Avon's Shares Fall on Ad Spending Plans, Profit Down 25%

Avon Products Tuesday reported that second-quarter profit dropped 25 percent, hurt by restructuring and advertising costs, and its shares slid 8.5 percent as it announced a further increase in ad spending.

Avon , the world's largest direct seller of cosmetics, said net income decreased to $113 million, or 26 cents a share, from $151 million, or 33 cents a share, in the year-ago period.

Net income included pretax costs of about $82 million on initiatives including restructuring its operations and revamping its product offerings.

Excluding the charges, the company earned 38 cents per share, according to Reuters Estimates, missing analysts' expectations of 42 cents.

Avon said it will ramp up advertising expenditure by an additional 15 percent to $375 million in fiscal 2007, which Morgan Stanley analyst William Pecoriello said could cut 2007 earnings by 5 cents a share.

"Level of spend keeps us from getting excited," wrote Bank of America analyst April Scee, who noted that Avon's profit margin, even excluding charges, fell short of her expectations.

Avon is in the middle of a multiyear restructuring that includes cutting jobs, weeding out less profitable products and aggressive advertising. The company has said it expects more than $700 million in savings, once it is done with the restructuring.

Sales rose 12 percent, and 7 percent in local currency, to $2.3 billion, in line with expectations. Sales rose in all of its markets, except the United States, where they were flat from the prior-year period.

Overall, beauty product sales rose 14 percent.

In the second quarter, Avon launched its new "Hello Tomorrow" ads to promote its cosmetics products, including the Ultra Color Rich Lipstick and the Anew Retroactive line of anti-aging skin-care products. Avon boosted ad spending by 74 percent to $93 million in the quarter.

Avon shares were down $3.31 at $35.50 after falling as low as $34.50 on the New York Stock Exchange.