Avon Quarterly Profit Drops 70% Amid Lower Europe Demand

Avon Products Inc., the door-to-door cosmetics seller that rebuffed a takeover offer from Coty Inc. this year, reported a 70 percent decline in second-quarter profit amid a sales slump in Europe and China.

Net income fell to $61.6 million, or 14 cents a share, from $206.2 million, or 47 cents, a year earlier, the New York-based company said today in a statement. The shares dropped 1.2 percent to $15.30 at the close in New York and have declined 12 percent this year.

Today’s stock drop pushes Avon’s market capitalization to about $6.61 billion, compared with Coty’s $10.7 billion offer in May. Avon has posted three straight years of declining profit and Chief Executive Officer Sherilyn McCoy, who took over in April, said on a conference call today that she will cut costs, re-evaluate the company’s markets and work to boost incentives for top sales representatives.

“Avon’s second-quarter financial results are not good and they reflect the complex challenges that Avon faces,” McCoy said in the statement.

Revenue fell 9.3 percent to $2.59 billion. Analysts projected $2.68 billion, the average of 11 estimates compiled by Bloomberg. Sales declined 14 percent in Europe, Middle East and Africa and a dropped 21 percent in China.

Excluding some items, profit in the quarter totaled 20 cents a share. Analysts projected 22 cents, the average of estimates compiled by Bloomberg.

‘New Management’

While better than the previous quarter, “problems are numerous and we believe new management has a lot of work to do to right the ship,” Mark Astrachan, an analyst at Stifel Nicolaus & Co. in New York, wrote in a note today. Increasing competition “means the clock is ticking to improve performance, particularly in Brazil and Russia,” said Astrachan, who recommends holding the shares.

Avon also said today in a regulatory filing that it’s in talks with the U.S. Securities and Exchange Commission and Department of Justice to settle an investigation into possible bribery in its overseas operations. Last year, the company said it had fired four executives suspected of paying bribes to officials in China. Avon and the government have been investigating potential violations of the Foreign Corrupt Practices Act, which outlaws bribing foreign officials.

Sales Representatives

Gross margin narrowed to 62.8 percent from 64.4 percent a year earlier amid higher product costs and a stronger dollar that hurt the value of sales from abroad. Last year, 45 percent of sales came from Latin America and 28 percent from Europe, Middle East and Africa.

Avon saw declines in the number of active sales representatives in several countries, including Brazil, Russia, the U.S. and the U.K. The quarter included a pretax restructuring charge of $38 million, or 6 cents a share.

The cost to protect Avon’s debt from default for five years jumped to a record. Credit-default swaps on the company’s debt climbed 80.6 basis points to 533.5 basis points at 4:30 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swaps, which typically fall as investor confidence improves and rise as it deteriorates, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Coty, the maker of perfumes by Beyonce Knowles and Heidi Klum, withdrew its $24.75-a-share bid for Avon in May, citing delays by Avon and unwillingness to engage in negotiations.

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