Avon 2006 Annual Report Download - page 24

PART II
ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the results of operations and finan-
cial condition of Avon Products, Inc. and its majority and wholly
owned subsidiaries (“Avon” or the “Company”) should be read
in conjunction with the information contained in the Con-
solidated Financial Statements and related Notes. When used in
this discussion, the terms “Avon,” “Company,” “we” or “us”
mean, unless the context otherwise indicates, Avon Products,
Inc. and its majority and wholly owned subsidiaries.
OVERVIEW
We are a global manufacturer and marketer of beauty and
related products. Our business is conducted worldwide, primarily
in the direct selling channel. We presently have sales operations in
approximately 63 countries and territories, including the United
States, and distribute products in approximately 51 more. Our
reportable segments are based on geographic operations in six
regions: North America; Latin America; Western Europe, Middle
East & Africa; Central & Eastern Europe; Asia Pacific and China.
We centrally manage global Brand Marketing and Supply Chain
organizations. Product categories include: Beauty, which consists
of cosmetics, fragrances, skin care and toiletries; Beauty Plus,
which consists of fashion jewelry, watches, apparel and accesso-
ries; and Beyond Beauty, which consists of home products and
gift and decorative products. Sales from Health and Wellness
products and mark, a global cosmetics brand that focuses on the
market for young women, are included among these categories
based on product type. Sales are made to the ultimate consumer
principally through approximately 5.3 million independent Repre-
sentatives, who are independent contractors and not employees
of Avon. The success of our business is highly dependent on
recruiting, motivating and retaining Representatives.
We view the geographic diversity of our businesses as a strategic
advantage. In developed markets, such as the United States, we
seek to achieve growth in line with that of the overall beauty
market, while in developing and emerging markets we have
higher growth targets.
We have continued to experience strong growth from most
developing markets, such as Brazil, Russia and Turkey, and sig-
nificant contribution from another, Colombia, in which we
acquired the Avon business of our licensee during the fourth
quarter of 2005. We have also experienced signs of improve-
ment in certain developed markets, such as the United States
and United Kingdom. We are taking steps to address continued
declines in certain other developed markets, Mexico and Japan,
but challenges remain as these markets require longer-term
solutions. During 2006, we experienced growth in all segments,
except Asia Pacific.
In 2005, we launched a comprehensive multi-year turnaround
plan, described below, which seeks to take cost out of our busi-
ness and reinvest those savings in initiatives that we expect to
generate revenues as well as increase profitability over the long
run. As part of this turnaround plan, in 2006 we invested ahead
of savings and incurred incremental costs, including costs to
implement restructuring initiatives, increased spending on adver-
tising and higher inventory obsolescence expense. Operating
profit during 2006 was negatively impacted by these costs asso-
ciated with our turnaround plan. Additionally, higher
compensation-related expenses and expenses associated with
the January 1, 2006, adoption of SFAS No. 123 (revised 2004),
Share-Based Payment, (“SFAS 123R”) negatively impacted oper-
ating profit.
Strategic Initiatives
In November 2005, we launched a comprehensive, multi-year
turnaround plan to restore sustainable growth. Our four-point
turnaround plan includes:
• Committing to brand competitiveness by focusing research
and development resources on product innovation and by
increasing our advertising;
• Winning with commercial edge by more effectively utilizing
pricing and promotion, expanding our Sales Leadership pro-
gram and improving the attractiveness of our Representative
earnings opportunity as needed;
• Elevating organizational effectiveness by redesigning our struc-
ture to eliminate layers of management in order to take full
advantage of our global scale and size; and
• Transforming the cost structure so that our costs are aligned
to our revenue growth and remain so.
The turnaround plan is starting to deliver results. We attacked
our cost structure, primarily through delayering, and we have
reinvested ahead of savings from this and other cost savings ini-
tiatives. Our initial investments have focused significantly on
advertising and our direct selling channel, where we have
increased investments in 2006. During 2006, we increased our
investment in advertising by 83% from $135.9 in 2005 to
$248.9 in 2006, to support product launches, and in support of
Avon China’s direct-selling launch. In 2007, we expect to
increase our investment in advertising by 35% to almost $340.0.
We are also committed to increasing our spending on product
and brand innovation. In 2006, we launched several new
innovative products, including Anew Clinical THERMAFIRM Face
Lifting Cream,Anew Clinical EYE LIFT,superFULL mascara, Avon
Solutions Ageless Results, Ultra Moisture Rich Metallic Lipstick,