Avon Lowers Sales, Profit Forecast, Shares Plunge

Avon Products Inc. (AVP) on Friday posted a 33 percent increase in third-quarter profit, but continued concerns over weakness in the United states pushed the stock 7 percent lower.

The company raised its full-year profit outlook but forecast lower fourth-quarter U.S. sales and profit.

"Without U.S., Avon becomes an emerging markets story with an inherently greater risk profile, which does not warrant above-group valuation," Andrew Shore, analyst at Deutsche Bank, wrote in a research note as he downgraded the stock to "hold" from "buy."

New York-based Avon reported a third-quarter profit of $176.9 million, or 37 cents a share, compared with $133.1 million, or 28 cents a share, a year earlier.

Analysts on average forecast 34 cents a share, according to Reuters Estimates.

Total revenue rose 11 percent to $1.81 billion. Sales would have been up 10 percent without a boost from the weaker dollar, which lifts the value of sales outside the United States.

Unit volume rose 15 percent and the company had 11 percent more active sales representatives in the quarter, compared with the year earlier.

U.S. profit fell 9 percent and sales fell 1 percent on weak sales of color cosmetics, higher freight costs and the impact of hurricanes during the quarter. The number of active representatives, a key measure for the company, was flat in the United States in the quarter.

"Rep growth is slowing to unacceptable levels and new launches have been abysmal," Shore said.

Low- and middle-income U.S. consumers are being pressured by higher fuel prices and concerns about unemployment, Avon Chairman and Chief Executive Andrea Jung (search) said in a conference call with analysts, citing the company's own research.

Latin American profit rose 18 percent, beating the company's expectations, on an 8 percent sales gain, with strength seen especially in Venezuela and Brazil, Avon said.

European profit rose 60 percent, with sales up 33 percent, helped by promotions and incentive programs for sales representatives.

Asia Pacific profit rose 29 percent, and sales rose 14 percent, helped by strong sales gains in China.

The company raised its full-year profit outlook, due to the third-quarter results and the possibility of a lower fourth-quarter tax rate.

Avon sees earnings for the year at $1.75 to $1.77 a share, up from its prior forecast of $1.72 a share. Analysts on average had forecast $1.74 a share, according to Reuters Estimates.

The company forecast fourth-quarter earnings per share of 58 cents to 60 cents on double-digit sales growth. Analysts, on average, forecast 60 cents a share, according to Reuters Estimates.

U.S. sales are expected to fall 3 percent, with profit of about $110 million, down from $133 million a year earlier, the company said.

Avon also said it expects in 2005 to reach its long-term targets of at least 10 percent earnings growth and a double-digit sales increase in local currencies.

Avon shares fell $2.96 to $40.25 Friday on the New York Stock Exchange (search).