Representatives grew 6%, and units increased 2% versus the prior-year quarter. All of these measures benefited from the company's late-2005 acquisition of its licensee in Colombia.

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.

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.

In line with the turnaround initiative to improve brand competitiveness, third quarter 2006 included a substantial $32 million increase in advertising, to $66 million, to support new products as well as Avon China's direct-selling launch. The company is tracking well ahead of its target to increase advertising by 50% in 2006, and now expects to spend approximately $250 million, nearly double last year's level.

In the quarter, the company resolved a long-standing dispute regarding value-added tax (VAT) in the U.K. That resolution resulted in a one-time charge of $21 million.

Third-quarter 2006 expenses also included year-over-year increases in provisions for performance-based compensation, reinstatement of a 401(k) matching program and stock-option expensing. The adoption of stock-option expensing, effective January 1, 2006, and design changes to share-based compensation plans related to that adoption, reduced operating profit by $10 million.

Interest expense in the third quarter 2006 rose significantly year over year due to a higher debt level primarily associated with the company's share repurchase program, as well as higher interest rates.

The quarter's effective tax rate of 41.3% was higher than 2005's rate of 31.8%, primarily due to the impact of repatriation of international earnings in 2006. Net income in the third quarter 2006 was $86 million, or $.19 per share, compared with $164 million, or $.35 per share, a year ago. Despite 2006 being a transition year, cash flow from operations is ahead of last year, totaling $439 million through the first nine months of the year versus $370 million last year.

The company reported that 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.

Andrea Jung, chairman and CEO, commented, "We are on track with our turnaround actions. In spite of year-over-year revenue declines in certain key markets, we are seeing some early signs that our actions are starting to work in those markets. We are pleased that in this transition year, our top- line growth has exceeded our expectations, as evidenced by our 9% revenue growth and 10% increase in Beauty sales this quarter.

"We are capturing sizeable savings already this year from restructuring actions implemented to date. With the additional turnaround initiatives announced today, we have significant opportunities over and above the benefits that we had anticipated in the plans we laid out last November. Product Line Simplification and the Strategic Sourcing Initiative should further boost our brand competitiveness and operating efficiency.

"We still have much work ahead of us in our multi-year effort to restore Avon to sustainable growth. We're confident in our four-point turnaround plan and early indicators tell us that our plans are working," Ms. Jung concluded.

Third-Quarter Regional Highlights

In the North America region, third-quarter revenue was 1% lower than the prior-year period on both a dollar and local-currency basis. Third-quarter units were 9% lower. Active Representatives decreased 2% versus the prior year, following a 6% decline in the first half of 2006. Avon's U.S. business saw response to its ongoing actions to increase Representative ordering activity. Fuel prices remained a negative factor but to a lesser degree than in the first half. Operating profit was negatively impacted by reinstatement of performance-based compensation, a substantial increase in advertising and higher obsolescence expense.

In Latin America, third-quarter revenue grew 28% (25% in local currency). The region continued to benefit from the late-2005 Colombia acquisition, with that market contributing 12 points of revenue growth. The region's revenue also benefited from ongoing strength in Brazil, Avon's second largest market, where top-line growth approached 40%. The performances of these two markets more than offset continued softness in Mexico, where revenue decreased 4%. The region's active Representatives rose 12% and units increased 13% in total. Operating profit grew 13%, as benefits of higher revenue more than offset unfavorable inventory obsolescence expense and other increased expenses, including advertising. The region's operating margin was 17.8%.

Western Europe, Middle East and Africa continued to achieve solid revenue growth, driven by a revenue increase of nearly 40% in Turkey. The region's third-quarter revenue increased 8%, (6% in local currency). Active Representatives rose 4% versus the prior-year period, and units increased 1% year over year. Due to the U.K. VAT resolution, significant costs to implement restructuring initiatives and incremental inventory obsolescence expense, the region recorded an operating loss versus an operating profit in the prior-year quarter, and operating margin was (10.8)%.

In Central & Eastern Europe, revenue in the third quarter rose 2% (declined 3% in local currency) and units sold decreased 4%. New Russian importation laws for ethanol-based products dramatically affected the company's ability to ship fragrance orders in Russia, resulting in $15 million of lost revenue in the region. Russia had revenue growth of 4%, and top-line growth would have approached 20% if fragrance products had shipped. The region's Active Representatives grew 8%. Apart from the Russian importation issue, the region's performance was mostly in line with that of the second quarter 2006, with continued softness in color cosmetics. The region's operating profit was 10% lower than in 2005, and operating margin was 21.5%. Operating profit was unfavorably impacted by higher product costs and advertising expense.

