UPDATE 3-Avon's turnaround stalls; shares plummet

Thu Oct 31, 2013 12:50pm EDT

(Adds details from conference call)

By Phil Wahba

Oct 31 (Reuters) - Avon Products Inc's quarterly sales slipped, missing forecasts and sending its shares plummeting as investors questioned whether its turnaround plan was working.

The weak results, triggered by declines in North America as well as emerging markets like Mexico and Russia, knocked its stock to its lowest level since February, when Chief Executive Sheri McCoy started detailing her plan to return Avon to growth.

Adding to Avon's woes, the world's largest direct-seller of cosmetics also said on Thursday that the U.S. Securities and Exchange Commission offered to settle a previously disclosed bribery probe in September with penalties that were "significantly greater" than Avon's offer to pay $12 million.

Avon said a settlement of the size the SEC has proposed - which Avon did not reveal - would "materially adversely" hurt its financial condition.

Avon shares fell 23.5 percent to $17.14 in morning trading, knocking $2.3 billion off its market capitalization.

Revenue declined 7 percent to $2.26 billion while Wall Street analysts expected $2.44 billion, according to Thomson Reuters I/B/E/S. The drop was 1 percent when stripping out the impact of currency movements.

The numbers dashed hopes raised by the previous two quarters that McCoy's efforts - highlighted by moves to exit unprofitable markets, improve representatives' compensation, and improve its technology to make it easier to fill orders, and track and collect commissions - were taking hold.

Many of Avon's efforts hurt business instead. For example, sales in Canada tumbled from the disruption caused by a new technology platform designed to improve order management that Avon piloted there this summer.

"We need to build strong execution into our DNA. This will take time," McCoy, who replaced Andrea Jung in April 2012, told analysts on a conference call.

During the quarter, Avon sold 7 percent fewer items, and the number of sales reps fell by 3 percent, after showing signs of stabilizing earlier in 2013.

Morningstar analyst Erin Lash said the quarter showed the depth of Avon's problems. "It's going to be a bumpy ride," she said.

In Mexico, a bright spot for Avon in recent quarters, sales dropped 5 percent in part because of aggressive discounting by competitors while Avon raised its prices.

In the United States, Avon's poor showing was to a great degree self inflicted, exacerbated by a slowing beauty market.

Steps Avon has taken to simplify its operations, such as lowering the number of district managers - who are responsible for attracting new talent - ended up hurting Avon.

"Our recruiting engine fell apart," McCoy said.

In North America, revenues continued its years-long slide, falling 19 percent, and its army of Avon Ladies sales representatives shrank by 16 percent.

Avon like others in the industry was also hit by a broad slowdown in the North American beauty market. Elizabeth Arden Inc reported its North American sales fell 3 percent last quarter, and L'Oreal on Thursday said U.S. retailers had cut inventories in response to a market slowdown.

One bright spot was Brazil, Avon's top market, where sales rose 13 percent. Avon has developed products specifically for that market, where it competes with Natura Cosmeticos Sa , and fixed computer systems that had previously led to delays in 'reps' getting their commissions.

Avon reported a net loss of $5.5 million, or 1 cent per share, in the quarter, compared with a profit of $31.6 million, or 7 cents per share, a year earlier. Adjusted net income came to 14 cents per share, while analysts looked for 19 cents.

The SEC and the Department of Justice are looking into whether Avon employees engaged in bribery overseas to develop new markets. The investigation began in 2011. Avon has already spent hundreds of millions of dollars on its own investigation.

Separately, luxury beauty products maker Estee Lauder Cos Inc reported higher sales, led by gains in high-end products such as La Mer skin cream, helping to overcome softness in South Korea and Southern Europe. The beauty group maintained its full year sales forecast.

Estee Lauder's shares rose 1.6 percent on Thursday. (Reporting by Phil Wahba in New York; Editing by Maureen Bavdek, Jeffrey Benkoe and Bernard Orr)

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article