Avon 2003 Annual Report Download - page 6

Avon’s strategic initiatives include a focus on Beauty brands, expansion
of Sales Leadership and exploration of geographic opportunities.
The Company’s strategic initiatives include a focus on Beauty brands as
a key driver of sales growth, as well as new product lines such as Health
and Wellness products and the Mark. brand. Growth is also targeted through
further expansion of Sales Leadership, a career opportunity for Avon
Representatives, as well as exploration of geographic opportunities, particu-
larly in China and Central and Eastern Europe. In addition, the Company
expects that its Business Transformation programs will continue to produce
margin expansion, primarily as a result of savings from supply chain and
marketing initiatives, which will also fuel continued increases in consumer
and strategic investments.
Fluctuations in the value of foreign currencies caused U.S. dollar-translated
amounts to change in comparison with previous periods; however, Avon’s
diversified global portfolio of markets has demonstrated that the effects of weak
economies and currency fluctuations in certain countries may be offset by strong
results in others. Actions which may mitigate currency risk include strategies such
as hedging of certain currencies, and local manufacturing and sourcing in certain
countries to limit risk associated with possible increases in the cost of imported
goods. Avon cannot, however, project the possible effect of currency fluctuations
upon its result when translated into U.S. dollars or on its future earnings.
Critical Accounting Estimates
Avon believes the accounting policies described below represent its critical
accounting policies due to the estimation processes involved in each. See
Note 1, Description of the Business and Summary of Significant Accounting
Policies, for a detailed discussion of the application of these and other
accounting policies.
Allowances for Doubtful Accounts Receivable
Representatives contact their customers, selling primarily through the use of
brochures for each sales campaign. Sales campaigns are generally for a two-
week duration in the U.S. and a three to four week duration outside the U.S. The
Representative purchases products directly from Avon and may or may not sell
them to an end user. In general, the Representative, an independent contractor,
remits a payment to Avon each sales campaign, which relates to the prior
campaign cycle. The Representative is generally precluded from submitting
an order for the current sales campaign until the accounts receivable balance
for the prior campaign is paid; however, there are circumstances where the
Representative fails to make the required payment. The Company records an
estimate of an allowance for doubtful accounts on receivable balances based
on an analysis of historical data and current circumstances. Over the past three
years, annual bad debt expense has been approximately $105.0 to $125.0.
The Company generally has no detailed information concerning, or any com-
munication with, any end user of its product beyond the Representative. Avon
has no legal recourse against the end user for the collectibility of any accounts
receivable balances due from the Representative to Avon. If the financial con-
dition of Avon’s Representatives were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required.
Allowances for Sales Returns
Avon records a provision for estimated sales returns based on historical expe-
rience with product returns. Over the past three years, sales returns have
been in the range of $260.0 to $290.0, or approximately 4% of sales. If the
historical data Avon uses to calculate these estimates does not properly
reflect future returns, due to changes in marketing or promotional strategies
or for other reasons, additional allowances may be required.
Provisions for Inventory Obsolescence
Avon records an allowance for estimated obsolescence equal to the differ-
ence between the cost of inventory and the estimated market value. In deter-
mining the allowance for estimated obsolescence, Avon classifies inventory
into various categories based upon their stage in the product life cycle, future
marketing sales plans and the disposition process. Avon assigns a degree of
obsolescence risk to products based on this classification to determine the
level of obsolescence provision. If actual sales are less favorable than those
projected by management, additional inventory allowances may need to be
recorded for such additional obsolescence. Over the past three years, annual
obsolescence expense has been approximately $60.0.
Pension, Postretirement and Postemployment Expense
The Company maintains qualified defined benefit pension plans, which cover
substantially all employees in the U.S. and in certain international locations.
Additionally, the Company has unfunded supplemental pension benefit plans for
certain current and retired executives (see Note 10, Employee Benefit Plans).
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