Asia Pacific revenue was 3% lower in the quarter (3% lower in local currency), active Representatives decreased 10% and units declined 9%, as the region continued to be unfavorably impacted by a decline in Japan as well as the first-quarter 2006 closing of Indonesian operations. Japan's revenue declined 13% year over year, compared with a decline of nearly 30% in 2006's first half. Japan's results reflect early response to actions to improve direct selling and recalibrate the level of its direct mailings. The region's operating profit was 25% lower year over year, largely due to the revenue decline and higher product costs. Operating margin was 10.4%.

Revenue in China grew 9% (7% in local currency), despite the exit of company-run store counters, which had a negative 10-point impact on the quarter's revenue growth. Growth reflected the continued roll out of direct selling. At quarter end, Avon China had over 236,000 certified Sales Promoters registered with the government and was engaged in training these Sales Promoters to become active Representatives within Avon's direct-selling model. Units were 1% higher versus the prior year in the third quarter. China had an operating loss of $3.0 million in the third quarter, versus operating profit of $1.6 million in 2005's third quarter, due to increased expenses associated with the launch of direct selling and fees paid to service centers. Operating margin was (6.1)%.

In addition to the variances noted earlier, year-over-year increases in global expense allocations negatively impacted all regions in the third quarter of 2006. Total global expenses increased 34% year over year, but net of allocation to the segments, rose 3%.

Avon will conduct a conference call at 9:00 A.M. today to discuss the quarter's results. The dial-in number for the call is (800) 843-2086 in the U.S. or (706) 643-1815 from non-U.S. locations (conference ID number 8245635). The call will be webcast live at www.avoninvestor.com and can be accessed or downloaded from that site for a period of two weeks.

Avon, the company for women, is a leading global beauty company, with over $8 billion in annual revenue. As the world's largest direct seller, Avon markets to women in well over 100 countries through over five million independent Avon Sales Representatives. Avon's product line includes beauty products, fashion jewelry and apparel, and features such well-recognized brand names as Avon Color, Anew, Skin-So-Soft, Avon Solutions, Advance Techniques, Avon Naturals, Mark, and Avon Wellness. Learn more about Avon and its products at www.avoncompany.com.

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Statements in this release that are not historical facts or information are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "estimate," "project," "plan," "believe," "expect," "anticipate," "intend," "planned," "potential" and similar expressions, or the negative of those expressions, may identify forward-looking statements. Such forward-looking statements are based on management's reasonable current assumptions and expectations. Such forward- looking statements involve risks, uncertainties and other factors, which may cause the actual results, levels of activity, performance or achievement of Avon to be materially different from any future results expressed or implied by such forward-looking statements, and there can be no assurance that actual results will not differ materially from management's expectations. Such factors include, among others, the following:

