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Avon Third-Quarter Net Falls as Sales Drop in China, U.K.

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Nov. 1 (Bloomberg) -- Avon Products Inc., the cosmetics seller that named a new chief executive officer after three years of declining earnings, said third-quarter profit fell 81 percent as sales fell in the U.K. and China.

Net income dropped to $31.6 million, or 7 cents a share, from $164.2 million, or 38 cents, a year earlier, New York-based Avon said today in a statement. Excluding some items, profit was 17 cents a share. The average of 14 analysts’ estimates compiled by Bloomberg was 23 cents.

Chief Executive Officer Sheri McCoy, who took over in April, said today she was lowering the company’s dividend and plans to cut $400 million in costs in the next three years while boosting sales at a mid-single-digit percentage rate. Third-quarter sales fell 25 percent in the U.K. and 31 percent in China as the number of active representatives dropped 1 percent.

“It’s still unclear the extent of Avon’s operational issues and the amount of time and investment” that will be needed to fix them, Tim Conder, an analyst at Wells Fargo & Co. in St. Louis, wrote today in a note. He rates Avon market perform, the equivalent of a hold.

The shares rose 1.8 percent to $15.77 at the close in New York. Avon has declined 9.7 percent this year.

Sales Decline

Total revenue fell 7.7 percent to $2.55 billion. The average estimate of 11 analysts was $2.59 billion. Excluding the effect of foreign-currency fluctuations, sales rose 1 percent.

In North America, revenue declined 6 percent in the main business, hurt by fewer representatives, and dropped 25 percent in its Silpada jewelry unit.

The quarterly dividend will shrink to 6 cents a share from 23 cents as part of a review of the company’s capital structure, Avon said today. The company also set a goal of boosting revenue at a mid-single-digit percentage rate for the next three years and cutting costs by at least $400 million a year, mainly through reducing selling, general and administrative expenses.

McCoy said Avon’s problems had developed “over time, not overnight, and solutions will take time as well.”

“I recognize you would like to hear me present a magic bullet or a quick fix, but our business is complex,” she said today on a conference call with investors.

Jung Tenure

McCoy succeeded Andrea Jung, who had a 13-year tenure leading Avon that included declining earnings, a bribery investigation and a rejected $10.7 billion takeover offer from Coty Inc. earlier this year. Jung will step down as executive chairman at the end of the year and be succeeded by Fred Hassan, currently the company’s lead independent director.

Avon also gave an update on the government and company’s investigations into potential violations of the Foreign Corrupt Practices Act, which outlaws bribing foreign officials.

After recent discussions with the Department of Justice and the Securities and Exchange Commission, Avon said in a filing today that “it is probable that the company will incur a loss related to the government investigations.”

“We are unable to reasonably estimate the amount or range of such loss; however such loss could be material,” the company said.

Estee Lauder

Avon rival Estee Lauder Cos., today reported first-quarter adjusted profit of 79 cents a share, topping the 77-cent average estimate of 18 analysts surveyed by Bloomberg. Net income rose 8 percent to $299.5 million, helped by increases in North America and China. Sales rose 3 percent to $2.55 billion.

The shares fell after Estee Lauder said sales in local currencies this year would gain as much as 7 percent, down from a previous estimate of as much as 8 percent, because of unexpected weakness in Western Europe and Korea. Full-year adjusted profit may be as much as $2.56 a share, trailing analysts’ $2.58 average estimate.

Estee Lauder fell 0.7 percent to $61.17 at the close. The shares have gained 8.9 percent this year.

The company is gaining customers from mass-market competitors because of the service and assistance it offers, Chief Executive Officer Fabrizio Freda said today in a telephone interview.

“The business model of prestige is winning,” he said.

Estee Lauder, based in New York, will develop products geared to local tastes, such as pigmentation creams for Asian customers and wrinkle creams for Europeans, he said. The company introduced its Osiao line of skin care for Asian consumers last month.

The maker of Clinique and MAC skincare and make-up also boosted its annual dividend to 72 cents a share from 52.5 cents and said it has authorized the repurchase of as many as 40 million more shares, or about 10 percent of total outstanding common stock.

To contact the reporter on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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