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Beauty shares fall as Avon faces Venezuela profit hit

Fernando Morales/The Globe and Mail

Avon Products Inc. said Thursday that currency devaluation in Venezuela would hurt its profit this year, sending its shares down 6 per cent even as it reported a quarterly profit that met Wall Street's expectations.

Shares of other companies in the beauty products and cosmetics business also fell, even though Avon and rival Sally Beauty Holdings Inc. reported quarterly profits on Thursday that met Wall Street's expectations.

Sally Beauty shares were down more than 3 per cent on the New York Stock Exchange on Thursday afternoon. Also down were shares of Estee Lauder , Revlon and Bare Escentuals . Their declines came as other U.S. stocks tumbled as the number of Americans claiming jobless benefits rose unexpectedly.

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Venezuela largely depends on imports for consumer goods and the devaluation of its currency, the bolivar, means that many products will cost more for people who live there.

That hurts many U.S. companies that do business there. That includes Avon, the world's largest direct seller of cosmetics, which said about 5 per cent of its sales in the first nine months of 2009 came from Venezuela.

The company said the devaluation could take about $85-million (U.S.) off its 2010 operating profit. It plans to take a $50-million charge because of it in the first quarter.

"We believe this [Venezuela impact]may be meaningfully more than many had suspected," Sanford Bernstein analyst Ali Dibadj said in an e-mail.

Avon's news about Venezuela came on the same day that the company reported a fourth-quarter profit excluding items of 68 cents, in line with what analysts on average were expecting, according to Thomson Reuters I/B/E/S.

The company's fourth-quarter net income rose to $269.4-million, or 62 cents a share, from $232.4-million, or 54 cents a share, a year ago. Revenue rose 13 per cent to $3.15-billion, slightly beneath Wall Street estimates.

The results reveal tepid North American demand for products by Avon and other beauty companies, even as overseas sales helped them in the fourth quarter.

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Beauty supply and hair products distributor Sally Beauty posted a fiscal first-quarter profit in line with expectations. Sales rose 9 per cent to $704.9-million, topping estimates, as shoppers save money by doing their hair at home instead of getting it done at the salon.

The company said its international business improved, and that it was getting its source material at cheaper prices.

Even so, shares fell. The results were "generally solid," said Oppenheimer analyst Joseph Altobello, but he added that he was "a bit surprised this did not lead to better gross margin expansion, and higher corporate expenses partially offset the top line growth."

Bright spot?

Avon's smaller rival Nu Skin Enterprises Inc. reported better-than-expected sales, helped by a gain of 7 per cent from foreign currency fluctuations and a new skin-care product. It forecast first-quarter profit above market estimates.

Stifel analyst Mark Astrachan said prospects for Nu Skin's anti-aging cream "ageLOC" were strong in 2010.

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"Given our views of organic growth and expectations for 'ageLOC,' we believe the company's 2010 guidance is likely conservative," Mr. Astrachan said in a note.

The strong results and outlook pushed Nu Skin's stock up as much as 7.9 per cent to $26.95, although it later pared gains to $26.19. Nu Skin was one of the few beauty companies whose shares rose Thursday.

About 326,100 Nu Skin shares changed hands on Thursday, almost double the 50-day average trading volume.

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