May 1, 2012 / 11:45 AM / 6 years ago

Avon's profit sinks as sales dip; shares fall

(Reuters) - Avon Products Inc (AVP.N) 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 its army of sales representatives shrank 2 percent. Excluding the impact of currency, sales edged up 1 percent, helped by modest price increases.

The company’s shares fell 8 percent, or $1.72, to $19.88 in midday trading, their lowest level since just before smaller rival Coty went public with its takeover offer on April 2.

Avon, which has begun laying off corporate employees and will let go more this quarter, said its gross margin fell 3.1 points to 60.8 percent of sales, hurt by labor costs in such markets as Brazil, Argentina and Venezuela, and the costs to make and promote its cosmetics in Russia.

“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 an unsolicited $10 billion, or $23.25 a share, takeover bid from Coty, saying a new CEO would do more to increase the company’s value than being bought out.

That new CEO, Sheri McCoy, who was a top executive at Johnson & Johnson and replaced 12-year veteran Andrea Jung last week, acknowledged how much work was ahead of her.

“Avon also faces significant challenges. It has lost market share and missed expectations. It has had problems executing. It has faced operational and strategic issues,” McCoy said on a call with Wall Street analysts, in her first public statements since taking the helm.

“Stabilizing the business is my first and most urgent objective,” McCoy said.

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

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For a graphic: link.reuters.com/zux87s

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AMMO FOR COTY?

Avon’s weak results could bolster Coty’s argument that Avon has been mismanaged and needs to be taken private for the business to turn around.

Coty has said it could consider raising its bid but would need to get access to Avon’s books and conduct due diligence to get a better handle on the extent of Avon’s problems and the potential fallout of an ongoing U.S. probe it is facing into whether it committed bribery overseas last decade.

Its own internal probe has cost it tens of millions of dollars.

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

Ross told analysts that Avon’s problems were “fixable.”

Avon last year shelved a top-to-bottom business review, preferring to wait until a new CEO was in place.

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.

But Ross said on the call that she expected pressure from competitors to continue in Brazil and that Avon needs to offer more “Brazilian-centric products” and ad campaigns.

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.

McCoy said one of her priorities will be to keep reps “motivated and well compensated.”

Avon will face shareholders on Thursday at its annual meeting in New York.

Reporting By Phil Wahba; Editing by Maureen Bavdek

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