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Avon Beauty sales grow by 19%

Jul '08
Avon Products Inc reported that second-quarter 2008 total revenue grew 17% year over year (9% in local currency) to $2.7 billion.

Sales of Beauty products rose 19%. Active Representatives increased 7%, and units sold were up 5% versus the prior-year quarter. All six operating regions contributed to the growth in each of these measures.

Operating profit doubled, to $374 million from $187 million, and the company's operating margin rose to 13.7% from 8.0% in the year-ago quarter.

Net income in the second quarter 2008 was $236 million compared with $113 million in the year-ago quarter. Earnings per share were $.55 versus $.26 per share in the prior-year quarter, or 112% higher.

Andrea Jung, chairman and CEO, commented, "The second quarter performance is the best that we have delivered since launching our turnaround in late 2005.

Both top-line and bottom-line growth rates are among the strongest of the last two years. We achieved these results on the strength of our well-balanced geographic portfolio and the momentum of our turnaround plan.

"Our results this quarter contributed strongly to a six-month operating margin of 12.8%. With this solid year-to-date performance and the timing of our expected 2008 savings and benefits from strategic initiatives weighted to the second half of the year, we are well on our way to achieving our 2008 operating margin target. That target is to deliver a full-year 2008 operating margin that approaches 2005's level of approximately 14%.

"Like our peers, we are experiencing input cost pressures in the current business environment. The savings and benefits from our strategic initiatives, our ongoing ability to capture strategic price increases, and the leverage from our revenue growth are helping to offset these cost pressures," Ms. Jung concluded.

The company's 19% growth in Beauty sales included increases in all categories: Color was up 26%, Fragrance grew 17%, Skin Care increased 15% and Personal Care rose 17%.

Beauty sales benefited in part from a year-over-year 10% increase in advertising expense, to $103 million. Advertising supported the launch of new products, such as Pro-to-Go Lipstick and Anew Ultimate Eye Contouring System as well as Representative recruitment advertising in priority markets.

Additionally, 2008's second quarter included an incremental $16 million of costs for initiatives to improve the Representative Value Proposition (RVP).

Second-quarter 2008 operating profit included costs associated with the company's restructuring program of $13 million ($.02 per share after tax), versus costs of $82 million ($.14 per share after tax) related to the company's Product Line Simplification (PLS) ($61 million) and restructuring programs ($21 million) in the prior-year period.

Avon reiterated that it expects to achieve annualized savings of approximately $430 million once all initiatives of its multi-year restructuring program, launched in late 2005, are fully implemented by 2011 - 2012.

Those savings are expected to reach $270 million in 2008 and $300 million in 2009. The company anticipates costs to implement all restructuring initiatives from inception to completion to be approximately $530 million. Approximately $482 million of those costs were recorded through the second quarter of 2008.

Additionally, Avon reiterated that it expects to achieve, beginning in 2010, in excess of $200 million annual benefits each from its PLS program and Strategic Sourcing Initiative for a total in excess of $400 million from these two programs and over $830 million annually from all initiatives when fully implemented.

The quarter's effective tax rate of 31.2% compared with 2007's rate of 32.3%.: At quarter end, Avon's total debt had increased $167 million from the year-end level, and cash had decreased $3 million.

Net cash provided by operating activities was $172 million through six months of 2008 compared with $1 million of cash used by operating activities in the same period of 2007.

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