Avon Reports Second-Quarter Earnings of $.69 Per Share, Including
$.20 of Tax Benefits, on 6% Revenue Increase Company Sees 7-8%
Revenue Growth in Second Half; Full-Year Earnings Forecast in Range
of $2.03-$2.08 per Share NEW YORK, July 19 /PRNewswire-FirstCall/
-- Avon Products, Inc. (NYSE:AVP) today reported that earnings in
the second quarter 2005 increased to $.69 per share, including a
$.20-per-share tax benefit ($.03 per share more than initially
anticipated) primarily from settlements of prior-year audits that
were completed in the second quarter. These earnings compare with
guidance of $.66 per share. In the second quarter 2004, earnings
were $.49 per share, including a tax benefit of $.05 per share.
Avon said that revenue in the second quarter 2005 grew 6% (2% in
local currencies) to $2.0 billion -- on top of 13% growth in the
year-ago period. Revenue in the quarter was below expectations due
to two factors which each impacted topline growth by approximately
two points: an unexpected temporary decline in China as Beauty
Boutique owners reacted with concern to the imminent resumption of
direct selling in that country; and lower-than- anticipated revenue
growth in Central and Eastern Europe resulting from
underperformance of several key marketing offers as well as delayed
expansion into new geographies within Russia. Total Beauty sales in
the second quarter 2005 rose 7%, active Representatives grew 6% and
units increased 2%, respectively, versus the prior year. Operating
profit increased 6%, in line with revenue growth, and operating
margin was 17.3%, including the impact of lower corporate expenses
that resulted primarily from the reversal of accruals for 2005
performance- based compensation plans. Net income in the second
quarter 2005 was $328.6 million, compared with $232.3 million a
year ago. Second Quarter Regional Highlights U.S. second-quarter
performance was in line with the company's expectations, with
revenue and operating profit decreasing 6% and 14%, respectively.
Beauty sales declined 11% due to continued weak customer purchase
frequency in an environment of stepped-up competitive activity.
Reflecting ongoing, planned category repositioning, Beauty Plus
sales increased 5% and Beyond Beauty sales declined 3%. Units and
active Representatives in the quarter were down 12% and 2%,
respectively. U.S. operating margin was 18.6%. In Europe, revenue
in the second quarter increased 12% on top of 28% revenue growth in
the year-ago period. In local-currency terms, revenue was up 6%,
with gains in units and active Representatives of 10% and 9%,
respectively. Central and Eastern Europe grew 16% with revenue in
Russia increasing 17%, continuing strong market outperformance but
below the company's planned levels. Europe's second-quarter
operating profit grew 10%, and operating margin was 22.4%. In Latin
America, broad-based strength across most of the region contributed
to second-quarter revenue growth of 17% (10% in local currencies)
with strong results in Brazil and Venezuela, in particular, and a
solid increase in Mexico's Beauty sales offsetting softness in
several non-core categories in that market. Active Representatives
and units in the region both grew 9%. Operating profit increased by
13%, and operating margin was 25.0%. In Asia Pacific, revenue was
flat (down 2% in local currency) and units declined 7% as the
region's performance was impacted by a 19% decline in China's
revenue due to the direct-selling transition issues. Asia Pacific
active Representatives in the quarter grew 4%. Operating profit
declined 23%, versus the year-ago quarter primarily as a result of
the China revenue decline. Operating margin in the region was
14.3%. In commenting on the company's second-quarter results,
Andrea Jung, Avon's chairman and chief executive officer, said,
"While the U.S. and Latin America performed in line with our
expectations, the situation in China was clearly unexpected. We are
moving rapidly to assure our Beauty Boutique owners that they will
have an opportunity to earn as much or more with Avon in our future
model, and believe this will be a transitional issue. We continue
to feel privileged to have been chosen as the first company
authorized to conduct a direct-selling test and our optimism about
the long-term $1 billion opportunity in China remains unchanged. In
Central and Eastern Europe, where our topline momentum continues to
be strong and we remain confident in our beauty leadership
position, we have significantly enhanced our marketing offering and
implemented aggressive plans to accelerate order growth in the back
half of the year." Revised Outlook On a consolidated basis for the
third quarter, Avon expects revenue growth to accelerate to the
high-single digits (mid-single digits in local currencies).
