Avon sees big drop in profits as Indonesian operations close

By Simon Pitman

- Last updated on GMT

Related tags Cent Revenue Income

Direct sales giant Avon has reported a 36.7 per cent drop in its Q4
income as it tackles fierce competition and rising costs. The
disappointing results coincide with the decision to pull out of the
Indonesia market, which also knocked profits.

The company said that its net income stood at $183 million, compared to $289 million for the same quarter ending December 2004. The fall in profits came despite a 4 per cent rise in worldwide sales for the quarter, which stood at $2.4 billion.

Avon apportioned the largest part of the blame for poor profits on the closure of its Indonesian operations, which led to the company incurring costs of $22 million.

The closure forms part of a major restructuring plan which led to a drop in operating profit of 72 per cent during the course of 2005 for the Asia Pacific region and a 7 per cent drop in profits.

The restructuring also meant downsizing certain operations in all regions, which also pushed up costs. This, combined with increased price discounting, higher operating expenses and unfavorable product mix in certain regions caused a further negative impact on profits.

Another thorn in Avon's side has been the consistent under performance in the saturated US market. The company reported that fourth quarter revenue declined by 7 per cent, while operating profit was 25 per cent lower.

Elsewhere the European market saw sales grow by 2 per cent for the quarter, largely driven by strong growth in Russia and Central Europe. The important UK market saw flat revenue growth.

In Latin America revenue revenue growth came in at 27 per cent for the quarter, as the company benefited from a new licensing in Colombia and sizeable income growth in Venezuela, Brazil and Argentina.

"With a challenging 2005 behind us, we are now aggressively moving forward with the turnaround plan we outlined at our investor update meeting last November,"​ said CEO Andrea Jung.

"We are aggressively addressing costs through our restructuring program, while at the same time stepping up the level of investment behind our brands with innovation and a planned 50 per cent increase in advertising spend in 2006,"​ she added.

"These efforts to return Avon's business to sustainable growth are our primary focus going forward. Our organization is committed to this task and aligned behind our turnaround strategies."

The company is now predicting that revenue growth throughout 2006 will largely be flat or up slightly on the 2005 figure of $8.1 billion. Likewise, fall in income levels is expected to continue as restructuring charges continue to eat into the profits.

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