International sales really took off in Latin America this quarter, rising 32% (or 19% when excluding the effects of a weak dollar on reported results). China grew almost as fast at 29%; there, "Active Representatives" (individuals who sell Avon products to friends, family, and others) expanded an impressive 99% as the company returned to a direct model after receiving government approval to do so.
As a result, operating profits in China more than tripled to 15.5% of sales. Profits in Europe, Asia, and Latin America all grew nicely, with the only fall in North America, which also experienced a 6% drop in sales. Management attributed the domestic weakness to the impact of a weak economy and some problems with filling orders, but expects second-quarter trends to improve. Overall, consolidated operating income improved an attractive 25% on solid cost controls, and Avon continued on its multiyear restructuring program to try and boost net margins back into the double digits; they last hit these levels in 2005.
Avon should have no problem expanding margins if global top-line growth continues at its current clip. The business model is also sound, and it's especially compelling overseas, since Avon can use a direct sales force to compete with the beauty divisions of personal-product titans such as Procter & Gamble
As much as I like Avon as a business and am impressed by its recent operational improvements, I find its valuation slightly unattractive. The forward P/E is just less than 19, which seems pricey for a company that doesn't have itself completely put together. Until it boosts profits and cash flow to match the levels of a few years ago, I'll remain on the investment sidelines.