Another Ouch at Avon

A strong dollar put another dent in Avon Product Inc.'s fourth quarter results, as corporate sales fell 12% and beauty sales declined 14%.

“While progress against our financial goals in 2014 was slower than I would have liked, I am pleased with the sequential improvements we made in several key markets and categories in the second half of the year. We have stronger management teams across our key markets and better discipline in executing consistently against Avon's core processes,” said Sheri McCoy, chief executive officer, Avon Products, Inc. “Going into 2015, we intend to build on that momentum. However, based on strengthening of the US dollar, we expect the impact of foreign currency on our reported results to be significant. We are working to mitigate as much of the impact as possible. Avon has weathered emerging market cycles in the past and I'm confident we will do so again.”

For the fourth quarter of 2014, total revenue of $2.3 billion decreased 12%, but increased 5% in constant dollars. Total units decreased 3%, and price/mix was up 8% during the quarter. Active Representatives were down 4%, while average order increased 9%. Beauty sales declined 14%, but increased 5% in constant dollars. Fashion & Home sales declined 13%, but increased 1% in constant dollars.

Fourth-quarter 2014 gross margin was 60.7%, and adjusted gross margin was 60.8%. Adjusted gross margin was 40 basis points lower than the prior-year quarter, primarily due to the unfavorable impact of foreign exchange driven by Europe, Middle East & Africa and Latin America, and higher supply chain costs, primarily from high-inflation countries. This was partially offset by the favorable net impact of mix and pricing, primarily due to inflationary pricing in Latin America.

Operating profit was $170 million, and operating margin was 7.3% in the quarter. Adjusted operating profit was $217 million, and adjusted operating margin was 9.3%, up 110 basis points from the fourth quarter of 2013. Adjusted operating margin was favorably impacted by the benefit of Value Added Tax (“VAT”) credits in Brazil, as well as benefits from the company's cost savings initiatives. These benefits were partially offset by the negative impact of foreign currency transaction costs and translation adjustments, which reduced Adjusted operating margin by approximately 260 basis points.