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Shares soar as struggling Avon reverses sales decline

Avon Products Inc.'s business at long last showed signs of life at the end of 2012 as the struggling beauty company reversed sales declines in top markets like Brazil and Russia, attracted more sales representatives and cut costs.

Shares of Avon rose as much as 18.4 per cent in Tuesday morning trading, hitting their highest levels since smaller rival Coty Inc. in May withdrew an unsolicited bid to buy Avon.

Avon for years has grappled with shrinking profits in the face of intense competition and its own missteps in making the practice of selling its cosmetics, skin creams and fragrances lucrative for the "Avon Ladies" on whom it relies.

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But Avon, known for signature products such as Skin So Soft, on Tuesday reported a stronger-than-expected fourth-quarter profit from ongoing operations.

The world's largest direct seller of beauty products also said it sold 2 per cent more items in the quarter that ended Dec. 31, and that the number of sales representatives increased 1 per cent, halting at least for now a shrinking sales force.

Chief executive Sheri McCoy, who took the reins last April from former CEO Andrea Jung, nonetheless sounded a cautious note about the early stages of the company's turnaround.

"We have a lot of work ahead of us but I am confident that we will continue to make progress towards the financial goals that we laid out for you," she said on a conference call, even as she called the quarterly numbers "early signs of stabilization" and said she expects the progress to continue.

One of those goals is achieving mid-single-digit percentage revenue growth by 2016. In 2012, revenue fell 5 per cent.

The results came as a relief to investors who for years had been accustomed to dashed hopes that Avon was fixing its business. By the end of Ms. Jung's tenure, Avon had attempted several botched turnarounds.

"While there are still many challenges, there is also fundamental improvement," BMO Capital Markets analyst Connie Maneaty wrote in a note, pointing to rising sales in Latin America, Europe and the Middle East – markets that account for three quarters of Avon's business.

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Ms. McCoy said she would provide further details on the next steps in Avon's turnaround at an industry conference next week.

The company is being investigated by the U.S. government on allegations employees bribed overseas officials a few years ago. Avon did not provide an update on the probe on Tuesday.

Its shares soared 17 per cent to $20.24 (U.S.) in late morning trading and were the top percentage gainer on the New York Stock Exchange.

In Brazil, its top market, revenue excluding the impact of currency rose 10 per cent as more sales reps came aboard, reversing earlier declines. Revenue in Russia also improved, rising 3 per cent.

Avon faces a formidable rival in Brazil in Natura Cosmeticos SA and is taking new steps to entice its sales reps to stay, such as offering them insurance, provided they meet some goals. Ms. McCoy said Avon still faces many challenges there.

North America, a market where Avon still gets about 15 per cent of sales, continues to be a major sore spot. Revenue in the home market fell 12 per cent while the sales force shrank 13 per cent, continuing a years-long decline.

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Ms. McCoy said Avon is "committed" to fixing that market, calling it important to the company's image.

"The U.S. is still imploding," said Ali Dibadj, a Sanford C. Bernstein analyst. "There really is only Brazil that did well."

In Asia, the world's fastest-growing market for cosmetics, revenue was down 3 per cent, largely because of shrivelling sales in China.

Overall, revenue fell 1 per cent to $3-billion, in line with Wall Street's projections, according to Thomson Reuters I/B/E/S.

Avon reported a net quarterly loss of $162.2-million, or 37 cents per share, compared with a loss of $400,000, or nil per share a year ago.

On an adjusted basis, which excluded factors like a writedown for its poor performing Silpada business, Avon had a profit from continuing operations of 37 cents per share, beating Wall Street analyst estimates by 10 cents.

The company is in the process of cutting $400-million in selling, general and administrative costs per year and has cut hundreds of jobs and exited markets like Korea and Vietnam.

Avon said the cost-cutting was on schedule.

Avon has more exposure than most Western companies to Venezuela, where it gets 5 per cent of its revenue.

Following the Venezuelan government's decision last week to devalue the country's currency 32 per cent, Avon said it expects a $50-million after-tax loss this year for the writedown of some assets. It also sees $50-million in charges in the first half of 2013 related to the historical cost in U.S. dollars of non-cash items such as inventory.

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