Avon net falls in 4Q on troubles in Brazil, Russia

NEW YORK (AP) -- Supply problems in Brazil, poor sales in Russia and rising costs for raw materials pushed Avon Products Inc.'s net income down 15 percent in the fourth quarter.

The cosmetics company plans to raise prices to offset rising costs for commodities such as resins and chemicals, freight and labor. It also plans to freeze hiring on all but critical positions.

About 80 percent of Avon's revenue comes from outside of North America.

"As we closed out the year, we continued to experience disappointing sales results which were negatively impacted by service disruptions in Brazil and weak performance in Russia," CEO Andrea Jung said. She added the company is "squarely focused" on "restoring growth" in the two regions.

It was the second consecutive quarter of disappointing results from Brazil, usually a stronghold for Avon. Last quarter, the company said relaunches of makeup such as mascara and lipstick went poorly.

In a call with analysts, Jung said the poor results had to do with June government mandates requiring electronic invoices, which exacerbated problems with its supply system in Brazil. That led to service delays and product shortages three times the normal level. Jung said Avon is updating the systems.

The company blamed weakness in Russia on incentive requirements that were too high to meet, an increase in taxes for entrepreneurs and weaker-than-expected response to makeup.

During a call with analysts, Jung stressed that the company's fourth-quarter problems did not have to do with the company's overall strategy and structure, but regionally specific problems that can fixed individually.

But analysts on the call seemed exasperated by that response.

"It is great that your problems aren't structural, but if they are all execution, well then, should there be a bunch of people who lose their jobs over such awful execution?" asked Citi Investment Research analyst Wendy Nicholson

Jung responded that "operational rigor on the ground" and strong leadership was a top priority.

The beauty company's net income fell to $229.5 million, or 53 cents per share, from $269.4 million, or 62 cents per share, a year earlier.

Adjusted earnings were 59 cents per share, sharply missing analyst estimates of 66 cents per share, according to FactSet.

Revenue for the quarter ended Dec. 31 edged up 1.3 percent to $3.18 billion, partly helped by higher prices, but fell short of analyst expectations of $3.27 billion.

Revenue from Latin America, Avon's largest region accounting for 40 percent of its business, rose 5 percent to $1.27 billion.

Revenue from North America, 20 percent of Avon's business, rose 1 percent to $644.4 million, although excluding newly acquired Silpada, a direct jewelry seller, revenue would have fallen 10 percent. Unit sales dropped 14 percent.

The steepest drop came from China, where revenue fell 45 percent to $55 million as the company continues to transition to a direct-selling system more similar to the one it uses elsewhere. China banned direct sales in the 1998 after widespread pyramid schemes caused problems, but reversed that decision in 2005. Revenue was hurt by a 44 percent drop in unit sales as the company advertised less.

For the year, net income fell 3 percent to $606.3 million, or $1.29 per share, from $625.8 million, or $1.45 per share. Revenue rose 6 percent to $10.86 billion.

Shares fell 88 cents, or 3 percent, to close at $28.47 Tuesday, closer to the low end of the stock's 52-week range of $36.20 during the past year.