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Costs narrow Avon profit margins

By Simon Pitman , 02-May-2006

Avon has reported a 67 per cent drop in its first quarter net income as restructuring charges aimed at reinvigorating sales hit the company's bottom line.

The world's biggest direct sales personal care company said that the impact was accounted for and that its restructuring program had led to a faster than expected recovery should pay significant dividends from the next financial year.

Total revenue stood at $2bn for the first quarter, an increase of 6 per cent on the previous year, driven mainly by gains in developing countries, together with its newly acquired business in Colombia.

Net income was hit by the negative impact of $120m in quarterly charges, which was mainly attributable to the company's massive restructuring program. Operating profits stood at $86m, compared to $174m in 2005.

The restructuring program is estimated to cost $500m before taxes and will see the closure of a number of unprofitable businesses as well as a staff restructuring that is expected to hardest hit the management tiers.

Avon CEO Andrea Jung has said that she intends to half the number of management tiers from 15 to eight.

Indeed, last week the company announced a total of 1,300 job losses, which were mainly management positions on a global basis.

However, the results were well received by the financial world, where Avon shares rose by 4.4 per cent in the first day of trading to reach $32.6 on the New York Stock Exchange.

Avon's restructuring program has been well received by the financial world. The fact that it has been implemented so quickly and early signs that it is impacting the efficiency of the business are helping to bolster the company's image even further.

"The quarter's results reflect the aggressive actions we are taking to return our business to sustainable growth," Jung said.

"Along with actions aimed at streamlining our organization and reducing our cost structure, we are committed to improving our brand competitiveness. In particular, our large first-quarter increase in advertising is reflective of early action on this front, and we plan a similar lift in advertising spend in the second quarter," Jung added.

On a regional basis the company reported that its North American sales had increased by 3 per cent, despite active representatives being 5 per cent lower in number. This meant that sales for the region rose to $613.8m.

In the Latin America market sales rose by 28 per cent, to $612.6m - just shy of the total for the mainstay North American market. As well as the recent Colombian acquisition, this figure was boosted by the continued strength of the Brazil market.

Sales in the Western European, Middle East and Africa market were reported to be flat, but rose 7 per cent on currency gains, reflecting the hugely competitive nature of the Western European market.

In Central and Eastern Europe actual sales grew by 3 per cent, while in Asia Pacific they grew by 11 per cent. However unit sales in the Asia market fell 10 per cent, mainly impacted by a decline in the Japanese market.

Meanwhile the shift to direct sales in China has bought about a surprising fall in sales, with sales revenues declining 27 per cent to $47.4m. The company said that this was largely down to its boutique network placing smaller orders since the resumption of direct sales, which is still in the process of being rolled out.

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