Avon Regains Some Allure

Investors bid the shares higher Tuesday after the cosmetics giant posted a slight rise in quarterly profit

Avon Products (AVP) CEO Andrea Jung is making headway in her efforts to pull the cosmetics giant out of a lengthy slump. Faced by falling sales and rising costs, Avon has laid off around 10% of its entire workforce, according to Morningstar. The company has been undergoing a massive reorganization plan that's costing up to $500 million. But now light is beginning to glimmer at the end of that dark tunnel.

Avon's sales during the three months ended Dec. 31 rose to $2.6 billion, up 9% compared to the same period of 2005. Net income edged ahead by 0.5% year over year to $184 million during the quarter. "The investments we are making in our business are clearly starting to deliver results," said CEO Andrea Jung in a press release Feb. 6.

Jung has been pushing aggressively in recent years to make her company more efficient. In one recent example, Avon said Jan. 9 that it's building a single distribution center in the Midwest that will employ 500 people and open in 2009. At the same time, the company is planning to phase out current distribution branches in Newark (Del.), and Glenview (Ill.) by mid-2009 and mid-2010, eliminating about 620 positions. Jung has also been outsourcing parts of Avon's operations; in November Avon announced a plan to hand over the responsibility for human resources work like payroll, compensation, and benefits to IBM Global Services. Avon's goal is to cut $300 million in costs by 2009.

At the same time the company is putting more effort into promoting its brand and making it more competitive. During the fourth quarter, Avon spent $89 million on advertising, up 95% from the same period of 2005. The increase went toward introducing new product lines like Anew Clinical ThermaFirm and superFULL mascara. This is in sharp contrast with 2005, when Avon cut its spending on advertising and promotions by 50%, while rivals like Procter & Gamble (PG) and L'Oreal were spending plenty and gaining sales.

After winning approval from China's government in February, 2006, Jung is also pushing through with a plan to direct-sell in the country, where door-to-door sales had been banned since 1998 (see BusinessWeek.com, 2/28/06, "Avon Calls, China Opens the Door"). At year end, Avon China had over 350,000 licensed Sales Promoters registered with the government and was engaged in training them to become Active Representatives within the direct-selling business.

Avon's fourth quarter results surprised Wall Street players, who bid up the stock 9.6% to $37.95 per share in midday trading on the New York Stock Exchange Feb. 6.

Avon still faces challenges. Fourth quarter operating profit sank 5% year over year to $282 million, dragged down by things like those hefty restructuring costs. While Jung continues grappling with the risks of transforming her business, her low-income customers will be sensitive to the weather in the global economy.

Jung remains optimistic. "As we move into 2007, we are still in the early years of our multi-year turnaround," Jung said in the press release. "We are confident that our plan is the right one, and we remain committed to restoring Avon to sustainable growth."

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