Avon 2000 Annual Report Download - page 8

1999 Compared to 1998
North America > Sales in North America increased 1%
to $2.05 billion, and operating profit increased 9% to
$361.1 in 1999. The u.s. business reported sales and
operating profit growth of 2% and 9%, respectively.
The sales increase in the u.s. resulted primarily from an
increase in the average order size. Growth in fashion jew-
elry and accessories and beyond beauty categories was
partially offset by sales decreases in cft and apparel. Sales
of fashion jewelry and accessories rose significantly over
1998 reflecting the success of sterling silver and bolder
jewelry designs, the introduction of licensed luggage
and a strong performance in watches and handbags.
Additionally, sales of accessories increased significantly
due to the success of the Pokémon watch in the fourth
quarter. The Beyond Beauty category, consisting prima-
rily of home entertainment and gift and decorative items,
posted strong growth due to increased sales of inspira-
tional and religious products. Fourth quarter sales of
Millennium products also contributed to the overall
increase of Beyond Beauty items. These improvements
were partially offset by declines in the cft and apparel
categories. The decrease in cft sales resulted primarily
from lower fragrance sales in 1999 due to the underperfor-
mance of women’s new products as well as fewer offers on
existing products. Apparel sales decreased due to under-
performance of new product introductions and demon-
stration products as well as a shift in focus from sales
growth to increased profitability. A 1.1 point operating
margin improvement in the u.s. included favorable gross
margin and operating expense ratios. The gross margin
improvement resulted from supply chain cost improve-
ments and product category management, partially offset
by price reductions in cft during the fourth quarter to
drive sales. The favorable expense ratio reflects lower
spending in 1999 on advertising, lower variable compen-
sation and the elimination of the Sponsorship program,
partially offset by increased spending on strategic initia-
tives such as the Internet and express and Beauty Centers.
International > International sales increased 2% to $3.24
billion and operating profit increased 14% to $594.8
from $520.0 in 1998. Excluding the impact of foreign
currency exchange, international sales rose 14% and oper-
ating profit increased 27% over 1998. The sales growth
resulted from strong double-digit growth in the Pacific
region, most significantly in Japan, the Philippines,
Taiwan and Australia, as well as growth in Europe reflect-
ing improvements in Poland and the United Kingdom,
and in Mexico, Venezuela and Central America. These
results were significantly offset by sales declines in Brazil,
and, to a lesser extent, in Russia, Argentina and Germany.
In Latin America, sales declined 3% to $1.64 bil-
lion while operating profit increased 3% to $366.5 in
1999. Excluding the impact of foreign currency exchange,
sales increased 17%, a 20 point differential due primarily
to the Brazilian real devaluation that began in early 1999,
discussed below. Brazil, however, had double-digit
increases in local currency sales, units and number of
customers served. Sales decreased in Argentina and Chile
as a result of weak economic conditions. The Argentine
economy has been in a prolonged recession with high
unemployment and low consumer spending. Despite the
sales decline, Avon continued to gain market share in
Argentina in 1999. These sales declines were partially
offset by strong growth in Mexico, and, to a lesser extent,
in Venezuela and Central America. Mexico’s sales increase
resulted from both operational factors including new
product launches in the cosmetics, home and fashion lines
as well as economic growth reflecting consumer price
increases in 1999. Sales grew in Venezuela due mainly to
price increases as well as double-digit increases in number
of orders and active Representatives, and in Central
America due to strong increases in units, customers
served and active Representatives. The improvement in
the region’s operating profit was primarily due to favor-
able results in Mexico attributable to the sales increase
and an improved gross margin, partially offset by
increased advertising expense and incentive programs in
1999. The gross margin improvement in Mexico resulted
from a shift in the sales mix from fewer sales of toiletries
to more sales of higher-margin cosmetics and fragrances.
However, in the third quarter of 1999, Avon’s retail
competitors in the toiletries and non-cft categories sig-
nificantly discounted their prices which led to unit
declines. Management in Mexico adjusted prices in the
fourth quarter of 1999 and planned incentive programs
to aggressively recruit Representatives to mitigate the
impact of competitors’ deep discounting. Active
Representatives in Mexico grew 11% in 1999. Venezuela
contributed to the region’s growth in operating profit
through a gross margin improvement driven by price
increases as well as bpr initiatives, particularly in the
home segment. As discussed, these improvements were
partially offset by reduced sales and a gross margin
decline in Brazil and weak economic conditions in
Argentina and Chile. Brazil’s gross margin decline, par-
ticularly during the fourth quarter of 1999, resulted from
increased costs due to the impact of the devaluation.
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