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Third Quarter 2013 a Rocky One for Avon

Posted: October 31, 2013

Avon Products, Inc. reported third-quarter 2013 results. "The third quarter was tough. Our quarterly performance was negatively impacted by macroeconomic headwinds and continued weakness in some parts of our business, particularly North America," said Sheri McCoy, CEO of Avon Products. "However, overall, Avon is headed in the right direction, parts of our business are stabilizing, and we are making progress toward our three-year financial goals."

For the third quarter of 2013, total revenue of $2.3 billion decreased 7%, or 1% in constant dollars, compared to the same time period in 2012. Constant-dollar revenue was favorably impacted by approximately one point as a result of the recognition of tax credits of $22 million in the third quarter of 2013 associated with a change in estimate of expected recoveries of Value Added Taxes (VAT) in Brazil. Total units decreased 7% and price/mix was up 6% during the quarter. Active representatives² were down 3%.

Beauty sales declined 9%, or 2% in constant dollars. Fashion and home sales declined 7%, or 2% in constant dollars.

Operating profit was $68 million and operating margin was 2.9% in the quarter. Operating profit included a $42 million non-cash impairment charge associated with with China. Based on the significant lowering of the company's long-term revenue and earnings projections for China and the decline in revenue performance in the third quarter, which was significantly below expectations, the company completed an interim impairment analysis of China operations. As a result, the company recorded the non-cash impairment charge of $42 million pre-tax, and a valuation allowance for deferred tax assets related to China of $9 million, or a combined $0.12 per diluted share.

For Latin America, the company recorded total revenue of $1.207 billion for the quarter, a 5% drop. However, third-quarter constant-dollar revenue growth was favorably impacted by approximately two points due to the recognition of tax credits in Brazil in the third quarter of 2013, associated with a change in estimate of expected recoveries of VAT. The region's revenue growth was also due to higher average order, which benefited from pricing, including inflationary impacts, primarily in Argentina and Venezuela, and new Beauty product launches. Brazil revenue was up 1%, or 13% in constant dollars, which included an approximate four-point benefit due to the VAT credits. Revenue growth was also due to higher average order, primarily due to benefits from pricing, new beauty product launches and continued strength in fashion and home. Constant-dollar revenue growth was driven by both beauty and fashion and home. Mexico revenue was down 5%, or 7% in constant dollars, primarily driven by lower average order, partially offset by an increase in active representatives. Revenue in Mexico was negatively impacted by slowing economic activity and increased discounting by retail competition while we selectively raised prices. Venezuela revenue was down 22%, or up 15% in constant dollars, due to higher average order, benefiting from the inflationary impact on pricing that was partially offset by a decrease in units sold. Higher average order was partially offset by a decrease in active representatives, which was impacted by continued economic and political instability as well as service issues.

For Europe, the Middle East and Africa, total revenue for the quarter was $619.2 million, which was relatively flat. Third-quarter constant-dollar revenue growth was due to higher average order, which was partially offset by a decrease in active representatives. In Russia, revenue was down 4%, or 2% in constant dollars, primarily due to lower average order, which was partially offset by an increase in active representatives. U.K. revenue was down 4%, or 2% in constant dollars, primarily due to a decrease in active representatives, which was partially offset by higher average order. Turkey revenue was down 13%, or 4% in constant dollars, due to a decrease in active representatives, which was partially offset by higher average order. South Africa revenue was down 1%, or up 21% in constant dollars, due to higher average order, largely driven by an increase in units sold, as well as an increase in active representatives.

 

In North America, total revenue for the quarter was down 19% to $328.6 million. Third-quarter constant-dollar revenue decline was primarily due to a decrease in active representatives. Active representatives were negatively impacted by recruitment challenges. In the third quarter of 2013, revenue in Canada was adversely impacted due to significant field disruptions as a result of the piloting of the Service Model Transformation (SMT) technology platform and associated business process changes initiated in the second quarter of 2013. North America beauty sales declined 20%, driven primarily by skin care and fragrance, while fashion and home sales declined 16%, on both a reported and constant-dollar basis.

Asia Pacific saw total revenue of $167.4 million for the quarter, a 22% decline. The third-quarter constant-dollar revenue decline was driven by the unfavorable results of China and a decrease in active representatives in the other Asia Pacific markets. The region's revenue was also negatively impacted by approximately one point as a result of the company's decision to exit the South Korea and Vietnam markets. Revenue in the Philippines was down 9%, or 5% in constant dollars, as ongoing operational challenges in that market contributed to the decrease in active representatives and a decline in unit sales. Revenue in China was down 67%, or 69% in constant dollars, primarily due to declines in unit sales, partly due to the company's actions intended to reduce inventory levels held by beauty boutiques, which negatively impacted sales. Additionally, the number of beauty boutiques declined.

Read more about Avon's third quarter 2013 financial performance here.