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May 1 (Reuters) - Avon Products Inc would pay the U.S. government $135 million to settle a multiyear bribery probe into its overseas business development practices, under a preliminary agreement the beauty products company disclosed on Thursday.
A settlement would end a costly distraction for Avon when Chief Executive Officer Sheri McCoy, now two years into her term, is still struggling to fix the business.
Avon reported lower-than-expected revenue and earnings for the first quarter, hurt by a drop in sales in key markets such as Russia, the United States and Mexico, as well as the departure of more sales representatives.
Overall sales fell 11.1 percent to $2.18 billion, while analysts were expecting $2.21 billion. Without the effects of currency fluctuations, the decline would have been 3 percent.
Avon shares fell 6.7 percent to $14.25 in premarket trading.
"A turnaround looks to be further off than either we or management had expected," BMO Capital Markets analyst Connie Maneaty said in a research note.
Avon has been beset by different kinds of problems in each market. For instance, in Russia and Brazil, it has faced aggressive competitors offering lower prices.
In the United States, it is grappling with a large exodus of its sales representatives. Its products have struggled to compete against inexpensive beauty items at drugstores or from chains like Sephora.
McCoy, who said she was "not satisfied" with the results, in February updated analysts on her plans to revive the 128-year-old company, but those efforts have had little effect so far.
Globally, Avon sold 6 percent fewer items during the quarter, and the size of its sales force of "Avon Ladies" representatives fell 4 percent.
It was the second quarter in a row of poor results after signs of progress in the middle of 2013.
Brazil, Avon's largest market, was a bright spot, with sales rising 5 percent, excluding the impact of currency.
But in North America, Avon's business continued to degenerate, with sales down 22 percent and 18 percent fewer representatives. In Mexico, once a promising market, revenue fell 8 percent, while in Russia, it dropped 11 percent, excluding currency.
Avon said its net loss had widened to $168.4 million, or 38 cents per share, from $13.7 million, or 3 cents per share, a year earlier. Last year, Avon exited markets such as South Korea and Vietnam, incurring costs.
Adjusted net income from continuing operations came to 12 cents a share. That was 9 cents below what analysts expected, according to Thomson Reuters I/B/E/S.
The cost of the settlement, subject to a final agreement and approval, would be in fines, disgorgement and prejudgment interest, roughly split evenly between the U.S. Department of Justice and the U.S. Securities and Exchange Commission.
A settlement of $135 million would be one of the largest from an U.S. company, according to a list from a popular blog on the law, FCPA Blog.
The government's investigation into potential violations by Avon of the Foreign Corrupt Practices Act began in 2011, following the company's internal probe that started in 2008 into allegations of improper payments in China.
Avon's own probe has already cost the company about $300 million.
(Reporting by Phil Wahba in New York; Editing by Lisa Von Ahn)