May 1, 2012
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Avon's profit sinks as sales continue to slide

May 1, 2012

Avon Products Inc on Tuesday reported a disappointing quarterly profit as the company dealt with higher costs and declining sales, potentially giving new ammunition to smaller rival Coty's bid to take over the world's largest direct seller of cosmetics.

Avon sold 1 percent fewer items, and saw the number of active sales representatives continue to slip, falling 2 percent. Excluding the impact of currency, sales edged up 1 percent.

The company, which has begun laying off corporate employees, said its gross margin fell 3.1 points to 60.8 percent of sales, hurt by labor costs and the costs to make and promote its cosmetics.

"Margins were pretty much a disaster but it goes to show how much they have to spend back to grow just 1 percent," said Ali Dibadj, an analyst with Alliance Bernstein.

The company last month rebuffed a $10 billion, or $23.25 a share, takeover bid from smaller rival Coty, saying a new CEO would do more to increase the company's value.

In premarket trading, Avon shares fell about 2.7 percent to $21.02, having closed Monday at $21.60.

Coty has said it will not raise its bid until it can get access to Avon's books and conduct due diligence.

But Avon's weak results could bolster Coty's argument that Avon has been mismanaged and needs to be taken private to turn around.

Avon has been bedeviled by heavy competition from drugstores in the United States, aggressive pricing by rivals in Eastern Europe and inadequate ordering systems that have frustrated representatives in Brazil.

It is also facing a U.S. probe into whether it committed bribery overseas last decade.

"It probably gives Coty more fodder if they wanted to make a more aggressive push for Avon," Dibadj said.

Avon last year shelved a top-to-bottom business review, preferring to wait until its new CEO arrived. Sheri McCoy, previously a senior executive with Johnson & Johnson, took the reins of the company on April 23, replacing Andrea Jung after a 12-year stint.

In a statement, the company's finance chief Kimberly Ross said Avon would discuss its growth strategy "at the appropriate time."

Avon reported a net profit of $26.5 million, or 6 cents per share, on revenue of $2.58 billion in the quarter that ended March 31, compared with net income of $143.6 million, or 33 cents, on revenue of $2.63 billion a year earlier.

Excluding certain items, Avon had a 10 cent profit, well below the 28 cents Wall Street was expecting, according to Thomson Reuters I/B/E/S.

There were nonetheless signs of improvement. Sales in Brazil, its top market, rose 2 percent excluding the impact of currency exchange despite aggressive competition, helped by an increase in the number of reps.

And sales in Russia, another top market, rose 1 percent as Avon won new representatives.

But in North America, sales continued their years-long slide, falling 4 percent, hurt by a 10 percent loss of reps. (Reporting By Phil Wahba; Editing by Maureen Bavdek)

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