Add
AVP to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| AVP > SEC Filings for AVP > Form 10-Q on 29-Oct-2009 | All Recent SEC Filings |
29-Oct-2009
Quarterly Report
(Dollars in millions, except per share data)
OVERVIEW
We are a global manufacturer and marketer of beauty and related products. Our business is conducted worldwide, primarily in the direct selling channel. We presently have sales operations in 67 countries and territories, including the United States, and distribute products in 43 more. Our reportable segments are based on geographic operations in six regions: Latin America; North America; Central & Eastern Europe; Western Europe, Middle East & Africa; Asia Pacific; and China. We centrally manage global Brand Marketing, Supply Chain and Sales organizations. Product categories include: Beauty, which consists of color cosmetics, fragrances, skin care and personal care; Fashion, which consists of fashion jewelry, watches, apparel, footwear and accessories; and Home, which consists of gift and decorative products, housewares, entertainment and leisure products and children's and nutritional products. Sales from Health and Wellness products and mark., a global cosmetics brand that focuses on the market for young women, are included among these three categories based on product type. Sales are made to the ultimate consumer principally through direct selling by approximately 6.0 million independent Representatives, who are independent contractors and not employees of Avon. The success of our business is highly dependent on recruiting, retaining and servicing our Representatives.
We view the geographic diversity of our businesses as a strategic advantage in part because it allows us to participate in higher growth beauty markets internationally. In developed markets, such as the United States, we seek to achieve growth in line with that of the overall beauty market, while in developing and emerging markets, we seek to achieve higher growth targets. During 2008, approximately 80% of our consolidated revenue was derived from operations outside the U.S.
During the first nine months of 2009, revenues decreased 9%, impacted by unfavorable foreign exchange and the depressed global economy. Local currency revenue increased 5%, with increases in all segments except North America. Sales from products in the Beauty category decreased 9%, due to unfavorable foreign exchange. On a local currency basis, sales of products in the Beauty category increased 6% due to a 3% increase in units and net per unit. Active Representatives increased 9%. The unfavorable impact of foreign exchange lowered operating margin by an estimated 3 points (approximately 2 points from foreign-exchange transactions and approximately 1 point from foreign-exchange translation), year over year. See the "Segment Review" section of Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information related to changes in revenue by segment.
We expect that the global economic pressures will continue in the foreseeable future and that 2009 will continue to be a challenging year; however we expect the pressures from foreign exchange to ease in the fourth quarter of 2009. We expect revenue growth in 2009 to be consistent with our long-term revenue growth expectations of mid-single digits, excluding the impact of foreign exchange. We also expect that 2009 full year operating margin will continue to be pressured by the unfavorable impacts of foreign exchange, both foreign currency translation and the impact of transaction losses caused by changes in foreign exchange. Operating margin will also be negatively impacted by restructuring charges during 2009. We believe benefits from our strategic sourcing initiative ("SSI") program, focusing on manufacturing productivity, changing the sourcing of raw materials and finished goods to help mitigate foreign exchange impacts, and some softening in commodity costs will help to partially offset the negative impact of foreign exchange. We continue to look for ways to transform our cost structure and intend to reduce non-strategic spending during 2009, while continuing our strategies of investing in advertising and our Representatives, which we continue to expect will remain approximately in line as a percent of revenue for the full year on a combined basis. We are focused on innovating our direct selling channel through technological and service model enhancements for our Representatives and assessing new product category opportunities. We also continue to offer an increased assortment of "smart value" products, which are quality products at affordable price points, and promote our Representative earnings opportunity to a wider audience.
We believe that our operating cash flow and global cash balances of $1.3 billion, coupled with the continuing execution of our turnaround strategies and the competitive advantages of our direct selling business model, will allow us to look beyond the 2009 challenges and continue our focus on long-term sustainable, profitable growth.
Our strategic initiatives include advertising and representative value proposition ("RVP") investments, the product line simplification program ("PLS"), SSI, enterprise resource planning system, zero-overheard-growth philosophy and sales and operation planning process. We are also implementing restructuring initiatives under our 2005 and 2009 Restructuring Programs. For a description of our key strategic initiatives, please refer to Item 7 of our 2008 Annual Report on Form 10-K ("2008 Form 10-K"). With regards to our four major initiatives, SSI, PLS and the two restructuring programs, we remain on track with our expectations included in the 2008 Form 10-K. See Note 9, Restructuring Initiatives, of the Notes to Consolidated Financial Statements for more information on our restructuring programs.
