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UPDATE 4-Avon sales skid again; preliminary deal on bribery probe

(Adds details on proposed FCPA settlement)

May 1 (Reuters) - Avon Products Inc's quarterly results on Thursday showed just how hard it will be for the direct seller of beauty products to turn itself around, with big setbacks in key markets like Russia, Latin America and the United States.

Shares fell 12.6 percent to $13.36 in afternoon trading. The company also announced it agreed to pay the U.S. government $135 million to settle a multiyear overseas bribery probe, under a preliminary deal.

Chief Executive Officer Sheri McCoy can scarcely afford the distraction of such an investigation at a time she is struggling to fix Avon two years into her term.

"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.

It was the second quarter in a row of poor results after signs in early 2013 that McCoy's turnaround was taking hold.

The 128-year-old company has been bedeviled by different problems in different markets. It has responded with steps such as introducing market-specific products in Russia and Mexico, and fixing a computer system that had stymied Brazilian sales representatives in getting their commissions.

In the United States, it is aggressively courting the Hispanic market.

Avon has also exited markets such as Vietnam and South Korea, while undertaking $400 million-a-year cost cuts.

But the benefits of its initiatives have been slow in coming.

Sales fell 11.1 percent to $2.18 billion in the first quarter ended March 31, compared with analysts' expectations of $2.21 billion. Excluding the effects of currency fluctuations, the decline would have been 3 percent.

Globally, Avon sold 6 percent fewer items, and the size of its "Avon Ladies" sales force fell 4 percent.

Brazil, Avon's largest market, was a bright spot, with sales rising 5 percent, excluding the impact of currency.

But in North America business continued to degenerate, with sales down 22 percent and with 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 widened to $168.4 million, or 38 cents per share, from $13.7 million, or 3 cents per share, a year earlier, which it incurred costs from exiting markets.

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.

POTENTIAL FCPA DEAL

The cost of the settlement of the bribery probe, subject to a final agreement and approval, would be in fines, disgorgement and prejudgment interest, split roughly evenly between the U.S. Department of Justice and the Securities and Exchange Commission.

Under the settlement, the DOJ would defer criminal prosecution for three years in exchange for Avon's agreeing to have a compliance monitor; that could be replaced after 18 months by Avon's agreeing to self-monitor and reporting obligations for another 18 months.

If there were no further violations during that time, the charges against Avon would be dismissed.

A settlement of $135 million would be one of the largest from a 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 cost the company about $300 million.

(Reporting by Phil Wahba in New York; Editing by Lisa Von Ahn and Leslie Adler)

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