  -- our ability to implement the key initiatives of our global business
     strategy, including our multi-year restructuring initiatives, product
     mix and pricing strategies, enterprise resource planning, customer
     service initiatives, product line simplification, strategic sourcing
     initiative, and cash management, tax, foreign currency hedging and risk
     management strategies, and our ability to achieve anticipated benefits
     from such initiatives;
  -- the possibility of business disruption in connection with our
     multi-year restructuring initiatives;
  -- the costs associated with our product line simplification program;
  -- our ability to achieve growth objectives, particularly in our largest
     markets and new and emerging markets;
  -- our ability to replace lost sales attributable to the repositioning of
     the Beauty Plus and Beyond Beauty business in the United States;
  -- our ability to successfully identify new business opportunities and
     acquisition candidates, and our ability to successfully integrate or
     manage any acquired business;
  -- the effect of political, legal and regulatory risks, as well as foreign
     exchange or other restrictions, imposed on us, our operations or our
     Representatives by governmental entities;
  -- our ability to successfully transition our business in China in
     connection with the resumption of direct selling in that market and our
     ability to operate using the direct-selling model permitted in that
     market;
  -- the impact of substantial currency fluctuations on the results of our
     foreign operations;
  -- general economic and business conditions in our markets, including
     social, economic and political uncertainties in Latin America, Asia
     Pacific, Central and Eastern Europe and the Middle East;
  -- the possible impact of the new importation laws for ethanol-based
     products in Russia;
  -- a general economic downturn, information technology systems outages,
     disruption in our supply chain or manufacturing and distribution
     operations, or other sudden disruption in business operations beyond
     our control as a result of events such as acts of terrorism or war,
     natural disasters, pandemic situations and large scale power outages;
  -- the quality, safety and efficacy of our products;
  -- our ability to attract and retain key personnel and executives;
  -- competitive uncertainties in our markets, including competition from
     companies in the cosmetics, fragrances, skin care and toiletries
     industry, some of which are larger than we are and have greater
     resources;
  -- our ability to implement our Sales Leadership program globally, to
     generate Representative activity, to increase Representative
     productivity, and to compete with other direct-selling organizations to
     recruit, retain and service Representatives;
  -- the impact of changes in market trends, purchasing habits of our
     consumers and changes in consumer preferences, particularly given the
     global nature of our business and the conduct of our business in
     primarily one channel;
  -- our ability to protect our intellectual property rights;
  -- the risk of an adverse outcome in our material pending and future
     litigations;
  -- our access to financing; and
  -- the impact of possible pension funding obligations and increased
     pension expense on our cash flow and results of operations.

Additional information identifying such factors is contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005, filed with the U.S. Securities and Exchange Commission. We undertake no obligation to update any such forward-looking statements.

                           AVON PRODUCTS, INC.
                    CONSOLIDATED STATEMENTS OF INCOME
                   (In millions, except per share data)

                          Three months   Percent    Nine months   Percent
                             ended       Change       ended       Change
                          September 30   ------    September 30   ------
                       -----------------        ------------------
                         2006     2005            2006      2005
                       -------- --------        --------  --------

  Net sales            $2,038.1 $1,865.7     9% $6,079.4  $5,690.5    7%
  Other revenue            20.5     20.3            61.9      60.9
                       -------- --------        --------  --------
   Total revenue        2,058.6  1,886.0     9%  6,141.3   5,751.4    7%

  Cost of sales (1)       814.8    724.5         2,371.0   2,153.1
  Marketing,
   distribution and
       administrative
        expenses (1)(2) 1,076.3    914.4         3,291.3   2,746.7
                       -------- --------        --------  --------
       Operating profit   167.5    247.1   -32%    479.0     851.6  -44%
                       -------- --------        --------  --------
  Interest expense         23.9     13.2            74.3      33.8
  Interest income         (10.9)   (10.5)          (40.8)    (26.4)
  Other expense, net        5.5      2.3             7.9       7.6
                       -------- --------        --------  --------
       Total other
        expenses           18.5      5.0            41.4      15.0

  Income before taxes
   and minority interest  149.0    242.1   -38%    437.6     836.6  -48%
  Income taxes (3)         61.5     77.0           142.6     167.1
                       -------- --------        --------  --------

  Income before minority
   interest                87.5    165.1           295.0     669.5
  Minority interest        (1.1)    (1.3)           (1.5)     (5.1)
                       -------- --------        --------  --------
  Net income              $86.4   $163.8   -47%   $293.5    $664.4  -56%
                       ======== ========        ========  ========


  Earnings per share:
  Basic                    $.19     $.35   -46%     $.65     $1.41  -54%
                       ======== ========        ========  ========
  Diluted                  $.19     $.35   -46%     $.65     $1.40  -54%
                       ======== ========        ========  ========



  Average shares
   outstanding:
  Basic                   446.36    466.56         448.80    469.97
  Diluted                 447.93    468.95         450.40    473.82

  (1) For the three and nine months ended September 30, 2006, costs to
      implement restructuring initiatives impacted costs of sales by ($0.5)
      and ($0.8), respectively, and Marketing, distribution and
      administrative expenses by $16.1 and $185.9, respectively.

  (2) For the three and nine months ended September 30, 2006, Marketing,
      distribution and administrative expenses included $21.0 associated
      with the resolution of a long-standing dispute regarding value-added
      tax in the U.K.

