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Avon sales slide as door-to-door reps leave

Avon products are seen at a Grameen America open house at St. John's University in New York
Avon products are seen at a Grameen America open house at St. John's University in New York

By Phil Wahba

(Reuters) - Avon Products Inc reported weaker-than-expected fourth-quarter results as sales slid in most markets, and executives raised the possibility of layoffs soon.

At the same time, representatives who work on commission and are essential to selling Avon's cosmetics directly to consumers were leaving the company in greater numbers than in several years.

Still, Avon shares were up more than 3 percent, rising after outgoing Chief Executive Officer Andrea Jung pledged to let her successor take steps to fix the company without impediment. Analysts and investors have been concerned that her staying on as chairman would make it hard for Avon to recruit a successor with a plan of his or her own.

"Just to be very clear, the new CEO will have absolute autonomy to define his or her strategic and operational priorities," said Jung, who agreed in December to step down from the CEO post that she has held since 1999.

Avon's shares have come under intense pressure in the last year because of weak performances in key emerging markets including Brazil and Russia. The stock has also suffered from fallout from an expensive internal bribery investigation that began in China in 2008 as well as a probe by U.S. prosecutors.

The company said it would again pay a dividend of 92 cents per share in 2012 despite investors' fears that its operations would not generate enough cash for the $400 million payout.

Avon said on Tuesday that it would wait for the announcement of Jung's replacement before updating its business review, which it was initially to present in early 2012. The company has given no timetable for naming a new CEO, although it is expected to be this year.

Avon reported a net loss of $400,000, or nil per share, compared with year-earlier net income of $229.5 million, or 53 cents per share.

Excluding some items, Avon made 39 cents per share from continuing operations, well below the 51 cents Wall Street analysts were expecting, according to Thomson Reuters I/B/E/S.

Revenue fell 4 percent worldwide to $3 billion, also missing Wall Street estimates.

The results point to declining business in Russia and Brazil, where Avon has banked on growth to mitigate a long-term slide in its home market of North America. The company said problems in those countries were the biggest factor in the drop-off in representatives.

Revenue fell 1 percent in Brazil. Poor implementation of a new computer system there has frustrated sales representatives, many of whom also represent rivals such as Brazil's Natura Cosmetics SA.

Revenue fell 10 percent in Russia, where Avon faced aggressive pricing from competitors and sales reps dropped out.

Jung said the computer problems in Brazil had "stabilized" and that the decline in representatives in Russia had eased at the end of 2011.

The only bright spot in Avon's revenue was Mexico, where sales were up 12 percent in constant dollars.

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Graphic on Avon earnings: http://link.reuters.com/bed66s

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WAITING FOR A CEO

For all the promising things Avon executives said, many analysts were reserving judgment until the new CEO comes in.

"A lot won't be determined until the new CEO is appointed," said RBC Capital Markets analyst Jason Gere. "I still want to hear the new plan."

Jung said that the focus in 2012 would be sales improvements and containing costs, rather than improvement in margins.

Avon, which relies on its legion of 6 million sales representatives, said the number who are active had fallen by 3 percent. A Morgan Stanley analyst on the call said that was the worst drop in more than a decade.

Although Avon's former CFO said in October that the company had difficulty funding its dividend with free cash flow, new finance chief Kimberly Ross said on Tuesday that even without profit growth, "we would generate sufficient cash to pay the dividend."

In a sign that Avon is struggling with acquisitions it made to win new customers, the company took a $263 million impairment charge for Silpada, which it bought in 2010 for $650 million, blaming rising silver costs for hits to sales.

On the legal front, Jung said little about a federal probe related to Avon's China business. Federal prosecutors are investigating a draft internal report from 2005 by Avon that flagged concern about the company's compliance with U.S. anti-bribery laws, two people familiar with the matter said on Monday.

Jung said on Tuesday that Avon was cooperating with the government, but that she was "unable to predict the duration, or consequences" of the probe.

In 2006, Avon became the first Western company to win a license from China to sell products door-to-door, which was viewed as a coup for Jung.

Prosecutors have presented evidence to a grand jury, The Wall Street Journal reported on Monday.

Avon shares were up 3.4 percent at $18.13 at midday on Tuesday, off an earlier high at $18.48.

(Reporting by Phil Wahba in New York; Editing by Lisa Von Ahn)

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