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Avon Announces 3Q EPS $.01 Ahead of Expectations Despite Latin America Challenges

Earnings Up 9% to $.48 Before Net Charge of $.10 Per Share

PRNewswire
Oct 18, 2002

      Sales Up 11% in Local Currencies on 13% Growth in Units and a
                  10% Increase in Active Representatives

NEW YORK, Oct. 18 /PRNewswire-FirstCall/ -- Avon Products, Inc. (NYSE: AVP) today announced ongoing strength in sales, operating margin and earnings in the third quarter of 2002, driven by the continuing resurgence of its U.S. business and strong local currency results in all international regions.

Earnings in the quarter increased 9% to $.48 per share, versus $.44 per share in the third quarter of 2001 before unusual items in both periods. Earnings in the quarter were $.01 per share ahead of the company's previous guidance and the consensus estimate of Wall Street analysts. Avon said the earnings upside was due to higher-than-expected gains from foreign currency contracts in the quarter. The company's full-year earnings outlook remains unchanged, due to the expected impact of less-favorable currency exchange rates in the fourth quarter.

Including the net charge, earnings were $.38 per share in the third quarter of this year, versus earnings of $.48 per share including unusual items last year. Net income in the quarter was $90.3 million, versus $114.6 million in the year-ago period.

As previously disclosed, Avon recorded a net charge of $36.3 million pretax ($25.2 after-tax, or $.10 per share). The charge resulted from a special charge of $43.6 million pretax ($30.4 million after-tax, or $.12 per share) related to the company's Business Transformation initiatives, which was partially offset by a benefit of $7.3 million pretax ($5.2 million after-tax, or $.02 per share) from an adjustment to a special charge recorded in the fourth quarter of 2001 for Business Transformation initiatives.

In last year's third quarter, unusual items resulted in a net benefit of $15.2 million pretax ($9.7 million after tax, or $.04 per share).

Sales in the third quarter of 2002 increased 3% to $1.45 billion, versus $1.41 billion in the year-ago period.

Sales growth, excluding the impact of foreign currency translation, accelerated to 11% on top of the very strong 12% local currency increase in last year's third quarter. Local currency sales were driven by unit growth of 13% and a 10% increase in active Representatives in the quarter. All geographic regions contributed to the gains in units and Representatives.

Before unusual items in both periods, operating profit in the quarter rose 7% in dollars and 21% in local currencies, with all geographic regions posting double-digit local currency gains. In addition, operating margin expanded 50 basis points to a record third-quarter level of 13.1%, driven by accelerating benefits from the company's Business Transformation initiatives. Gross margin rose 50 basis points to 62.9%.

Cash flow from operations was strong in the quarter. After making an $80 million cash contribution to its employee pension plans, cash flow was $40 million. In last year's period, cash flow of $114 million included a one-time benefit of $27 million from a settlement with Sears.

Commenting on the results, Andrea Jung, Avon's chairman and chief executive officer, said, "We are very pleased with the company's accelerating growth in local currency sales in the quarter, especially against the backdrop of ongoing currency weakness in Latin America and the difficult comparisons against very strong results in last year's third quarter. We are also pleased with the pace of beauty sales, which grew 5% in the quarter, as we continue to focus on product innovation and consumer image initiatives."

"The U.S. business had another outstanding quarter, with sales up 6% on top of a 7% increase last year, while operating profit climbed 17% and operating margin grew 150 basis points to a record third-quarter level. The U.S. continues to build strength-on-strength, demonstrating that our strategies are working and that we can produce solid sustainable growth in our largest and most competitive market," Ms. Jung said.

"In addition, profit gains of more than 20% in Europe and Asia in the quarter more than offset a decline in Latin America, where local currency results were robust but currency translation significantly reduced dollar-denominated profits," she said.

"We're also pleased that Avon's Business Transformation initiatives are gaining momentum, enabling us to expand third-quarter operating margin, even after increasing strategic spending over last year. We are confident that we will achieve our goal of a 50 basis-point improvement in operating margin for full-year 2002," Ms. Jung said.

"Looking ahead, we see the fundamental strength of our global direct selling operations continuing and we are confident that we will achieve our stated earnings target of $2.30 per share in 2002, excluding unusual items," she said. "That would make 2002 our third consecutive year of double-digit earnings growth."

Avon will conduct a conference call today at 10:00 am New York time to discuss the results for the quarter and the outlook for the rest of the year. The conference call will be webcast live and can be accessed through the Investor section of the company's website, http://www.avon.com/.

