UPDATE 2-Avon Q3 revenue slides as turnaround stalls; shares drop

Phil Wahba
Thursday, 31 Oct 2013 | 9:09 AM ET

(Adds analyst comment, share activity, Estee Lauder results, Avon byline)

Oct 31 (Reuters) - Avon Products Inc posted weaker-than-expected quarterly results on Thursday, on another big sales drop in North America and weakness in growing markets like Mexico and Russia, stalling the beauty company's turnaround.

Avon shares dropped 15.1 percent to $19 in premarket trading.

Revenue fell 7 percent to $2.26 billion while Wall Street analysts expected $2.44 billion, according to Thomson Reuters I/B/E/S.

During the quarter, Avon sold 7 percent fewer items, and the number of sales reps fell by 3 percent, after showing signs of stabilizing earlier in 2013.

Avon Chief Executive Sheri McCoy, who has repeatedly told Wall Street since taking the helm 18 months that the fixes will take time, said "macroeconomic headwinds" were partly to blame for the poor showing.

Under McCoy, Avon has exited unprofitable markets, improved sales representatives' compensation, and fixed its technology to make it easier to fill orders, and track and collect commissions.

Morningstar analyst Erin Lash said the quarter showed the depth of Avon's problems.

"It's going to be a bumpy ride," Lash said. She pointed to a disruption from a new technology platform piloted in Canada this summer that hurt sales.

The most pronounced drop in sales came in North America, where revenue slid 19 percent, and its army of Avon Ladies sales representatives shrank by 16 percent, compared with a year earlier, a blow to a company that depends almost entirely on direct-selling.

The loss of the sales reps was due largely to insufficient compensation and a loss of market share, which made it less attractive to sell Avon products, analysts said.

There were also problems in key emerging markets where it has bet on growth and had success earlier this year.

In Mexico, sales dropped 5 percent in part because of aggressive discounting by competitors while Avon raised its prices. In Russia, one of the fastest growing cosmetics markets, sales were off 2 percent.

One bright spot was Brazil, Avon's top market, where sales rose 13 percent.

Avon reported a net loss of $5.5 million, or 1 cent per share, in the quarter, compared with a profit of $31.6 million, or 7 cents per share, a year earlier. Adjusted net income came to 14 cents per share, while analysts looked for 19 cents.

In a regulatory filing, Avon said the U.S. Securities and Exchange Commission had offered to settle a Foreign Corrupt Practices Act probe in September with penalties that were "significantly greater" than its June offer to pay $12 million.

The SEC and the Department of Justice are looking into whether Avon employees engaged in bribery overseas to develop new markets. The investigation began in 2011.

Separately, luxury beauty products maker Estee Lauder Cos Inc reported higher sales, led by gains in high-end products such as La Mer skin cream, helping to overcome softness in South Korea and Southern Europe. The beauty group maintained its full year sales forecast.

(Reporting by Phil Wahba in New York; Editing by Maureen Bavdek and Jeffrey Benkoe)

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