Avon Profit Up but Outlook Disappoints

Avon Products Inc. (AVP), the world's largest direct seller of beauty products, said on Monday first-quarter profit jumped 16 percent, as strong growth in countries such as China and Russia offset expected weakness in the United States.

However, the company gave a second-quarter outlook slightly below analysts' mean expectations, sending shares down more than 4 percent.

Avon forecast second-quarter earnings of about 66 cents per share, including a tax-audit benefit of 17 cents a share. Analysts had expected second-quarter earnings of 52 cents per share.

But the second-quarter forecast suggests Avon is revising expectations down 3 cents, as the company's guidance is only 14 cents, not 17 cents, ahead of the current consensus estimate, Deutsche Bank analyst William Schmitz said.

Profit at New York-based Avon climbed to $172.0 million, or 36 cents per share, from $148.1 million, or 31 cents per share, a year earlier.

Analysts, on average, expected Avon, whose product lines include Anew and Skin-So-Soft (search), to earn 35 cents per share, according to a poll by Reuters Estimates.

First-quarter revenue rose 7 percent to $1.88 billion, below analysts' mean expectation for sales of about $1.91 billion, according to Reuters Estimates.

Avon is ridding itself of the toy business and introducing other items, such as plus-size intimate apparel, to attract U.S. consumers. It does not expect to return to profitable growth in the United States until 2006.

U.S. sales fell 6 percent, as beauty sales fell and the company worked on exiting certain businesses. U.S. operating profit slipped 15 percent.

Avon, which has 4.9 million independent representatives selling its products worldwide, said sales and operating profit rose in each of the company's other regions: Asia Pacific, Europe and Latin America.

In April, Avon said it won Chinese government approval to test direct selling in three regions and that it would start testing in Beijing and Tianjin and the southern province of Guangdong, but did not say how the tests would impact growth.

China closed the door on all direct selling — including Avon's — in 1998, confining the company to selling through retail outlets. The ban was mainly aimed at domestic pyramid schemes, but Avon was also affected.

Avon said first-quarter revenue in China rose nearly 40 percent. Strong growth also came in Russia, which posted a 24 percent revenue climb after an 89 percent jump a year earlier.

"Russia, Central and Eastern Europe continue to post stellar top-line results, although region-wide units were somewhat weak at 6 percent," Schmitz, who has a "hold" rating on the shares, said of European growth.

While the company is getting growth in developing areas, "mature markets remain extremely soft," Schmitz said.

U.K. revenue fell 3 percent. A year earlier, sales in the United Kingdom were helped by the launch of Anew Clinical Line and Wrinkle Corrector.

Avon raised its 2005 earnings per share forecast to $2.12 to $2.17 from $1.95 to $2.00, citing a second-quarter benefit of about $80 million, or 17 cents per share, from tax-audit settlements in prior years.

Analysts, on average, had expected the company to earn $1.99 per share for the year.

Additional tax settlements are possible during 2005 and could result in further benefits, the company said.

Avon shares were down $1.68, or 4.2 percent, at $38.40 in morning trade on the New York Stock Exchange.