  (3) For the three and nine months ended September 30, 2006, income taxes
      were impacted by an increase in tax expense due to the repatriation of
      international earnings by $12.2 and $21.6, respectively.  For the nine
      months ended September 30, 2006, income taxes were impacted by a
      reduction in tax expense of $12.6, due to audit settlements and the
      closure of tax years by expiration of the statute of limitations, as
      well as $11.8 due to tax refunds.  For the nine months ended September
      30, 2005, income taxes were also impacted by a reduction in tax
      expense of $98.5 due to the completion of income tax examinations as
      well as the closure of a tax year by expiration of the statute of
      limitations, net of related adjustments.


                             AVON PRODUCTS, INC.
                    CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (Unaudited)
                                (In millions)

                                           September 30        December 31
                                               2006                2005
                                           ------------        -----------

  Cash, including cash equivalents             $1,102.8           $1,058.7
  Accounts receivable, net                        634.6              634.1
  Inventories                                     977.2              801.7
  Prepaid expenses and other                      522.2              435.1
                                           ------------        -----------
  Total current assets                          3,236.8            2,929.6

  Property, plant and equipment, net            1,043.3            1,050.8
  Other assets                                  1,058.3              791.6
                                           ------------        -----------

  Total assets                                  5,338.4            4,772.0
                                           ============        ===========

  Debt maturing within one year                   566.3              882.5
  Accounts payable                                594.7              538.2
  Other current liabilities                     1,278.7            1,089.6
                                           ------------        -----------
  Total current liabilities                     2,439.7            2,510.3

  Long-term debt                                1,256.8              766.5
  Other non-current liabilities                   659.0              701.0

  Total shareholders' equity                      982.9              794.2
                                           ------------        -----------

  Total liabilities and shareholders'
   equity                                      $5,338.4           $4,772.0
                                           ============        ===========



                             AVON PRODUCTS, INC.
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (Unaudited)
                                (In millions)

                                                 Nine Months Ended
                                                    September 30
                                             --------------------------
                                               2006              2005
                                             -------           -------

  Cash Flows from Operating Activities:
  Net income                                  $293.5            $664.4
    Depreciation and amortization              120.4              97.5
    Provision for doubtful accounts            104.3              96.7
    Provision for obsolescence                 120.7              54.5
    Asset impairment                             7.7                 -
    Share-based compensation                    46.5               8.0
    Deferred income taxes                      (45.2)              1.0
    Other                                       15.4               7.1

  Changes in assets and liabilities:
    Accounts receivable                       (102.3)            (92.2)
    Inventories                               (278.7)           (279.9)
    Prepaid expenses and other                 (39.1)            (46.6)
    Accounts payable and accrued
     liabilities                               234.1              27.5
    Income and other taxes                     (21.8)            (99.8)
    Non-current assets and liabilities         (17.0)            (68.5)
                                             -------           -------
  Net cash provided by operating
   activities                                  438.5             369.7

  Cash Flows from Investing Activities:
  Capital expenditures                         (97.9)           (145.0)
  Disposal of assets                            11.1               9.8
  Other investing activities                   (48.4)            (11.5)
                                             -------           -------
  Net cash used by investing activities       (135.2)           (146.7)

  Cash Flows from Financing Activities:
  Cash dividends                              (239.0)           (237.5)
  Total debt, net change                       176.1             715.3
  Repurchase of common stock                  (233.4)           (511.5)
  Proceeds from exercise of stock
   options, net of taxes                        26.8              59.0
  Other financing activities                    (1.4)             (0.5)
                                             -------           -------
  Net cash (used) provided by financing
   activities                                 (270.9)             24.8

  Effect of exchange rate changes on
   cash and equivalents                         11.7             (31.7)
                                             -------           -------

  Net increase in cash and equivalents         $44.1            $216.1
                                             =======           =======


                           AVON PRODUCTS, INC.
                          SUPPLEMENTAL SCHEDULE

                  Three Months Ended September 30, 2006

                             REGIONAL RESULTS

                                     Total
                                    Revenue
                      Total Revenue in Local  Operating   Op.         Active
    $ in Millions          US$      Currency  Profit US$ Margin Units  Reps
                     -------------- -------- ----------- ------ ----- ------
                             % var. % var.         % var. 2006 % var. % var.
                               vs     vs             vs   per-   vs     vs
                              3Q05   3Q05           3Q05  cent  3Q05   3Q05
                     -------------- -------- ----------- ------ ----- ------

