Avon Speeds Cost Cuts, Plans Charge
CHICAGO – Avon Products Inc., the world's largest direct seller of beauty products, said on Friday it will post up to $90 million in charges in the fourth quarter and may take more next year as it speeds up cost-cutting moves while facing struggling Latin American markets.
But the company said it still expects to meet fourth-quarter earnings and sales targets, helped by U.S. sales growth that could be the best in seven years.
Most of the charges will be related to severance payments as the company streamlines its structure, revamps its supply chain and takes other steps to improve its business, Avon said. The company declined to specify how many jobs would be cut in the restructuring, which it first talked about in May.
Latin America, which accounts for about a third of Avon's business, has been worse than expected.
The company has looked to cost cuts that were unrelated to the restructuring, such as replacing part of senior executive cash bonuses with stock options to help mitigate the slowdown in the region.
``We've completely shut down all nonessential spending enterprise-wide,'' Andrea Jung, chairman and chief executive, told analysts in a conference call on Friday.
DOUBLE-DIGIT EARNINGS GROWTH SEEN
Jung said the company was comfortable with earnings expectations of about $2.30 in 2002. Analysts forecast earnings of $2.28 to $2.35 a share in 2002, with a consensus of $2.31, according to market research firm Thomson Financial/First Call.
``Business transformation, plus the underlying strength of our business fundamentals, should enable Avon to deliver double-digit growth in earnings per share and local currency sales next year, although we expect this very uncertain external environment to continue,'' Jung said.
For the fourth quarter of 2001, the company said it expects to post earnings of 74 cents before the charges, up from 67 cents a year ago.
Analysts forecast fourth-quarter earnings of 72 cents to 74 cents, with a consensus of 74 cents, according to market research firm Thomson Financial/First Call. The consensus estimate for the 2001 full year is $2.09.
``If Latin America is going to be a bit below plan, it's been made up for by strong growth in the U.S. and continued strong growth in Europe, and that's what diversified companies should do,'' said Art Cecil, a research analyst at T. Rowe Price.
The company said that, as expected, sales in the quarter should increase in the mid-single digits in dollar terms, as its U.S. business performs well, while Latin American economies are weaker than expected.
``U.S. sales are trending significantly above our recent expectations, at about 8 percent to 9 percent, and operating profits are expected to be up in the same range,'' Jung said.
Excluding the effects of foreign currency exchange, sales growth should be in the high single digits, boosted by solid gains in the number of active sales representatives across all geographic regions.
LATIN AMERICA WEAK, EUROPE STRONG
Internationally, results in Mexico and Argentina are tracking below the company's recent expectations due to weaker economic conditions there, Jung said.
Europe continues its strong growth track, as it has all year, with sales expected to be up in the mid-teens and operating profit advancing at almost twice the rate of sales. In Asia, trends are in line with expectations, with sales and profits up slightly in dollar terms.
Avon said it was close to reaching an agreement with a second retailer, which it did not name, for its ''store-within-a-store'' concept. The concept, which sells Avon's beComing line of products, debuted at J.C. Penney Co. Inc. earlier this year. The company had also planned to introduce it at Sears, Roebuck and Co., but Sears backed out when it exited the cosmetics business.
Avon shares were down 21 cents at $48.61 in early afternoon trading on Friday on the New York Stock Exchange. Since Sept. 11, Avon shares have been about flat while the Standard & Poor's 500 index has gained about 6 percent.