NEW ACCOUNTING STANDARDS
Information relating to new accounting standards is included in Note 1, Accounting Policies, of the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS-THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009, AS
COMPARED TO SEPTEMBER 30, 2008
Consolidated
Three Months Ended September 30, Nine Months Ended September 30,
Favorable Favorable
(Unfavorable) (Unfavorable)
%/Point %/Point
2009 2008 Change 2009 2008 Change
Total revenue $ 2,551.3 $ 2,644.7 (4 )% $ 7,201.4 $ 7,882.5 (9 )%
Cost of sales 954.8 975.0 2 % 2,700.3 2,892.1 7 %
Selling, general and
administrative expenses 1,338.0 1,372.6 3 % 3,891.3 4,023.2 3 %
Operating profit 258.5 297.1 (13 )% 609.8 967.2 (37 )%
Interest expense 26.1 24.6 (6 )% 78.8 76.8 (3 )%
Interest income (3.2 ) (10.1 ) (68 )% (15.2 ) (27.9 ) (46 )%
Other expense, net 3.9 3.4 (15 )% 7.9 16.1 51 %
Net income attributable to Avon $ 156.2 $ 222.6 (30 )% $ 356.4 $ 642.9 (45 )%
Diluted earnings per share $ .36 $ .52 (31 )% $ .83 $ 1.49 (44 )%
Advertising expenses* $ 84.3 $ 105.8 20 % $ 243.9 $ 290.1 16 %
Gross margin 62.6 % 63.1 % (0.5 ) 62.5 % 63.3 % (0.8 )
Selling, general and
administrative expenses as a %
of total revenue 52.4 % 51.9 % (0.5 ) 54.0 % 51.0 % (3.0 )
Operating margin 10.1 % 11.2 % (1.1 ) 8.5 % 12.3 % (3.8 )
Effective tax rate 32.0 % 19.5 % (12.5 ) 33.2 % 28.2 % (5.0 )
Units sold 5 % 2 %
Active Representatives 10 % 9 %
|
* Advertising expenses are included within selling, general and administrative expenses.
Revenue
Total revenue decreased 4% for the three months ended September 30, 2009, with unfavorable foreign exchange accounting for 11 percentage points of the revenue decline. Local currency revenue increased 7%, with increases in all segments except North America and China. Active Representatives increased 10%.
On a category basis, the decrease in revenue for the three months ended September 30, 2009, was driven by a decrease of 3% in both Beauty sales and Fashion sales, as well as a decrease of 5% in Home sales. Within the Beauty category, skincare declined 8%, personal care declined 4%, fragrance declined 4% and color cosmetics increased 4%. Local currency sales of our product categories increased 7%, with the Beauty category increasing 8%. Within the Beauty category, local currency sales of skincare increased 1%, personal care increased 7%, fragrance increased 9% and color cosmetics increased 17%. Local currency sales of Fashion increased 4% and Home increased 3%.
Total revenue decreased 9% for the nine months ended September 30, 2009, with unfavorable foreign exchange accounting for 14 percentage points of the revenue decline. Local currency revenue increased 5%, with increases in all segments except North America. Active Representatives increased 9%.
On a category basis, the decrease in revenue for the nine months ended September 30, 2009 was primarily driven by a decrease of 9% in Beauty sales, with decreases in all sub-categories of Beauty. Within the Beauty category, skincare declined 12%, personal care declined 8%, fragrance declined 8% and color cosmetics declined 5%. Fashion sales decreased 10% and Home sales decreased 8%. Local currency sales of our product categories increased 5%, with the Beauty category increasing 6%. Within the Beauty category, local currency sales of skincare decreased 1%, personal care increased 7%, fragrance increased 9% and color cosmetics increased 11%. Local currency sales of Fashion were flat and Home increased 3%.
Gross Margin
Gross margin for the three and nine months ended September 30, 2009, decreased by 0.5 points and 0.8 points, respectively. We estimate that the unfavorable impact of transaction foreign exchange lowered gross margin by approximately 1 and 2 points for the three- and nine-month periods ended September 30, 2009, respectively. We were able to offset a portion of this negative impact from foreign exchange through strong manufacturing productivity gains, benefits from SSI and improved pricing. During the nine months ended September 30, 2008, gross margin was benefited by approximately $13 of reduced obsolescence as a result of changes in estimates to our disposition plan under our PLS program.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three- and nine-month periods ended September 30, 2009, decreased $34.6 and $131.9, respectively. The decrease for both the three- and nine-month periods primarily related to lower advertising costs, which decreased by 20% and 16%, respectively, offset by higher costs incurred to implement our restructuring initiatives. We recorded charges under our 2005 and 2009 Restructuring Programs of $30.2 and $133.8 during the three- and nine-month periods ended September 30, 2009, respectively, as compared to $11.8 and $50.3 during the respective periods of 2008. Additionally, as a percentage of revenue, selling, general and administrative expenses for the three- and nine-month periods ended September 30, 2009, increased by 0.5 and 3.0 points, respectively, due to:
• the decline in revenues caused by the impact of unfavorable foreign exchange, while selling, general and administrative expenses are disproportionately U.S. dollar based;
• higher brochure costs due to higher cost of paper, additional flyers and brochure pages to offer "smart value" products and an increase in the number of brochures due to a larger number of Representatives;
• incremental investments of approximately $7 and $31 for the three- and nine-month periods ended September 30, 2009, in our Representatives through RVP by continued implementation of our Sales Leadership program, enhanced incentives, increased sales campaign frequency, improved commissions and new e-business tools;
• higher bad debt expense as a percent of revenues caused by an influx of new Representatives, who normally have a higher rate of default than established Representatives, as well as economic conditions; and
• higher distribution costs as a percent of revenues due to the impact of processing more, smaller orders, particularly during the first half of 2009.