  North America      $570.2   -1%    -1%     $16.4  -70%  2.9%   -9%   -2%
  Latin America(1)    707.5   28     25      125.6   13  17.8    13    12
  Western Europe,
   Middle East
   & Africa           261.3    8      6      (28.1)   * -10.8     1     4
  Central &
   Eastern Europe     269.0    2     -3       57.8  -10  21.5    -4     8
  Asia Pacific        201.3   -3     -3       20.9  -25  10.4    -9   -10
  China                49.3    9      7       (3.0)   *  -6.1     1     *
  Total from
   Operations       2,058.6    9      7      189.6  -29   9.2     2     6
  Global Expenses         -    -      -      (22.1)  -3     -     -     -
  Consolidated(1)  $2,058.6    9%     7%    $167.5  -32%  8.1%    2%    6%


                           CATEGORY SALES (US$)
                                                           Consolidated
                                                      ----------------------
                                                                   % var. vs
                                                                        3Q05
                                                     -----------------------
  Beauty (cosmetics/fragrances/skin care/toiletries)      $1,433.7      10%
  Beauty Plus (fashion jewelry/watches/apparel/
   accessories)                                              382.2        6
  Beyond Beauty (home products/gift/decorative)              222.2        8
                                                           -------   ------
   Net Sales                                              $2,038.1       9%
  Other Revenue                                               20.5        1
                                                           -------   ------
  Total Revenue                                           $2,058.6       9%


                   Nine Months Ended September 30, 2006

                             REGIONAL RESULTS

                                     Total
                                    Revenue
                      Total Revenue in Local  Operating    Op.        Active
    $ in Millions          US$      Currency  Profit US$ Margin Units  Reps
                     -------------- -------- ----------- ------ ----- ------
                             % var.  % var.       % var. 2006 % var. % var.
                               vs      vs            vs   per-   vs     vs
                              9M05     9M05         9M05  cent  9M05   9M05
                     -------------- -------- ----------- ------ ----- ------

  North America    $1,804.1   1%     0%     $115.2 -46%  6.4%   -5%   -4%
  Latin America(1)  1,973.2   24     19      291.2   -9  14.8     9    12
  Western Europe,
   Middle East &
   Africa             767.8    3      6     (36.4)    *  -4.7     3     2
  Central & Eastern
   Europe             863.6    3      2     190.6   -18  22.1    -1     9
  Asia Pacific        588.0   -8     -6      30.9   -66   5.3   -10   -11
  China               144.6   -6     -9     (7.9)     *  -5.5    -8     *
  Total from
   Operations       6,141.3    7      6     583.6   -36   9.5     1     5
  Global Expenses         -    -      -   (104.6)   -63     -     -     -
  Consolidated(1)  $6,141.3   7%     6%    $479.0   -44% 7.8%    1%    5%


                           CATEGORY SALES (US$)
                                                         Consolidated
                                                   ------------------------
                                                                   % var. vs
                                                                      9M05
                                                   ------------------------

  Beauty (cosmetics/fragrances/skin care/toiletries)       $4,267.8      7%
  Beauty Plus (fashion jewelry/watches/apparel/accessories) 1,196.7      12
  Beyond Beauty (home products/gift/decorative)               614.9       -
                                                           --------  ------
   Net Sales                                               $6,079.4      7%
  Other Revenue                                                61.9       2
                                                           --------  ------
   Total Revenue                                           $6,141.3      7%




  * Calculation not meaningful

  (1) The acquisition of our licensee in Colombia favorably impacted revenue
      growth in Latin America for the three and nine months ended September
      30, 2006, by 12 points and 11 points, respectively.  The acquisition
      also favorably impacted revenue growth in Consolidated Avon for the
      three and nine months ended September 30, 2006, by 3 points in each
      period.

FCMN Contact: sharon.samuel@avon.com

SOURCE: Avon Products, Inc.

CONTACT: Investors: Renee Johansen, or Rob Foresti, +1-212-282-5320, or
Media: Victor Beaudet, +1-212-282-5344, or Sharon Samuel, +1-212-282-5322, or
Jennifer Vargas, +1-212-282-5404, all for Avon Products, Inc.

Web site: http://www.avon.com/
http://www.avoncompany.com/

Company News On-Call: http://www.prnewswire.com/comp/079575.html

 
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