Despite The Face Lift, Avon Is Sagging

Ever since James E. Preston took over as chairman of Avon Products Inc. three years ago, one unwelcome visitor after another has been ringing his doorbell. Preston has had to fend off hostile overtures from Irwin L. Jacobs, Amway, and, most recently, a New York investment group called Chartwell Associates. In April, the beauty-aids purveyor ended its two-year takeover battle with Chartwell after boosting its dividend 40% and declaring a special $3-a-share payout for investors. Preston, it seemed, could finally breathe easily.

Well, not quite. True, Avon is no longer being hounded. But it's hard to paint a pretty face on its results. The U. S. economic downturn is hammering its domestic door-to-door business, and Preston is having trouble keeping turnover rates among his legion of sales representatives down to reasonable levels. These leaner times have also hurt Avon's Giorgio and Red lines of luxury fragrances sold in department stores.

SMALLER WORLD. More troubling still is the slowdown in Avon's international operations, which represent 55% of total sales. Avon now operates in over 100 countries, and its far-flung activities were to have been a buffer against gloomy times at home. But results in key markets such as Brazil and Japan are off this year -- and overall growth is sluggish.

This isn't the kind of year Preston had hoped for. Now that Avon isn't spending millions to keep raiders at bay, analysts were looking for head-turning results. Unfortunately for Avon, its net earnings were off 60% for the first nine months of 1991, to $43.1 million on $2.46 billion in sales. True, without a $75 million third-quarter charge to write down the value of securities Avon received from the sale of assets in 1987 and 1988, income from continuing operations would have grown 10%, to $118.1 million. Despite the sluggish economy, Preston is upbeat about the crucial fourth quarter, which typically accounts for 45% to 50% of total earnings. But the chairman recently warned analysts that Avon's 1991 results will be at the lower range of Wall Street earnings estimates -- perhaps around $210 million, or up only 8% from last year.

Preston, 58, is now working hard to lend some oomph to sales through such measures as direct mail. Since last spring, some Avon reps have supplied the company with names of potential customers, who are then mailed catalogs. So far, about 11% of customers have responded to the personalized campaign, well above the average 3% response rate for direct-mail solicitations. Preston thinks direct mail will account for $300 million to $500 million in sales within three to five years. Avon also has a toll-free number for telephone orders and will even take orders by fax. To get the word out on all of these changes, Preston plans to boost Avon's advertising budget by 50%, to $11 million, next year. "Avon is fundamentally a different business," says Preston, a 27-year veteran who started out in sales.

HOUSECLEANING. Avon has certainly undergone some big changes since Preston's arrival. With an eye to returning the company to its traditional emphasis on cosmetics, fragrances, and toiletries, Preston sold off the company's holdings in health care and retirement homes. The housecleaning was painful: Avon posted a $404.5 million loss in 1988, thanks to various write-downs.

With the help of Chief Financial Officer Edward J. Robinson, who was recruited from RJR Nabisco Brands Inc., Preston has also tidied up the company's balance sheet. Avon's once staggering debt load of $1.13 billion, which in 1988 represented 82.5% of total capital, will be pared down to about $400 million, or 63.5%, by year's end through asset sales and savings from layoffs and better inventory management. Even former detractors now credit Preston with bringing more focus to Avon. "This company is really very seriously concentrating on its core businesses," says M. Anthony Fisher, a New York real estate developer who won a board seat during Chartwell's unsuccessful attempt to take over Avon.

But Avon still has plenty more sprucing up to do. The company's U. S. beauty business, which accounts for 40% of sales, has been flat since 1989, compared with the 5%-to-7% annual growth for the industry as a whole. So Preston has whipped out his markdown pen. Prices on such items as nail enamel and shampoo have been discounted by up to 75%. Preston is also taking Avon's Giorgio and Red scents to new foreign markets to offset the downturn at home. But the price cuts and the push into new markets are pinching margins, which will fall this year to 14.1%, pretax, from 15.4% last year figures Merrill Lynch.

Preston is also trying to do more to retain Avon's sales representatives, some of whose positions now have a 250% annual turnover rate. Under a new program now being tried out in California and 25 other states, reps can earn up to 21% in bonuses on the sales of new reps they recruit.

OUT OF STOCK. Not all of the sales force are happy with the Preston regime, however -- and the reps are an all-important constituency at Avon. "We're the backbone of this company," says one disgruntled rep. Avon says it is committed to its reps and has no intention of supplanting them with direct mail. But a group of Avon salespeople in West Virginia recently fired off an angry letter to Avon President E. V. Goings Jr. complaining that merchandise they had ordered came in weeks overdue. Preston concedes that some Avon products do arrive late.

A bigger headache, though, is overseas. For years, foreign sales grew at an average 16% annual clip. But this year, a recession in Brazil and a flagging Japanese operation have hurt. International sales were up only 5% in the third quarter, and pretax operating profits fell 4%.

All the same, investors are hardly hitting the panic button. Avon's stock has appreciated more than 40%, to around 40, since the start of the year. And analysts believe Preston's makeover of Avon should finally start to pay off come 1992. If so, then maybe Preston can finally stop worrying about who might turn up on his doorstep.


Avon's U.S. door-to-door sales, now at about $1.4

billion, have barely budged during the last three years. Worse, profit margins

are being squeezed by price discounting


The wobbly economy has slammed sales of Avon's Giorgio and Red lines of luxury

fragrances. Sales of the perfumes, which run up to $175 an ounce, are off by

more than 15% this year


Avon's international sales, representing 55% of the $3.5 billion total, have been battered by an economic slowdown and currency

devaluation. Business is way off in Brazil and Japan, two key markets


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