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Avon starts to reap savings from restructuring

By Simon Pitman , 16-Feb-2007

In line with market expectations, global direct sales leader Avon says that its Strategic Sourcing Initiative is on course to bring about savings of $400m (€305m) during the course of the next few years.

In line with company forecasts, global direct sales leader Avon says that its Strategic Sourcing Initiative is on course to bring about savings of $400m (€305m) during the course of the next few years.

Analysts say that the prediction is in line with market expectations and in response Avon share prices rose slightly at the close of business on the New York Stock Exchange yesterday.

Confirmation that the SSI programme is on course leads the company to believe that total savings from its restructuring programme, first announced in the last quarter of 2005, should total $700m.

This figure takes into consideration the fact that the original restructuring programme is on track to make savings of $300m.

The company estimates that SSI will start realising significant cost savings during the second half of 2007, with those savings set to generate savings of $200m a year by 2009.

Likewise it is anticipating similar savings from its Product Line Simplification strategy, which aims to move product offerings away from the micro-segmentation trend that appears to have confused many consumers.

The company has also underlined the fact that its sourcing strategy has not incurred any major expenses.

"We are pleased that these incremental benefits will provide us with additional fuel with which to continue to drive our turnaround," said Andrea Jung, Avon CEO.

"We are seeing strong paybacks from our investments to drive growth, and in 2007 we will again invest in the business at accelerated levels, to build a strong foundation for sustainable growth."

Savings from both PLS, SSI and the restructuring in general are expected to be reinvested in brand development. This will mean a 35 per cent increase in advertising spend during the course of 2007, to $340m – a figure that complements an 83 per cent increase in 2006.

In view of the current status of the restructuring programme, the company reiterated previous estimates that revenue growth would average mid-single digit over the long term.

Although Avon did say that operating margins would take a year longer than initially forecast, analysts believe that it is being deliberately cautious about long term cost savings and revenue growth and are expecting figures to be higher.

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