Direct seller and marketer of makeup Avon Products (NYSE:AVP) just reported an ugly quarter by most metrics, throwing recent turnaround successes into question.
Unlike last quarter, strong sales trends didn't make their way down to the bottom line. Overall sales grew 12% thanks to a 22% gain in Latin America, which accounted for just more than a third of total sales. North America, the next largest geographic segment, posted flat sales, and only the Asia Pacific region experienced falling sales, albeit modest at negative 1%.
China witnessed an impressive 30% top-line boost as the resumption of direct sales is starting to pay off. But Avon failed to earn a profit in China, and plummeting operating profit in the mature markets of Europe and North America played a major part in the 21% fall in diluted earnings for the quarter.
Avon also continues to take steady charges as part of the ambitious turnaround it announced in November 2005. Throw in a 74% increase in advertising, and it's not surprising that earnings fell more than expected. And while management upped the pace of its share buybacks, it increased long-term debt and posted negative operating cash flow for the first six months of this year, which is in stark contrast to its history of ample cash flow generation.
Granted, 2007 wasn't intended to mark the end of Avon's multi-year restructuring program. And maybe the stock got ahead of itself, as trends prior to this quarter suggested the company was ahead of plan. In any case, I plan on keeping an eye on the stock -- the direct-selling business model is very profitable and a welcome alternative to peers such as Revlon (NYSE:REV), Elizabeth Arden (NASDAQ:RDEN), and Procter & Gamble's (NYSE:PG) beauty segment. Direct selling also tends to work well in emerging markets such as China and Latin America. But until Avon returns to its roots as a consistent, profitable grower, I'll remain on the sidelines.
For related Foolishness:
Got thoughts on Avon? Lovely -- bring them to CAPS!
Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