Operating profit is forecast to be down slightly. EPS is expected
to be in the range of $.34-$.36, compared with 2004's third quarter
of $.37 per share. In terms of regional performance for the third
quarter, the company said that the U.S. revenue trendline is
improving, with revenue expected to be down slightly from the prior
year. U.S. operating profit is forecast to decrease mid-to-high
teens, with the majority of the decline due to reversal of 2004
bonus accruals in the prior year. Europe's revenue is projected to
increase double digits and operating profit is forecast to rise in
the mid-single digits. In Latin America, revenue is anticipated to
grow in the high teens and operating profit is forecast to increase
around 10%. Asia Pacific's revenue is expected to be up at least
mid-single digits while operating profit for that region is
projected to be down high-single digits, including a more than
doubling of advertising in China. Looking ahead to the second half,
the company said that it anticipates revenue growth of 7-8% (6-7%
in local currency), double the first-half local- currency growth
rate, but below the company's previous expectation. As a result,
Avon expects full-year earnings to be in the range of $2.03-$2.08,
up from 2004 earnings of $1.77 per share. This EPS guidance
reflects the second- quarter tax benefit of $.20 per share,
partially offset by an impact of $.02 per share from a revised
higher effective tax rate in the second half. The company said that
additional tax settlements are possible during 2005, which could
result in further benefits. Additionally, cash flow from operations
is projected to be approximately $900 million for the full year.
Commenting on the company's revised outlook, Ms. Jung said: "We are
encouraged by some recent trends in the U.S. In addition, we expect
our current recovery actions to improve performances in China and
Central and Eastern Europe as we move through the balance of the
year. If all of these actions and trends play out in the back half
of the year, we can achieve the top end of our earnings projection.
However, given the volatility we've experienced in recent quarters
on a number of fronts, we believe that it is prudent to allow for
further risk, thus the breadth of our forecast." Ms. Jung added,
"Looking ahead, the broad strength of Avon's global portfolio
remains a significant competitive advantage and we remain confident
in Avon's unique growth and transformation strategies. Over the
long term, we expect to deliver high-single-digit local-currency
revenue growth, enabled by a greater step-up in strategic spending
support and thoughtful trade-off between our revenue growth and
margin targets, including evaluation of our enterprise expense
base. We remain confident that Avon's revenue growth will continue
to well outpace the overall Beauty market, supported by appropriate
levels of investment while also delivering margin expansion over
the long term." The company said that it is reviewing its long-term
targets and will provide additional detail at its annual investor
update meeting to be scheduled for late fall. Avon will conduct a
conference call at 8:00 A.M. today to discuss the quarter's results
and the outlook for the full-year. The dial-in number for the call
is (973) 528-0014 (entry code 2272). Additionally, the call will be
webcast live and can be accessed at http://www.avoninvestor.com/.
Avon is the world's leading direct seller of beauty and related
products, with $7.7 billion in annual revenues. Avon markets to
women around the world through 4.9 million independent sales
Representatives. Avon product lines include such recognizable brand
names as Avon Color, Anew, Skin-So-Soft, Avon Solutions, Advance
Techniques Hair Care, Avon Naturals, Mark, and Avon Wellness. Avon
also markets an extensive line of fashion jewelry and apparel. More
information about Avon and its products can be found on the
company's web site http://www.avoncompany.com/. CAUTIONARY
STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Statements in this
report that are not historical facts or information are
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Words such as "estimate,"
"project," "plan," "believe," "expect," "anticipate," "intend,"
"planned," "potential" and similar expressions may identify
forward-looking statements. Such forward-looking statements are
based on management's reasonable current assumptions and
expectations. Such forward-looking statements involve risks,
uncertainties and other factors, which may cause the actual
results, levels of activity, performance or achievement of Avon to
be materially different from any future results expressed or
