Avon in talks to settle bribery probe; profit plunges

Wed Aug 1, 2012 3:44pm EDT

(Reuters) - Avon Products Inc (AVP.N) said on Wednesday it is in talks to settle a U.S. bribery probe into overseas operations, a step analysts said could help the troubled beauty company move past a costly distraction and focus on fixing its business.

News of a possible settlement came as Avon reported a 70 percent plunge in second-quarter profit on declining sales in the United States, Russia and Brazil, and the company said it expects no improvement in the second half of 2012.

In her first extensive comments to Wall Street, new Chief Executive Sheri McCoy warned there was no guarantee Avon would reach a settlement, or how much it could cost. Avon has spent roughly $250 million so far on its own internal probe.

"While these discussions will take time, it is progress," McCoy said during a conference call with analysts.

The once iconic beauty brand has been struggling for years to keep up with rivals in the United States and abroad as low-cost, trendy brands took off. This year alone shares in Avon are down 42.4 percent.

On Wednesday, the company said in a regulatory filing it was in talks with the U.S. Securities and Exchange Commission and Department of Justice to settle the bribery probes.

Avon's own probe opened in 2008 and initially focused on whether its China business had violated the Foreign Corrupt Practices Act, which bars U.S. companies and others from paying bribes to officials of foreign governments.

The company's investigation spread to other countries and has led to dismissals and departures in the past year-and-a-half. The U.S. government opened its own probe last year.

"Putting this issue behind the company would better position management to focus on righting the business," said Morningstar analyst Erin Lash.

Avon's shares were down about 1.7 percent, or 27 cents, at $15.22 in afternoon New York Stock Exchange trading.

NO IMPROVEMENT IN SIGHT

The beauty company, known for brands like Skin-So-Soft and Avon Color, sold 4 percent fewer items during the quarter and its salesforce of 6 million "Avon Lady" representatives shrank 3 percent globally.

Revenue dropped 9 percent to $2.59 billion, below analysts' estimates of $2.66 billion.

Avon reported a net profit of $61.6 million, or 14 cents per share, down from $206.2 million, or 47 cents per share, a year earlier.

Excluding one-time items, earnings from continuing operations were 20 cents per share, a penny below Wall Street's expectations, according to Thomson Reuters I/B/E/S.

Avon struggled in all of its main categories, with the steepest declines in skincare and personal-care sales.

In Brazil, Avon's top market, the company faced weak demand and the loss of representatives, and in Russia, competition and a tough economy dented sales.

In its home market of North America, the multi-year slide in sales continued, falling 6 percent, and about 12 percent of representatives have left the company.

Avon's finance chief, Kimberly Ross, warned Wall Street to expect more of the same in the second half of the year.

In May, Avon fended off a $10.7 billion unsolicited takeover bid from Coty Inc, saying shareholders would benefit more in the long term from a turnaround under McCoy's leadership.

NO SACRED COWS

McCoy, a former Johnson & Johnson top executive who replaced 12-year veteran Andrea Jung in April, acknowledged in a statement that the results "are not good" and that turning around Avon "will take time."

She said the company is first trying to stabilize revenue, rein in costs and make being a representative more attractive.

While McCoy gave no detailed strategic review, she did give analysts a few hints of what she has planned.

For instance, she wants to add lower-priced items to Avon's offering to undo the damage done by its recent move to try to reach higher income customers with fancier products. She also wants to invest more in technology to help reps tap social media.

Avon might eventually enter new markets and is considering new ways to reach customers. But McCoy said direct selling is "still very relevant" despite the growth of retail in emerging markets and Avon's long U.S. decline.

At the same time, just as the company left Japan a few years ago, she did not rule out exiting other markets.

"There are no sacred cows," she said.

While she did not name Jung directly, McCoy was critical of how the company was managed before her arrival. For instance, McCoy said that Avon's multiple attempts to fix its business in recent years through restructurings had caused it to focus internally, lose sight of the competition, and created a "silo" mentality.

"Avon doesn't need yet another new strategy. We need to focus on the core of Avon's business," McCoy said.

(Reporting by Phil Wahba in New York; Editing by John Wallace, Maureen Bavdek, David Gregorio and Leslie Gevirtz)

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