UPDATE 4-Avon overhauls China business, profit tops view

* Q1 adjusted EPS $0.33 vs Wall St view $0.32

* Active representatives up 6 pct, down 25 pct in China

* Internal bribery probe to cost more this year

* Sees small ’10 China loss, shifts to more direct sales

* Shares up 0.6 percent after falling 3.5 percent
(Adds details on China, outlook; updates stock activity)

By Jessica Wohl

CHICAGO, April 30 (BestGrowthStock) – Avon Products Inc (AVP.N: ) is
overhauling its small China business and sees costs rising as
it proceeds with an internal investigation into bribery
allegations in that market.

The world’s top direct seller of cosmetics also posted a
lower net profit, weighed down by charges related to
Venezuela’s currency devaluation. Adjusted profit rose more
than expected.

Avon said its internal investigation and ongoing review of
practices in China and elsewhere should cost about $85 million
to $95 million this year, up from about $35 million in 2009.
Avon suspended four executives earlier this month pending the
outcome of the probe that began in 2008. [ID:nN13186804]

Chairman and Chief Executive Andrea Jung gave details about
the probe and plans to spark growth in China before discussing
Avon’s better-than-expected profit during a conference call.

“The allegation came in the form of a letter written
directly to me,” said Jung, whose parents moved from China to
the United States before she was born. “The allegation that
triggered our investigation was in China only.”

At the same time, Avon is having trouble recruiting sales
representatives in China as it moves to more of a direct sales
model from the boutiques it runs there. Jung said a sharp
decline in active representatives in China stemmed from the
hybrid retail-direct sales model Avon has there and weak
incentives, not the ongoing investigation.

China’s active representative ranks fell 25 percent in the
quarter after rising 32 percent in 2009 and more in previous
years after Avon got government clearance to resume direct
sales in China in 2006.

Revenue fell 31 percent in China, Avon’s smallest region,
even though the brand’s image remains strong there, Jung said.

“It seems to me that after years of investment in this
market, what we might have considered a growth vehicle at some
point has just been sidelined,” said BMO Capital Markets
analyst Connie Maneaty.

Shares of Avon were up 0.6 percent at $32.88 after falling
as much as 3.5 percent earlier in the session.

NEW CHINA MANAGER

Now, the company is embarking on an 18-month plan to move
more sales in China to direct selling, under the leadership of
a new general manager, Rene Ordonez. Ordonez had been a general
manager of South Latin America, part of Avon’s largest market.

S.K. Kao, the most recent general manager of Avon China,
was one of the executives placed on administrative leave.

Avon said it cannot predict the results or consequences of
its investigation and compliance reviews, or how long they will
take. It did not say which countries it is reviewing, but did
say they represent each of its four international segments
besides China, namely Latin America; Central & Eastern Europe;
Western Europe, Middle East & Africa; and Asia Pacific.

The company is looking into items such as travel,
entertainment, gifts and payments connected to direct and
indirect dealings with foreign governments and their
employees.

REVENUE, ADVERTISING SPENDING RISE

Avon earned $43 million, or 10 cents per share, down from
$117 million, or 27 cents per share, a year earlier.

Excluding the impact of Venezuela’s currency devaluation
and restructuring costs, Avon earned 33 cents per share, up
from 30 cents in the year-ago period and ahead of analysts’
average forecast of 32 cents, according to Thomson Reuters
I/B/E/S.

Total revenue climbed 13.9 percent to $2.49 billion,
topping analysts’ expectations of $2.46 billion. Revenue rose 8
percent on a constant-dollar basis.

Avon expects its China business to post a small loss this
year, be break-even or just slightly positive in 2011 and
become profitable in 2012 as it works on the new plan, Chief
Finance & Strategy Officer Charles Cramb said during the call.

The company still expects to deliver at least mid-single
digit constant-dollar revenue growth this year and its
long-term goals are intact, Cramb said. [ID:nWEN3974]

Advertising spending rose 23 percent to $96 million as the
company increased efforts to attract more representatives.

Sales on a constant-dollar basis grew in all parts of
Avon’s beauty portfolio except for skin care. Skin care sales
fell 5 percent due mainly to declines in China, Avon said.

In Latin America, revenue rose 14 percent in
constant-dollar terms and operating profit was flat due to
Venezuela being designated as a highly inflationary economy and
the devaluation of its currency.

Investment

(Reporting by Jessica Wohl, additional reporting by Dhanya
Skariachan in New York; editing by Michele Gershberg, Derek
Caney and Gunna Dickson)

UPDATE 4-Avon overhauls China business, profit tops view