Avon Products 1Q revenue rises 15 pct but profit falls with charge for Venezuelan devaluation

Avon Products 1Q profit drops with currency hit

NEW YORK — A currency devaluation in Venezuela, costs related to a bribery investigation in China and restructuring charges drove Avon Products Inc.’s profit down 64 percent in the first quarter.

But consumers in many international markets spent more on Avon’s cosmetics and other products, and its revenue climbed 15 percent, the company said Friday.

Avon, whose force of thousands of independent sellers ballooned during the recession as unemployed workers sought new income, increased its marketing spending during the quarter and continued to recruit sellers to promote its low-price products, some of which sell for less than $5.

Its outside sales force grew 6 percent, and it spent 23 percent more than a year earlier marketing its brands, which include Skin-So-Soft and Mark, as well as Avon.

Avon’s revenue fell 2 percent in North America, and units sold were flat, hurt by weakness in its non-beauty business.

Regionally, the biggest drop — 31 percent — came in China in both direct sales and sales at the company’s beauty boutiques. Its sales were up more than 20 percent in Latin America and Central and Eastern Europe, two key markets for Avon.

“We are pleased with the results in most regions, including the early signs of stabilization in North America,” wrote BMO Capital Markets analyst Connie Maneaty in a note to investors. “However, the collapse of business in China suggests that a growth vehicle has been sidelined and will take considerable time and effort to rebuild.”

Avon has been in the midst of a bribery investigation in China since 2008, when it received a tip that some travel, entertainment and other expenses in China may have been improper.

Avon has not said much publicly about the investigation, except that the company has expanded it to other countries. The Wall Street Journal, citing an anonymous source, reported this month that the probe involves the purchases of trips for Chinese government officials with ties to Avon’s business.

Earlier this month it put four executives on leave related to the investigation, which is still ongoing and has spread to other countries.

CEO Andrea Jung said the company is holding reviews “in a selection of markets representing each of our four international business units outside of China,” but added the original allegation was in China only.

The company said its costs related to the investigation were higher during the quarter but did not disclose them.

In a call with analysts, Jung said that aside from the investigation, China results have been weak and the company plans to focus more on direct selling, rather than a two-tiered structure of retail and direct selling, to improve results in the region. The change will begin in the summer and roll out through 2011. Avon named Rene Ordonez new general manager of China to lead the transition, effective immediately. He had been general manager of South Latin America.

“We anticipate this is the beginning of a new day in China,” Jung said.

Avon earned $42.5 million, or 10 cents per share, for the period that ended March 31, down from $117.3 million, or 27 cents per share, a year earlier.

But it earned 33 cents per share, excluding one-time costs like the devaluation of Venezuela’s bolivar and an internal restructuring that involved job cuts and other expense reductions. That beat the average forecast of analysts surveyed by Thomson Reuters by a penny per share.

Its revenue jumped 15 percent to $2.49 billion.

In Latin America and Europe, which make up about 70 percent of Avon’s sales, revenue rose solidly: 22 percent in Latin America and 28 percent in Central and Eastern Europe. Revenue rose 23 percent in Western Europe, the Middle East and Africa. But it increased more modestly — 10 percent — in Avon’s Asia Pacific region, which does not include China.

Competitor Revlon Inc., which reported on its first-quarter on Thursday, also saw revenue from its popular brands like Almay and Ultima II fall in the U.S. and grow overseas.

Avon shares fell 34 cents, or 1 percent, to close at $32.33 Friday.