Regional Highlights

In the North America region, Avon U.S., the company's largest operation, increased sales in the third quarter by 6%, driven by unit growth of 9% and a 2% gain in the number of active Representatives. Sales of beauty products in the U.S. grew 9%, due to strong double-digit increases in sales of skin care products and color cosmetics. Operating profit in the U.S. climbed 17%, and operating margin expanded by 150 basis points to a record level, driven by the benefits from Business Transformation, particularly in the area of supply chain.

In Europe, sales in the quarter were up 28% in dollars and 23% in local currencies, driven by unit growth of 32% and a 23% gain in the number of active Representatives. The markets of Central and Eastern Europe again generated significant double-digit sales increases, including Russia, which doubled its sales versus the year-ago period. The U.K., the largest market in the region, generated double-digit sales growth. Europe's operating profit in the quarter rose 21% in dollars and 18% in local currencies. Operating margin declined 70 basis points versus last year's third quarter, as expected, due to expenses associated with the implementation of the region's supply chain strategies.

In Latin America, sales in the third quarter were down 14% in dollars, but excluding the impact of foreign currency translation, were up 13%, driven by a 9% gain in units and a 10% increase in active Representatives. Most markets in the region posted double-digit local currency sales growth, with especially robust gains in Brazil and Venezuela. Latin America's operating profit was down 9% in dollars but rose 14% in local currencies, driven by strong results in Brazil, Venezuela, Mexico and Chile. Operating margin expanded by 140 basis points in the region, with gains in most major markets -- notably Mexico -- offsetting a significant decline in Argentina. Avon's business in Argentina remains profitable despite the country's economic issues and major currency devaluation this year.

In Asia, sales in the quarter were up 9% in dollars, and 7% in local currencies, reflecting unit growth of 14% and a 5% increase in the number of active Representatives. Most major markets contributed to the sales growth, particularly China, Taiwan and Australia. Operating profit in Asia rose 26% in dollars and 23% in local currencies, driven by gains in Japan and China. Operating margin in the region expanded 200 basis points in the quarter, with nearly all markets showing significant improvements.

Nine-Month Results

For the first nine months of 2002, Avon said that earnings before unusual items increased 13% to $1.52 per share, versus $1.35 in the first nine months of 2001. Including unusual items, earnings in the first nine months of 2002 were up 2% to $1.42 per share, versus $1.39 per share in the year-earlier period.

Net income in the first nine months of 2002, before unusual items, rose 13% to $366.8 million. Including unusual items, net income in the quarter was up 2% to $341.6 million.

Sales in first nine months of 2002 increased 3% to $4.33 billion, from $4.22 billion in the first nine months of 2001. Excluding the impact of foreign currency translation, sales were up 10% over prior year.

Avon is the world's leading direct seller of beauty and related products, with approximately $6.0 billion in annual revenues. Avon markets to women in 143 countries through 3.5 million independent sales Representatives. Avon product lines include such recognizable brands as Avon Color, Anew, Skin-So-Soft, Advance Techniques Hair Care, beComing and Avon Wellness. Avon also markets an extensive line of fashion jewelry and apparel. More information about Avon and its products can be found on the company's web site http://www.avon.com/.

  Cautionary Statement under the Private Securities Litigation Reform Act
   of 1995

Statements in this release, which are not historical facts or information, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management's reasonable current assumptions and expectations. Such forward-looking statements involve risks, uncertainties and other important factors, which may cause the actual results of the Company 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 important factors include, among others, the following: general economic and business conditions in the Company's markets including economic and political uncertainties in Latin America and the possible impact of the U.S. West Coast dock workers' labor dispute; the Company's ability to implement its business strategy and its Business Transformation initiatives including "clustering" of its markets; the Company's ability to achieve anticipated cost savings and profitability targets; the impact of substantial currency exchange fluctuations in the Company's principal foreign markets and the success of the Company's foreign currency hedging strategies; the impact of possible pension funding obligations on the Company's cash flow; and the effect of legal and regulatory proceedings and restrictions imposed on the Company or its operations by foreign governments. Additional information identifying such important factors is contained in the Company's Form 10-K/A report for the year ended December 31, 2001, filed with the S.E.C. The Company undertakes no obligation to update any such forward-looking statements.