See the "Segment Review" section of Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information related to changes in operating margin by segment.
Other Expense
Interest expense for the three- and nine-month periods ended September 30, 2009, increased by 6% and 3%, respectively, due to increased borrowings, partially offset by lower interest rates. At September 30, 2009, we held interest-rate swap agreements that effectively converted approximately 82% of our outstanding long-term, fixed-rate borrowings to a variable interest rate based on LIBOR.
Interest income for the three- and nine-month periods ended September 30, 2009, decreased by 68% and 46%, respectively, primarily due to lower interest rates.
Other expense, net for the three-month period ended September 30, 2009, increased primarily due to higher net foreign exchange losses. Other expense, net for the nine-month period ended September 30, 2009, was a lower expense than the prior year as a result of lower foreign exchange losses.
Effective Tax Rate
The effective tax rate for the three and nine months ended September 30, 2009, was 32.0% and 33.2%, respectively, compared to rates of 19.5% and 28.2%, for the same periods of 2008. The effective tax rate for the nine months ended September 30, 2009, includes the establishment of a valuation allowance against certain deferred tax assets as a result of restructuring activities and a higher tax cost associated with the repatriation of anticipated current year earnings, partially offset by a reduction in a foreign tax liability as a result of a planning strategy. The effective tax rate for the three- and nine-month periods of 2008 include net benefits of 13.6 points and 4.2 points, respectively, resulting from an audit settlement, which was partially offset by the establishment of a valuation allowance against deferred tax assets relating to loss carryforwards.
Segment Review
Latin America
Three Months Ended September 30, Nine Months Ended September 30,
%/Point Change %/Point Change
Local Local
2009 2008 US$ Currency 2009 2008 US$ Currency
Revenue $ 1,113.9 $ 1,064.8 5 % 18 % $ 2,885.0 $ 2,939.8 (2 )% 16 %
Operating profit 192.4 207.1 (7 )% 4 % 414.4 515.2 (20 )% (2 )%
Operating margin 17.3 % 19.4 % (2.1 ) (2.3 ) 14.4 % 17.5 % (3.1 ) (2.7 )
Units sold 10 % 8 %
Active Representatives 13 % 11 %
|
Revenue increased for the three months ended September 30, 2009, and decreased for the nine months ended September 30, 2009, with both periods impacted by unfavorable foreign exchange. Local currency revenue increased for both the three-and nine-month periods of 2009 reflecting growth in Active Representatives, driven by continued investments in RVP, and a higher average order. Revenue increased 7% in Brazil and declined 18% in Mexico for the three months ended September 30, 2009. Local currency revenue for the three months ended September 30, 2009, benefited from growth in all markets, particularly from increases of 22% in Brazil and 7% in Mexico. Revenue declined 3% in Brazil and 14% in Mexico for the nine months ended September 30, 2009, due to the impact of unfavorable foreign exchange
rates. Local currency revenue for the nine months ended September 30, 2009, benefited from growth in all markets, particularly from increases of 19% in Brazil and 12% in Mexico. Revenue in Venezuela for the three- and nine-month periods of 2009 grew 24% and 13%, respectively, in both local and U.S. dollars.
Local currency revenue growth for both the three- and nine-month periods of 2009 in Brazil was primarily driven by an increase in Active Representatives, as well as an increase in average order. Local currency revenue growth in Mexico for both the three-and nine-month periods of 2009 was driven by a significant increase in Active Representatives, partially offset by a lower average order. Revenue growth in Venezuela for both the three- and nine-month periods of 2009 reflected increased prices due to inflation, while the three-month period also reflects increased revenues from strong merchandising activities.
The decrease in operating margin for both the three- and nine-month periods of 2009 in Latin America was primarily due to the impact of unfavorable foreign exchange, including the impacts of foreign exchange transactions as well as translation, which negatively impacted operating margin for both periods by an estimated 2 points and 3 points, respectively. Additionally, higher costs to implement restructuring initiatives negatively impacted operating margin for the nine months ended September 30, 2009, by 0.9 points, partially offset by the benefit of higher revenues and fixed overhead expense.
