Avon Profit Down but Less Than Feared

Cosmetics company Avon Products Inc. (AVP) on Friday said quarterly profit fell 7 percent as high gasoline prices hurt sales in the United States and weakness continued in other regions such as China.

Still, after warning twice in the past three months that profit would not meet expectations, the results were not as bad as feared, and Avon shares rose almost 7 percent.

"The results are still weak and broadly so, but have not deteriorated from last quarter," April Scee, analyst at Banc of America Securities, said in a research note. "In fact, it looks like areas of particular concern may be stabilizing."

The world's largest direct seller of cosmetics also said it will announce a restructuring plan at a November 15 meeting with analysts.

Avon has been hit by increased competition, especially in the anti-aging skin-care market, at the same time that its customers and sales representatives face economic pressures.

The company also has internal issues that need to be fixed, Chairman and Chief Executive Officer Andrea Jung (search) said in a conference call with analysts. She gave no details.

"After five years of strong market outperformance, clearly the business dynamic has changed on us dramatically," Jung said.

Third-quarter net income fell to $163.8 million, or 35 cents per share, from $176.9 million, or 37 cents a share, a year earlier.

Analysts, on average, expected the company, whose brands include Anew, to earn 29 cents per share, according to Reuters Estimates.

Revenue rose 4 percent to $1.89 billion. Analysts on average had forecast $1.86 billion, according to Reuters Estimates.

U.S. revenue fell 6 percent as customers made fewer purchases. U.S. operating profit fell 11 percent as the mix of products bought shifted toward lower-margin items, the company said.

In the Asia Pacific business, revenue fell 3 percent, dragged down by a 16 percent drop in revenue in China.

Avon's boutique owners in China continued to reduce the size of their orders in connection with the anticipated resumption of direct selling in that country.

Avon warned in July and again in September that its 2005 results would be weaker than anticipated.

On Friday, Avon said that for the full year, it still projects an earnings-per-share increase in the low-to-mid single digits compared with 2004 earnings of $1.77 per share. The estimate includes 20 cents a share in tax benefits from the settlement of prior-year audits, and a 2-cents-a-share impact from a higher effective tax rate.

The company noted that the forecast does not include the impact of any steps it might take to cut its expense base.

Analysts' average earnings forecast for the year is $1.84 a share, according to Reuters Estimates.

Avon shares were up $1.81 to $26.52 on the New York Stock Exchange (search). The shares plunged 29 percent during the third quarter, while the six-company S&P Household & Personal Products Index (search), of which Avon is a component, rose 6.8 percent.