Avon Shares Fall on Weak Outlook Until 2006

Shares of Avon Products Inc. (AVP) fell more than 6 percent on Wednesday after the direct seller of beauty products said it did not expect U.S. sales and profit growth to resume until 2006 as lower-income consumers have curbed spending.

Avon also said it would phase out certain categories, such as toys, from its product lineup.

Fourth-quarter 2004 U.S. sales should drop about 5 percent, due mainly to a decline in its Beyond Beauty (search) category, Avon said. In 2005, U.S. sales are expected to decline slightly.

Also, the company said growth in active representatives should fall slightly versus last year's fourth quarter. The number of active representatives is a key measure for Avon, which currently has 4.4 million sales representatives worldwide.

"While the U.S. business is just over 30 percent of sales, as it goes, often does the stock price, and we are hard pressed to find a short-term thesis for outperformance," Deutsche Bank analyst Andrew Shore said in a statement. He has a "hold" rating on Avon shares.

The company expects its U.S. sales to continue to struggle, but on Tuesday said it expects international per-share profit to rise at least 10 percent a year from 2005 to 2007.

Avon at an investors' meeting in New York on Wednesday said that while it is ridding itself of the toy business, it will be introducing lines in other divisions, including plus-size intimate apparel and other undergarments.

Avon, which also markets items such as jewelry, apparel and videos, forecast local-currency sales to be up 10 percent per year over the same prior period due to expansion abroad, including the impact of its plan to reduce some of its product offerings in the United States.

Avon, whose product lines include Anew and Skin-So-Soft (search), said it plans to restore growth to its U.S. business by 2006, would discontinue toy sales in the second quarter of 2005 and plans a staged withdrawal of certain product lines in the Beyond Beauty segment over the next two years.

"The United States is turning out weaker than expectations and weighing on an otherwise good quarter," Morgan Stanley analyst Bill Pecoriello, who rates Avon "overweight," said in a note.

For the fourth quarter and full-year 2004, Avon said it expects earnings per share of 61 cents and $1.77, respectively, including the impact of its changes in its U.S. products and lower-than-anticipated effective tax rates.

Avon previously forecast earnings of 58 cents to 60 cents per share for the quarter.

While the new fourth-quarter forecast is higher, it was aided by the lower tax rate, which boosted earnings by 2 cents per share, analysts said.

Analysts, on average, expect Avon to earn 60 cents per share in the fourth quarter and $1.76 for the year, according to Reuters Estimates.

Avon forecast a 2005 profit of $1.95 to $2 per share, in line with analysts' average estimate of $1.98, according to Reuters Estimates.

The company will continue to look at generous dividends, said Chairman and CEO Andrea Jung (search), but said there are no major acquisitions on the horizon.

Shares of Avon were down $2.45, or 6.2 percent, at $36.99 on the New York Stock Exchange (search).