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Avon profits hit by ad spend and tax fee

By Simon Pitman , 30-Oct-2006

Despite sales rising significantly, profits at Avon have been hit by a rising ad spend, restructuring costs and charges relating to a tax dispute in the company's UK arm.

With all eyes have been on the company's profitability as it struggles to turn around the business and increase efficiency, profits for the third quarter, ending September 30, fell 47 per cent to reach $86.4m (€67.94m), compared to $163.8m a year ago.

The bottom line results were weak despite the fact that sales were up 9 per cent to $2.06bn, up from $1.89bn a year ago. The company said that the results were driven by a 10 per cent growth sales of its beauty products, of which skin care sales accounted for 16 per cent growth.

 

Although revenue increase beat all expectations, net profits were likewise below expectations, with share prices falling 3 per cent last Friday, the day that the figures were released.

 

The company said that its restructuring programme again had the biggest impact on the results, with over $40m in costs attributed to this quarter. It also said that further job cuts are likely to be announced in the coming months, which has so far accounted for the majority of the costs.

 

But in an attempt to turn around its brand image, company CEO Andrea Jung says that she wants to concentrate on increasing advertising spend in an effort to further raise revenues. As a result the budget for advertising more than doubled from $32m in the same period last year to reach $66m in the most recent quarter.

 

The company also said that it had a one time charge of $21m relating to a long-standing dispute over accounting for value added tax in the UK.

 

Avon is struggling to remain competitive in the fast-moving and saturated direct sales segment. In recent years the company has particularly struggled in its domestic market, the US, where a competitive retail environment has seen margins gradually eroded away.

 

In an effort to remain on top, the company implemented a restructuring programme in November of last year that aims to save $200m - money the company says will be re-invested in the business.

 

Advertising spend has already proved to be a major target for this reinvestment, but the company also says that it now wants to focus on expanding the global sourcing of its products in an effort to increase efficiencies.

 

"We are capturing sizeable savings already this year from restructuring actions implemented to date," said Jung. "With the additional turnaround initiatives announced today, we have significant opportunities over and above the benefits that we had anticipated in the plans we laid out last November. Product Line Simplification and the Strategic Sourcing Initiative should further boost our brand competitiveness and operating efficiency."

 

Looking at the results on a regional basis, the company said that the company's revenue in North America was 1 per cent lower than the corresponding quarter a year ago, with the number of products sold down 9 per cent from the same period last year.

 

However, the performance in other regions was considerably better, helping to push the overall results. IN Latin America third quarter sales rose 28 per cent, while in Western Europe, Middle East and Africa sales were up 8 per cent.

 

Revenue in China grew by 9 per cent, but in the Asia Pacific region as a hole, revenues were down 3 per cent on account of a continuing poor performance in Japan.

 

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