Avon Products 2Q Net Up On Margin Growth But Misses Views

Avon Products Inc.'s (AVP) second-quarter earnings rose 23% but revenue and per-share profit fell shy of analysts' estimates, as the door-to-door beauty products concern's revenue dropped in North America and Asia Pacific, most notably in China.

Avon is among the many U.S. companies that have been relying on growth abroad to offset recent softness in North America, though competition from Procter & Gamble Co. (PG) and other household-product companies is heating up. Avon has identified China as a priority growth market and also has been making acquisitions that complement its direct beauty business.

Despite weakness in China, other regions of the world demonstrated strong growth, with Latin America revenue up 19%, driven by Brazil, Mexico and Venezuela, and its European regions, the Middle East and Africa also grew, though that was sometimes a case of foreign-exchange benefits that more than erased declines on a constant-currency basis.

Hanging over Avon is the specter of a federal probe, reported in May by the Wall Street Journal, citing sources, into allegations of past bribes paid to officials overseas in violation of the Foreign Corrupt Practices Act. Avon has been conducting its own investigations for over three years, since an employee brought the possibility of "improperly incurred" expenses in China that related to travel with Chinese officials. Avon voluntarily reported its internal investigation, which began in June 2008, to the U.S. Securities and Exchange Commission and U.S. Department of Justice in October 2008, and the company has said it continues to cooperate with the agencies.

Citing a person familiar with the matter, the paper said the investigations have turned up evidence of potential wrongdoing in several countries, with questionable payments, totaling millions of dollars, to officials in Brazil, Mexico, Argentina, India and Japan. Avon has declined comment on any federal probe or a timeline to conclude its own investigation, but Avon has terminated several executives responsible for its Chinese operations.

Business in China has been a problem for Avon, even without alleged bribery worries, as Avon moves toward direct selling and away from a complex, hybrid business model. Year-over-year revenue in China fell 31% in the first quarter, excluding the benefits of currency exchange, though China reported a "modest" operating profit, reversing an operating loss in the year-ago period. The transition to direct sales will continue to plague near-term results in China, it said, but it remains upbeat about long-term revenue and operating profits there.

The company reported net income attributable to Avon of $206.2 million, or 47 cents a diluted share, up from $167.6 million, or 39 cents, a year earlier. Total revenue was $2.86 billion.

Analysts polled by Thomson Reuters had most recently forecast earnings of 50 cents a share on revenue of almost $2.89 billion.

Gross margin grew to 64.4% from 63.5%. Advertising costs fell 16% to $82 million, given its rebalanced spending between advertising and on its representatives.

Avon's beauty sales rose 8%, reflecting increases of 11% in fragrance, 8% in color, 3% in skincare, and 11% in personal care.

Shares closed Wednesday at $27.74 and were inactive premarket. The stock has fallen 6% over the past year.

-By Maxwell Murphy, Dow Jones Newswires; 212-416-2171; [e-mail]