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


                            Three months                Nine months
                                ended        Percent      ended      Percent
                             September 30    Change    September 30   Change
                             2002      2001            2002      2001


  Net sales              $1,448.8  $1,411.7    3%  $4,334.4  $4,215.1    3%
  Other revenue              14.6       9.7            39.8      30.5
       Total revenue      1,463.4   1,421.4    3%   4,374.2   4,245.6    3%

  Cost of sales (1) &
   (3)                      544.6     535.1         1,628.4   1,583.3
  Marketing,
   distribution and
   administrative
   expenses (1)             728.9     711.4         2,158.5   2,105.5
  Contract settlement
   gain, net of related
   expenses (2)                --     (25.9)            0.0     (25.9)
  Special charge (3)         34.3        --            34.3        --
       Operating profit     155.6     200.8  -23%     553.0     582.7   -5%

  Interest expense           14.2      16.1            40.5      54.7
  Interest income            (3.2)     (3.5)          (11.7)     (9.7)
  Other expense
   (income), net (4) &
   (5)                        1.1      12.4           (10.3)     21.3
       Total other
        expenses             12.1      25.0            18.5      66.3
  Income from continuing
   operations
   before taxes,
    minority interest
    and
   cumulative effect of
    accounting change       143.5     175.8  -18%     534.5     516.4    4%
  Income taxes               51.4      60.6           187.5     179.8

  Income from continuing
   operations before
   minority
   interest and
    cumulative effect of
    accounting change        92.1     115.2  -20%     347.0     336.6    3%
  Minority interest          (1.8)     (0.6)           (5.4)     (2.1)
  Income from continuing
   operations before
    cumulative effect of
     accounting change       90.3     114.6  -21%     341.6     334.5    2%
  Cumulative effect of
   accounting change,
   net of tax                  --        --             0.0      (0.3)
  Net income                $90.3    $114.6  -21%    $341.6    $334.2    2%


  Earnings per share:

  Basic earnings per
   share:
       Continuing
        operations           $.38      $.49  -22%     $1.45     $1.41    3%
       Cumulative effect
        of accounting
        change                 --        --              --     (0.00)
                             $.38      $.49  -22%     $1.45     $1.41    3%

  Diluted earnings per
   share: (6)
       Continuing
        operations           $.38      $.48  -21%     $1.42     $1.39    2%
       Cumulative effect
        of accounting
        change                 --        --              --     (0.00)
                             $.38      $.48  -21%     $1.42     $1.39    2%

  Average shares
   outstanding:
  Basic                    235.88    236.28          236.34    236.97
  Diluted                  244.84    245.73          245.81    246.09

  Notes:

  (1) Effective January 1, 2002, the Company adopted the provisions of
      Emerging Issues Task Force (_EITF_) 00-14, "Accounting for Certain
      Sales Incentives", which requires that the costs of certain products
      used in Avon's promotional activities, previously reported in
      Marketing, distribution and administrative expenses, be classified in
      Cost of sales.  For comparison purposes, the prior periods were
      adjusted to reflect the adoption of EITF 00-14.

  (2) For the three and nine months ended September 30, 2001, the Company
      received a cash settlement, net of related expenses, of $25.9 pretax
      ($15.7 after-tax; $0.06 diluted EPS) to compensate Avon for lost
      profits and incremental expenses as a result of the cancellation of a
      retail agreement with Sears. Lost profits attributable to the third
      quarter 2001 were estimated to be $4.3 pretax ($2.6 after-tax;
      $0.01 diluted EPS), which were included in EPS adjusted for unusual
      items.

  (3) For the three and nine months ended September 30, 2002, the Company
      recorded a special charge of $43.6 pretax ($30.4 after-tax; $0.12
      diluted EPS) related to the Company's Business Transformation
      initiatives. Also, the Company recorded a benefit of $7.3 pretax ($5.2
      after-tax; $0.02 diluted EPS) from an adjustment to the special charge
      for Business Transformation initiatives recorded in the fourth
      quarter of 2001. The net effect of the two unusual items is a
      charge of $36.3 pretax ($25.2 after-tax; $0.10 diluted EPS), of
      which $2.0 pretax is included in Cost of sales.

  (4) For the three months ended September 30, Other expense (income), net
      includes foreign exchange (gains) losses
      of ($2.0) and $2.3 in 2002 and 2001, respectively. For the nine
      months ended September 30, Other expense (income),
      net includes foreign exchange (gains) losses of ($18.7) and $8.4 in
      2002 and 2001, respectively. The three and nine months ended
      September 30, 2002 include foreign exchange gains of ($3.8) and
      ($30.1), respectively, related to U.S. dollar denominated assets,
      mainly in Argentina, Venezuela, Brazil and Mexico.

  (5) The three and nine months ended September 30, 2001 included a $6.4
      pretax expense ($3.4 after-tax; $0.01 diluted EPS) related to a
      settlement of a tax assessment in Argentina.

  (6) For purposes of calculating diluted earnings per share for the
      three months ended September 30, 2002 and 2001, after tax interest
      expense of $2.6 and $2.5, respectively, applicable to convertible debt
      was added back to net income. For the nine months ended September 30,
      2002 and 2001, after tax interest expense of $7.8 and $7.5,
      respectively, applicable to convertible debt was added back to net
      income.


