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.
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.
Logo from Avon