Avon Products Inc. (AVP) fell the most in 14 years after posting a third-quarter net loss and saying possible fines related to foreign bribery probes may materially hurt earnings.
The Securities and Exchange Commission offered a settlement last month with monetary penalties that were “significantly greater” than the $12 million the company had offered, Avon said in a filing today. Should the Justice Department offer similar terms, earnings, cash flow and ongoing business would be “materially adversely impacted,” the company said.
“Monetary penalties at the level proposed by the SEC staff are not warranted,” New York-based Avon said, without giving details of the SEC’s offer.
Avon, the world’s largest door-to-door cosmetics seller, and the government have investigated whether former employees in China and other countries bribed officials in violation of the Foreign Corrupt Practices Act. In regulatory filings in 2011, Avon disclosed the firing of four executives suspected of paying bribes in China.
The probes have dogged Chief Executive Officer Sheri McCoy, who took over in April 2012, as she works to trim Avon’s costs and exit unprofitable markets abroad.
The stock fell 22 percent to $17.50 at the close in New York, the biggest drop since September 1999. The shares have gained 22 percent this year, compared with a 23 percent increase for the Standard & Poor’s 500 Index.
“The third quarter was tough,” McCoy said in the statement. “Our quarterly performance was negatively impacted by macroeconomic headwinds and continued weakness in some parts of our business, particularly North America.”
The net loss in the quarter ended Sept. 30 was $5.5 million, or 1 cent a share, compared with net income of $31.6 million, or 7 cents, a year earlier, Avon said. Excluding some items, profit was 14 cents a share. The average of 12 analysts’ forecasts compiled by Bloomberg was 19 cents.
Revenue fell 7.5 percent to $2.32 billion, trailing analysts’ $2.44 billion average estimate. North American sales slid 19 percent to $328.6 million as the number of active sales representatives slid.
“Sales growth is the most important metric, and it did not improve, despite considerable reinvestment,” Mark Astrachan, an analyst at Stifel Financial Corp. in New York, wrote in a note today. He said he’s placing his recommendation to buy the shares under review. Astrachan called the SEC news “concerning” as cash flow declined during the quarter.
On today’s earnings call, McCoy, who’s announced exits from underperforming markets such as Ireland, said the U.S. “is an important part of our portfolio” and can counter volatility in emerging markets.
A 2011 change in the U.S. to a new sales model that involved reorganizing representatives and supervisors as well as redistricting was “much more disruptive to the business than anticipated,” McCoy said, adding that future shifts would be more gradual.
The new model hasn’t worked, and exiting the U.S. would benefit Avon shareholders, said Ali Dibadj, an analyst at Sanford C. Bernstein & Co. in New York.
“If you can sell it, sell it,” Dibadj said today in a telephone interview. Barring a sale, Avon should change its U.S. model, either by moving into retail sales or by focusing on “diehard” customer groups such as Hispanics, Dibadj said. He rates the shares market perform, the equivalent of a hold.
“We’ve been clear that we are committed to the U.S. -- to stemming the decline and returning that business to profitability,” Jennifer Vargas, an Avon spokeswoman, said today in an e-mail.
Separately, Estee Lauder Cos., maker of Clinique skincare and Bobbi Brown make-up, today raised the low end of its annual adjusted profit forecast by 6 cents, to a range of $2.80 to $2.87 a share. The average estimate of 17 analysts surveyed by Bloomberg is $2.90
The New York-based company, which sells higher-end products than Avon, said it expects to grow at twice the rate of rest of the prestige beauty sector. Adjusted earnings per share of 76 cents beat the 73-cent average estimate of 17 analysts compiled by Bloomberg.
Estee Lauder dropped 0.6 percent to $70.96 at the close in New York, for a 19 percent gain this year.
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