                           AVON PRODUCTS, INC.
                RECONCILIATION SCHEDULE FOR UNUSUAL ITEMS

  (in millions, except per share data)
                                         Three Months Ended September 30
                                                         Net Income
                                                           from
                                       Operating Pretax   Cont'g   Diluted
                                        Profit   Income Operations  E.P.S.
           2002
           As Reported                   $155.6   $143.5    $90.3   $0.38
                % vs. prior year           -23%     -18%     -21%    -21%

           Special Charge *                43.6     43.6     30.4    0.12

           Reversal of 2001 Charge *       (7.3)    (7.3)    (5.2)  (0.02)

           Adjusted                      $191.9   $179.8   $115.5   $0.48
                % vs. prior year             7%      12%      10%      9%


           2001
           As Reported                   $200.8   $175.8   $114.6   $0.48

           Sears Settlement **            (21.6)   (21.6)   (13.1)  (0.05)

           Argentina Tax Settlement          --      6.4      3.4    0.01

           Adjusted                      $179.2   $160.6   $104.9   $0.44


  * The Company recorded a Special charge of $43.6 pretax
    ($30.4 after-tax; $0.12 diluted EPS) related to the Company's Business
    Transformation initiatives. Also, the Company recorded a benefit of $7.3
    pretax ($5.2 after-tax; $0.02 diluted EPS) from an adjustment to the
    special charge for Business Transformation initiatives recorded in the
    fourth quarter of 2001. The net effect of the two unusual items is a
    charge of $36.3 pretax ($25.2 after-tax; $0.10 diluted EPS), of which
    $2.0 pretax is included in Cost of sales.

  ** The Company received a cash settlement, net of related expenses, of
     $25.9 pretax ($15.7 after-tax; $0.06 diluted EPS) to compensate Avon
     for lost profits and incremental expenses as a result of the
     cancellation of a retail agreement with Sears. Lost profits
     attributable to the third quarter 2001 were estimated to be $4.3 pretax
     ($2.6 after-tax; $0.01 diluted EPS), which were included in EPS
     adjusted for unusual items.


                            AVON PRODUCTS, INC.
                 RECONCILIATION SCHEDULE FOR UNUSUAL ITEMS

  (in millions, except per share data)
                                         Nine Months Ended September 30
                                                         Net Income
                                                           from
                                       Operating Pretax   Cont'g   Diluted
                                        Profit   Income  Operations E.P.S.
           2002
           As Reported                   $553.0   $534.5   $341.6   $1.42
                % vs. prior year            -5%       4%       2%      2%

           Special Charge*                 43.6     43.6     30.4    0.12

           Reversal of 2001 Charge*        (7.3)    (7.3)    (5.2)  (0.02)

           Adjusted                      $589.3   $570.8   $366.8   $1.52
                % vs. prior year             5%      14%      13%     13%


           2001
           As Reported                   $582.7   $516.4   $334.5   $1.39

           Sears Settlement **            (21.6)   (21.6)   (13.1)  (0.05)

           Argentina Tax Settlement          --      6.4      3.4    0.01

           Adjusted                      $561.1   $501.2   $324.8   $1.35


  *  The Company recorded a Special charge of $43.6 pretax ($30.4 after-
     tax; $0.12 diluted EPS) related to the Company's Business
     Transformation initiatives. Also, the Company recorded a benefit of
     $7.3 pretax ($5.2 after-tax; $0.02 diluted EPS) from an adjustment to
     the special charge for Business Transformation initiatives recorded in
     the fourth quarter of 2001. The net effect of the two unusual items is
     a charge of $36.3 pretax ($25.2 after-tax; $0.10 diluted EPS), of which
     $2.0 pretax is included in Cost of sales.

  ** The Company received a cash settlement, net of related expenses, of
     $25.9 pretax ($15.7 after-tax; $0.06 diluted EPS) to compensate Avon
     for lost profits and incremental expenses as a result of the
     cancellation of a retail agreement with Sears. Lost profits
     attributable to the third quarter 2001 were estimated to be $4.3 pretax
     ($2.6 after-tax; $0.01 diluted EPS), which were included in EPS
     adjusted for unusual items.

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SOURCE: Avon Products, Inc.

CONTACT: Brian Martin, +1-212-282-5103 or Victor Beaudet,
+1-212-282-5344, or Investors, Renee Johansen or Rob Foresti, +1-212-282-5320,
all of Avon Products, Inc.

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

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

 
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