Currency restrictions enacted by the Venezuelan government in 2003 have impacted the ability of our subsidiary in Venezuela ("Avon Venezuela") to obtain foreign currency at the official rate to pay for imported products. Unless official foreign exchange is made more readily available, Avon Venezuela's operations will continue to be negatively impacted as it will need to obtain more of its foreign currency needs from non-government sources where the exchange rate is unfavorable as compared to the official rate.
At September 30, 2009, Avon Venezuela had cash balances of approximately $135, primarily denominated in bolivars. The last dividends repatriated to the U.S. were during 2007, when Avon Venezuela remitted dividends of approximately $40 at the official exchange rate. Avon Venezuela continues to receive official foreign exchange for some of its imports and other remittances. We continue to use the official rate to translate the financial statements of Avon Venezuela into U.S. dollars. During the first nine months of 2009, Avon Venezuela's revenue and operating profit represented approximately 5% and 11% of Avon's consolidated revenue and Avon's consolidated operating profit, respectively.
Inflation in Venezuela has been at relatively high levels over the past few years and it is likely that Venezuela will be designated as a highly inflationary economy no later than the beginning of our 2010 fiscal year. Avon uses the National Consumer Price Index to determine whether Venezuela is a highly inflationary economy. Gains and losses resulting from the translation of the financial statements of subsidiaries operating in highly inflationary economies are recorded in earnings. If Venezuela is designated as a highly inflationary economy and there is a devaluation of the exchange rate used, earnings will be negatively impacted. For example, based on the balance sheet of Avon Venezuela at September 30, 2009, if Venezuela is designated as a highly inflationary economy and there is a subsequent 20% devaluation, an approximate $50 loss would impact pre-tax earnings. If Venezuela is not considered a highly inflationary economy, under the same 20% devaluation scenario, the approximate $50 pretax loss would be recorded in equity. Additionally, revenue and operating profit on an ongoing basis would be impacted by the devaluation.
North America
Three Months Ended September 30, Nine Months Ended September 30,
%/Point Change %/Point Change
Local Local
2009 2008 US$ Currency 2009 2008 US$ Currency
Revenue $ 535.2 $ 584.5 (8 )% (8 )% $ 1,631.5 $ 1,811.4 (10 )% (9 )%
Operating profit 24.1 29.9 (19 )% (15 )% 71.7 169.0 (58 )% (56 )%
Operating margin 4.5 % 5.1 % (0.6 ) (0.4 ) 4.4 % 9.3 % (4.9 ) (4.7 )
Units sold (5 )% (6 )%
Active Representatives 4 % 3 %
|
North America consists largely of the U.S. business.
Revenue for both the three- and nine-month periods of 2009 was negatively impacted by the continued recessionary pressure. Total revenue decreased for both the three- and nine-month periods of 2009 as a lower average order received from Representatives more than offset an increase in Active Representatives. Average order remains challenging particularly in our non-beauty categories. The growth in Active Representatives for the three- and nine-month periods of 2009 reflects our ongoing recruiting and training efforts. Given the economic environment, we expect continued pressure on our results in North America.
Higher costs to implement restructuring initiatives negatively impacted operating margin for both the three- and nine-month periods of 2009 by 2.0 points and 1.7 points, respectively. During the nine months ended September 30, 2009, lower revenues and fixed overhead expense also lowered operating margin; however, cost containment initiatives benefited operating margin during the three-month period.
Central & Eastern Europe
Three Months Ended September 30, Nine Months Ended September 30,
%/Point Change %/Point Change
Local Local
2009 2008 US$ Currency 2009 2008 US$ Currency
Revenue $ 314.1 $ 382.4 (18 )% 7 % $ 960.0 $ 1,236.6 (22 )% 4 %
Operating profit 46.7 59.3 (21 )% 10 % 114.4 244.0 (53 )% (34 )%
Operating margin 14.9 % 15.5 % (0.6 ) 0.4 11.9 % 19.7 % (7.8 ) (7.1 )
Units sold - (2 )%
Active Representatives 8 % 8 %
|
Revenue decreased for both the three- and nine-month periods of 2009 as a result of unfavorable foreign exchange. Local currency revenue for both the three- and nine-month periods of 2009 increased despite continued recessionary pressure throughout the region, reflecting growth in Active Representatives, driven by investments in RVP and brochures as well as strong marketing offers. The growth in Active Representatives was partially offset by a lower average order, particularly during the first six months of 2009. While the impact of unfavorable foreign exchange rates drove revenue declines of 9% in Russia and 32% in Ukraine during the three months ended September 30, 2009, local currency revenue grew 18% in Russia and 10% in Ukraine. While the impact of unfavorable . . .
|
|