implied by such forward-looking statements, and there can be no
assurance that actual results will not differ materially from
management's expectations. Such factors include, among others, the
following: general economic and business conditions in our markets,
including social, economic and political uncertainties in Latin
America, Asia Pacific, and Central and Eastern Europe and the
Middle East; our ability to implement our business, cash management
and tax strategies and our Business Transformation initiatives; our
ability to achieve anticipated cost savings and our profitability
and growth targets, particularly in our largest markets; our
ability to implement appropriate product mix and pricing
strategies; the impact of changes in consumer spending patterns and
preferences, particularly given the global nature of our business;
our ability to replace lost sales attributable to the repositioning
of the U.S. Beyond Beauty business; the impact of substantial
currency fluctuations on the results of our foreign operations and
the cost of sourcing foreign products and the success of our
foreign currency hedging and risk management strategies; our
ability to implement our Sales Leadership program globally, to
increase Representative productivity and recruit Representatives;
our ability to implement our enterprise resource planning project;
the impact of possible pension funding obligations and increased
pension expense on our cash flow and results of operations; the
impact of stock option expense pursuant to Statement of Financial
Accounting Standards No. 123(R); the effect of legal, regulatory
and tax proceedings, as well as restrictions imposed on us, our
operations or our Representatives by foreign governments; our
ability to successfully identify new business opportunities; our
access to financing; and our ability to attract and retain key
personnel and executives. Additional information identifying such
factors is contained in our Annual Report on Form 10-K for the year
ended December 31, 2004, filed with the U.S. Securities and
Exchange Commission. We undertake no obligation to update any such
forward-looking statements. AVON PRODUCTS, INC. CONSOLIDATED
STATEMENTS OF INCOME (In millions, except per share data) Three
months ended Percent Six months ended Percent June 30 Change June
30 Change 2005 2004 2005 2004 Net sales $1,963.9 $1,844.4 6%
$3,824.8 $3,585.8 7% Other revenue 20.4 21.9 40.6 45.3 Total
revenue 1,984.3 1,866.3 6% 3,865.4 3,631.1 6% Cost of sales (1)
730.4 673.8 1,428.6 1,340.0 Marketing, distribution and
administrative expenses (1) 909.9 867.0 1,832.3 1,736.2 Operating
profit 344.0 325.5 6% 604.5 554.9 9% Interest expense 10.5 9.8 20.6
15.9 Interest income (8.1) (3.9) (15.9) (8.4) Other expense, net
(2) 0.8 4.1 5.3 7.3 Total other expenses 3.2 10.0 10.0 14.8 Income
before taxes and minority interest 340.8 315.5 8% 594.5 540.1 10%
Income taxes (3) 10.3 79.4 90.1 153.3 Income before minority
interest 330.5 236.1 504.4 386.8 Minority interest (1.9) (3.8)
(3.8) (6.4) Net income $328.6 $232.3 41% $500.6 $380.4 32% Earnings
per share: Basic $.70 $.49 43% $1.06 $.81 31% Diluted $.69 $.49 41%
$1.05 $.80 31% Average shares outstanding: Basic 471.45 472.27
471.70 472.03 Diluted 475.57 478.37 476.28 477.60 Notes: (1) For
the three and six months ended June 30, 2004, certain U.S. expenses
were reclassified from operating expenses to cost of sales. These
reclassifications did not affect operating profit. (2) For the
three months ended June 30, 2005 and 2004, Other expense, net
includes foreign exchange losses of $3.9 and $2.7, respectively.
For the six months ended June 30, 2005 and 2004, Other expense, net
includes foreign exchange losses of $5.8 and $4.7, respectively.
During the second quarter of 2005, the Company recorded a gain on
the sale of marketable securities of $4.9. (3) For the three and
six months ended June 30, 2005, earnings per share were impacted by
a reduction in tax expense of $99.6, due to the completion of
income tax examinations as well as the closure of a tax year by
expiration of the statute of limitations, net of related
adjustments. For the three and six months ended June 30, 2004,
earnings per share were also impacted by a reduction in tax expense
of $24.8 and $28.6 respectively, due to cash management and tax
strategies, favorable audit settlements, and amended returns as
well as tax and interest refunds. AVON PRODUCTS, INC. CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited) (In millions) June 30
December 31 2005 2004 Cash, including cash equivalents $880.1
$769.6 Accounts receivable, net 564.4 599.1 Inventories 841.5 740.5
Prepaid expenses and other 400.3 397.2 Total current assets 2,686.3
