UPDATE 3-Avon slashes dividend as profit plunges, eyes cost cuts

* Quarterly profit misses analysts' estimates

* Company hopes to cut costs by $400 million/yr within 3 years

* Shares up 0.6 percent

Nov 1 (Reuters) - Avon Products Inc slashed its dividend by nearly 74 percent on Thursday and announced measures to cut hundreds of millions of dollars in costs in the next few years as its new chief executive officer continues to work on a turnaround.

The world's largest direct seller of cosmetics also said it was targeting sales growth in each of the next three years, excluding the impact of currency fluctuations.

Higher product costs, unfavorable exchange rates and ongoing difficulties in key markets like Brazil, the United States and Russia continued to bedevil Avon in the third quarter, and it reported a sharp plunge in profit for the period.

``It is clear that Avon faces a challenging situation,'' CEO Sheri McCoy, who took the helm in April, said on a conference call.

But there were signs of progress. Avon reported an 8 percent decline in revenue, caused by currency moves. Excluding those effects, the company said it was targeting mid-single-digit percentage sales gains in the next few years.

Last quarter, Avon sold 1 percent more items, and the number of sales representatives fell 1 percent, a more modest drop than in recent quarters.

Shares of Avon, which is known for brands like Skin-So-Soft and Avon Color, edged up 0.6 percent to $15.58 in morning trading.

Avon is planning to cut selling, general and administrative expenses by $400 million annually within three years, largely by simplifying its complex structure. Company executives did not provide details on the call.


The company, famed for its army of nearly 6 million ``Avon Ladies,'' has struggled with a drop in the number of sales representatives in key markets. Many of the representatives are dissatisfied with the commission structure, recognition and the technology Avon uses to support their efforts.

Winning back sales reps is Avon's top priority, McCoy said.

``They've also been very direct with me about what we need to do to improve the ease of doing business with Avon and help them succeed,'' McCoy said. ``I've heard them loud and clear.''

While she did not get into specifics, McCoy said the company would spend as much as $200 million in the next few years on information technology to help the reps.

The company lowered its quarterly dividend to 6 cents per share from 23 cents to give itself more flexibility.

McCoy had said previously that Avon did not want to tap its revolving credit facility to fund the dividend, so the move was largely expected, Morningstar analyst Erin Lash said.

``We didn't expect her to turn the company around overnight, and that's exactly what we're seeing,'' Lash said.

Excluding items such as an impairment charge for its disappointing China results, Avon reported a profit of 17 cents a share, below the analysts' average estimate of 22 cents, according to Thomson Reuters I/B/E/S.

Revenue fell to $2.55 billion in the quarter from $2.76 billion a year earlier.

Excluding the impact of currency fluctuations, sales were higher in Brazil, Avon's top market, and the company signed more sales reps there. Still the 2 percent growth was modest given the overall pace of the Brazilian market, where Avon competes with Natura Cosmeticos SA.

In North America, sales fell 8 percent, and in Russia, the company faced another reduction in the size of its sales force.

In China, a fast-growing cosmetics market, sales fell 31 percent.

Avon reported a net profit of $31.6 million, or 7 cents per share, down from $164.2 million, or 38 cents per share, a year earlier.

Since McCoy became CEO, the company has started negotiations with the U.S. government to settle a bribery probe.

Avon said in a separate filing that discussions were ``ongoing'' with U.S. authorities probing whether the company had broken anti-bribery laws overseas.