Avon Reports Disappointing Third Quarter Results

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NEW YORK, Nov. 1, 2012 -- Avon Products, Inc. today reported third-quarter 2012 results and provided goals for future performance. "Avon's third-quarter results remain disappointing. The challenges that Avon faces developed over time, not overnight, and it will take time to implement the solutions as well," said Sheri McCoy, Chief Executive Officer. "However, we have identified the first critical actions to return Avon to a position of financial health and improve our competitive position. With a clear focus on growing the top-line, managing costs, and improving our working capital, I am confident that we are moving Avon toward a steady recovery."

Third-Quarter 2012 (compared with third-quarter 2011) For the third quarter, total revenue of $2.6 billion decreased 8%, or increased 1% in constant dollars. Total units grew 1% and price/mix was flat during the quarter. Active Representatives were down 1%.

Avon Beauty sales declined 9%, or flat in constant dollars. On a reported basis, fragrance was down 7%, color and skincare both declined 11%, and personal care was down 9%. On a constant-dollar basis, fragrance increased 2% while color and skincare declined 1% and 3%, respectively. Personal care was flat.

Third-quarter 2012 gross margin was 61.2%, 270 basis points lower than the prior-year quarter, due to the net unfavorable impact of product mix and pricing, higher supply chain costs primarily due to costs associated with obsolescence as well as the negative impact from foreign exchange.

Operating profit was $106 million in the quarter and operating margin was 4.2%. Adjusted Non-GAAP operating profit was $152 million and adjusted Non-GAAP operating margin was 5.9%, down 440 basis points from the third quarter of 2011. This was offset by an $18 million decline in advertising, down 24% to $58 million.

Third-quarter 2012's effective tax rate was 58.2%, versus 31.5% in the third quarter of 2011. On an adjusted Non-GAAP basis, the effective tax rate was 37.2%, versus 31.5% in the third-quarter 2011, due primarily to lower benefits from audit settlements and statute expirations.

Income from continuing operations in the third quarter of 2012 was $33 million, or $0.07 per diluted share. Adjusted Non-GAAP income from continuing operations was $78 million, or $0.17 per diluted share.

Net cash provided by operating activities was $220 million for the nine months ended September 30, 2012, compared with $247 million in the same period of 2011, as lower net income was partially offset by improvements in working capital, lower contributions to the U.S. pension plan, and a payment in 2011 associated with a long-term incentive compensation plan of $36 million. The overall net cash used in the nine months ended September 30, 2012 was $148 million, compared with a use of $192 million for the same period in 2011, primarily due to lower capital expenditures.

Avon's net debt (total debt less cash) for the third quarter of 2012 was $2.2 billion, up $152 million from the year-end level.

Management is focused on stabilizing the business and returning Avon to sustainable growth and has set financial goals of mid single-digit constant-dollar revenue growth and a low double-digit operating margin over the next three years. Management has the team fully aligned around actions that will accelerate top-line growth, reduce costs and improve working capital. Management is also targeting cost savings of at least $400 million by the end of the three years to be largely driven by a reduction in Selling, General and Administrative expenses (SG&A). It also expects that there will be charges associated with the achievement of these goals.

Earlier today, the company announced a reduction in its quarterly dividend from $.23 per share to $.06 per share. This is part of an overall review of the capital structure and is consistent with prior communication that the company would assess the dividend in light of current operating performance as well as Avon's peer group. This dividend reduction, in conjunction with continued efforts to improve working capital, should help provide financial flexibility.