2,506.4 Property, plant and equipment, net 1,015.8 1,014.8 Other
assets 624.0 626.9 Total assets 4,326.1 4,148.1 Debt maturing
within one year 286.8 51.7 Accounts payable 474.5 490.1 Other
current liabilities 834.3 983.7 Total current liabilities 1,595.6
1,525.5 Long-term debt 865.9 866.3 Other non-current liabilities
688.2 806.1 Total shareholders' equity 1,176.4 950.2 Total
liabilities and shareholders' equity $4,326.1 $4,148.1 AVON
PRODUCTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions) Six months ended June 30 2005 2004 Cash Flows from
Operating Activities: Net income $500.6 $380.4 Depreciation and
amortization 63.7 64.3 Provision for doubtful accounts 60.3 67.3
Provision for obsolescence 29.5 31.9 Deferred income taxes 3.0
(21.4) Other 10.8 9.5 Changes in assets and liabilities: Accounts
receivable (28.2) (59.7) Inventories (147.4) (109.0) Prepaid
expenses and other (10.3) (7.3) Accounts payable and accrued
liabilities (47.9) 6.1 Income and other taxes (112.7) (57.3)
Non-current assets and liabilities (87.8) (76.8) Net cash provided
by operating activities 233.6 228.0 Cash Flows from Investing
Activities: Capital expenditures (86.6) (81.2) Disposal of assets
7.3 4.8 Other investing activities (11.0) (48.1) Net cash used by
investing activities (90.3) (124.5) Cash Flows from Financing
Activities: Cash dividends (159.7) (135.2) Total debt, net change
234.8 (1.8) Repurchase of common stock (129.7) (90.8) Proceeds from
exercise of stock options, net of taxes 55.2 82.0 Other financing
activities (0.3) 1.4 Net cash provided (used) by financing
activities 0.3 (144.4) Effect of exchange rate changes on cash and
equivalents (33.1) (11.2) Net increase (decrease) in cash and
equivalents $110.5 $(52.1) AVON PRODUCTS, INC. - SUPPLEMENTAL
SCHEDULE SECOND QUARTER 2005 - THREE MONTHS ENDED 6/30/05 REGIONAL
RESULTS Total Revenue in Local Operating $ in Millions Total
Revenue US$ Currency Profit US$ % var. vs % var. vs % var. vs 2Q04
2Q04 2Q04 North America $617.8 -4% -5% $110.0 -12% US 527.6 -6 -6
98.3 -14 International 1,366.5 12 6 299.4 6 Latin America 560.3 17
10 140.0 13 Europe 543.8 12 6 121.8 10 Asia Pacific 262.4 0 -2 37.6
-23 Total from Operations 1,984.3 6 2 409.4 0 Global Expenses - - -
(65.4) 21 Consolidated $1,984.3 6% 2% $344.0 6% Op. Margin Units
Active Reps 2005 % var. vs % var. vs percent 2Q04 2Q04 North
America 17.8% -10% -2% US 18.6 -12 -2 International 21.9 7 8 Latin
America 25.0 9 9 Europe 22.4 10 9 Asia Pacific 14.3 -7 4 Total from
Operations 20.6 2 6 Global Expenses - - - Consolidated 17.3% 2% 6%
CATEGORY SALES (US$) Consolidated % var. vs 2Q04 Beauty
(cosmetics/fragrances/toiletries) $1,389.2 7% Beauty Plus (fashion
jewelry/watches/apparel/ accessories) 355.7 6 Beyond Beauty (home
products/gift and decorative/candles) 219.0 4 Net Sales $1,963.9 6%
Other Revenue 20.4 -7 Total Revenue $1,984.3 6% SECOND QUARTER 2005
- SIX MONTHS ENDED 6/30/05 REGIONAL RESULTS Total Revenue in Local
Operating $ in Millions Total Revenue US$ Currency Profit US$ %
var. vs % var. vs % var. vs 1H04 1H04 1H04 North America $1,212.4
-4% -5% $192.3 -13% US 1,044.1 -6 -6 175.0 -15 International
2,653.0 12 7 559.2 11 Latin America 1,037.5 14 9 238.3 13 Europe
1,073.9 14 8 231.6 17 Asia Pacific (1) 541.6 5 3 89.3 -3 Total from
Operations 3,865.4 6 3 751.5 4 Global Expenses - - - (147.0) 12
Consolidated (1) $3,865.4 6% 3% $604.5 9% Op. Margin Units Active
Reps 2005 % var. vs % var. vs percent 1H04 1H04 North America 15.9%
-9% -2% US 16.8 -11 -2 International 21.1 7 10 Latin America 23.0 7
10 Europe 21.6 8 11 Asia Pacific (1) 16.5 4 8 Total from Operations
19.4 3 8 Global Expenses - - - Consolidated (1) 15.6% 3% 8%
CATEGORY SALES (US$) Consolidated % var. vs 1H04 Beauty
(cosmetics/fragrances/toiletries) $2,690.1 8% Beauty Plus (fashion
jewelry/watches/apparel/accessories) 690.3 7 Beyond Beauty (home
products/gift and decorative/candles) 444.4 2 Net Sales $3,824.8 7%
Other Revenue 40.6 -10 Total Revenue $3,865.4 6% (1) Growth in
Active Representatives was positively impacted by an increase in
the number of sales campaigns in the Philippines in the second
quarter of 2004, resulting in additional opportunities to order.
This change positively impacted Active Representative growth in
Asia Pacific and Consolidated Avon for the six months ended June
30, 2005 by 4 points and 1 point, respectively. DATASOURCE: Avon
Products, Inc. CONTACT: MEDIA: Victor Beaudet, +1-212-282-5344, or
Sharon Samuel, +1-212-282-5322, or INVESTOR: Renee Johansen or Rob
Foresti, +1-212-282-5320, all for Avon Products, Inc. Web site:
http://www.avoncompany.com/ http://www.avoninvestor.com/ Company
News On-Call: http://www.prnewswire.com/comp/079575.html
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