Avon shares plunge on 'soft' sales growth

NEW YORK (CNNMoney.com) -- Shares of Avon Products dropped as much as 11% Thursday after the company reported third-quarter results that missed analysts' expectations.

The beauty products company, famous for its door-to-door sales network, said sales were "softer" than expected in the quarter as consumer spending remains weak.

Avon has been struggling to transform itself over the last few years by expanding its overseas operations and acquiring smaller rivals. But the global economic slowdown has weighed on demand for beauty products and Avon itself has become the subject of takeover talk.

The company's stock bounced back a bit to end the day down 5.6%, at $31.01.
Just two weeks ago, shares were at a 2010 high near $35.50.

Avon (AVP, Fortune 500) said sales rose 4% to $2.7 billion in the quarter. Analysts were expecting total revenue of $2.69 billion, according to estimates from Thomson Financial.

The New York-based company reported net income of $167 million, or 38 cents per share, up from $156 million, or 36 cents per share, in the quarter.

Excluding certain one-time restructuring costs, Avon said net income was $178 million, or 41 cents per share, compared with $179 million, or 42 cents per share, in the same period last year. Analysts had been expecting adjusted earnings of 47 cents per share.

Despite the lackluster results, Avon has weathered economic storms before and the company should emerge intact from the current downturn, according to Morningstar analyst Erin Swanson.

While the company's turnaround efforts will eventually pay off, Swanson said sales in the United States will remain depressed as the nation's unemployment rate is expected to hold above 9% into next year.

"Cash-strapped consumers appear to still be spending cautiously in the firm's domestic market, which we believe will continue as long as unemployment levels remain elevated," she wrote in a research report.

Meanwhile, the company is also facing headwinds in China, where sales plunged 31% in the quarter.

Avon was the first company to receive a direct sales license in China, but the company has struggled to transition from a direct-sales model to a retail type format in China, Swanson said.

However, China currently account for less than 2.5% of Avon's overall sales activity, so the weakness there "will not materially affect Avon's consolidated results," she added.

On the bright side, sales in Latin America were up 13% in the quarter, while sales in Europe rose 7% versus last year.

Looking ahead, Avon chief executive Andrea Jung said in a statement that the company expects 2010 sales growth to be in the range of "at least mid-single digits (percentage-wise) in constant dollars," though she said profit margins will narrow due to investments.

"We remain committed to our long-term strategic growth plan as well as the achievement of our corporate objectives," she said, adding that sales and margins will continue to improve through 2013.