UPDATE 5-Avon profit, sales miss estimates, shares tumble

* EPS $0.41 ex-items vs Wall St view $0.47

* Total revenue $2.66 bln, vs Street view $2.69 bln

* Shares fall more than 11 percent, down 7.5 percent (Adds analyst comments)

By Jon Lentz

NEW YORK, Oct 28 (Reuters) - Avon Products Inc (AVP.N) posted a lower-than-expected quarterly profit as spending on advertising failed to lift sales as much as the company hoped, sending its shares down more than 11 percent.

The company, which has been rumored to be an acquisition target of France's L'Oreal SA (OREP.PA), also saw operating margin fall to 10.3 percent in the quarter from 11.4 percent a year earlier, excluding one-time items.

Margins were pressured by the increased advertising and by the costs of the company's investigation into bribery allegations in its China business. [ID:nN13186804]

"In other words, they spend a lot, they don't grow as much," said Sanford Bernstein analyst Ali Dibadj. "The results fly in the face of what management has touted for a long time, being margin expansion and strong top-line growth."

Avon shares fell more than 11 percent and were down 7.5 percent to $30.40 in midday trading on the New York Stock Exchange.

The company, a direct seller of women's beauty products through a cadre of representatives, spent heavily on advertising and other investments in the quarter, but revenue was less than the company expected.

"The third quarter was always planned to be a heavy investment quarter, although the lower-than-expected revenues added further pressure to operating margin," Chief Executive Officer Andrea Jung said in a statement.

Still, revenue was up 4 percent at $2.66 billion. Analysts on average forecast $2.69 billion.

Avon's net income in the third quarter rose to $166.7 million, or 38 cents a share from $156.2 million, or 36 cents a share, a year earlier.

Excluding one-time items, earnings were 41 cents a share, compared with the analysts' average estimate of 47 cents, according to Thomson Reuters I/B/E/S.

Erin Swanson, an analyst with Morningstar Inc, said she expected lower earnings due to advertising and investment in representatives.

"In our opinion, those investments, as well as investments to reduce the complexity of the supply chain, are wise for the long term," Swanson said.

NORTH AMERICA, CHINA WEAK

Avon saw revenue plummet 30 percent in China as the company continued its transition there to its traditional direct-selling model. China's operating loss was $3 million for the quarter, compared with a $3 million profit in the third quarter last year.

Swanson said that weak sales in China could persist for some time, though she noted that that country accounts for less than 2.5 percent of the company's sales.

Weak sales in North America should also continue while unemployment is still high, Swanson said.

Revenue growth was stronger in Latin America, the Middle East and Africa.

Cosmetics maker Revlon Inc (REV.N) also cited weak sales in the United States as it posted third-quarter profit that fell by 46 percent. [ID:nSGE69R0KH]

L'Oreal, the world's biggest cosmetics maker, beat forecasts last week as its luxury brands Yves Saint Laurent and Lancome rebounded.

An acquisition of Avon by a company like L'Oreal, which is not in direct sales, would not make sense due to the different distribution models, Swanson said.

Swanson noted that Avon's shares had been trading up this month amid speculation of an acquisition. (Reporting by Jon Lentz; Editing by Lisa Von Ahn, Dave Zimmerman and Gunna Dickson)