Avon sales miss on N.America 

Source: ONE News

Cosmetic maker Avon Products Inc warned investors that demand remains weak in North America while Elizabeth Arden Inc benefited from consumers picking up perfumes at duty-free shops.

Avon, the world's largest direct seller of cosmetics, reported third-quarter revenue that fell short of analysts' estimates, hurt by worse-than-expected revenue in North America, and its shares fell as much as 8.7%.

Elizabeth Arden posted an unexpected quarterly profit and sales that beat estimates, aided by improving trends in its travel retail business, which includes duty-free shops. Its shares rose as much as 10%.

"There are signs that economic conditions are beginning to improve, and, while early, we are expecting good performance from our new launches for the holiday season," said E. Scott Beattie, Arden's chief executive.

The company's retail customers have not yet returned to a normal pattern of ordering replenishment stock, he said, which suggests consumers are still spending cautiously.

Avon, which operates through a network of representatives, said revenue fell 8% in North America, worse than BMO Capital Markets analyst Connie Maneaty's expectation for a 2% decline.

"North American weakness was a surprise," Maneaty said. "We note, however, that the region does not determine overall EPS growth and we expect it to firm up over time."

Arden also sells Prevage anti-aging cream, which it created in alliance with Botox-maker Allergan Inc. Allergan posted higher quarterly profit on Thursday, as sales of the anti-wrinkle drug rose.

Cosmetics maker maker Revlon Inc also reported financial results on Thursday, posting a profit on sales that declined less than expected, and its shares soared 34%.

Arden's leverage, Avon's strategy

Arden's sales fell to $US265.2 million, but topped analysts' estimates for revenue of $2US62.9 million. Elizabeth Arden saw revenue fall 5.3% in its North American fragrance business and nearly 10% in its international business.

The company also raised the lower end of its full-year sales and earnings outlooks. It expects earnings for the full fiscal year of 55 to 65 cents per share on net sales expected to rise 2.5% to 3.5%. It previously forecast earnings of 50 to 65 cents per share and a 2% to 3.5% increase in sales.

Oppenheimer analyst Joseph Altobello said he remains bullish on Arden's shares.

"Arden's earnings power remains understated, in our view, with operating leverage likely to magnify even a modest improvement in reorders," Altobello said in a research note.

Avon's third-quarter profit excluding restructuring costs was 42 cents per share. Analysts on average were expecting 40 cents, according to Thomson Reuters I/B/E/S.

Revenue fell to $US2.55 billion, short of analysts' estimates of $US2.57 billion. It also increased its cosmetics sales representatives count by 10% in the quarter as more people sought jobs.

Avon met with investors on Fridaty (NZT) to discuss its results and strategies, including steps to sustain growth in Latin America, where revenue rose 5%, and improve results in North America.

Sanford Bernstein analyst Ali Dibadj said the North American results were disappointing, given the much easier comparisons with the weak year-ago quarter.

"North America did not get better. Latin America is still staying strong and that's supporting the company, but it doesn't look like it's a lot to write home about at this point," Dibadj said.

Part of Avon's plan to improve revenue and profit margins calls for expanding its portfolio of higher-margin beauty products such as skin creams, and to phase out some fashion or home items.

When Avon completes its restructuring in 2013, it expects to have mid-single-digit revenue growth and operating margins improving to mid-teen levels.

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