Avon 2007 Annual Report Download - page 14

PART I
risk of adverse currency fluctuations, currency remittance
restrictions and unfavorable social, economic and political
conditions.
See the sections “Risk Factors – Our ability to conduct business,
particularly in international markets, may be affected by political,
legal and regulatory risks” and “Risk Factors – We are subject to
other risks related to our international operations, including
exposure to foreign currency fluctuations” in Item 1A on page
11 through 12 of this 2007 Annual Report on Form 10-K.
Manufacturing
We manufacture and package almost all of our CFT products.
Raw materials, consisting chiefly of essential oils, chemicals,
containers and packaging components, are purchased for our
CFT products from various suppliers. Almost all of our non-CFT
products are purchased from various suppliers. Additionally, we
produce the brochures that are used by the Representatives to
sell our products. The loss of any one supplier would not have a
material impact on our ability to source raw materials for our
CFT products or paper for the brochures or our non-CFT prod-
ucts. Packages, consisting of containers and packaging compo-
nents, are designed by our staff of artists and designers.
The design and development of new CFT products are affected
by the cost and availability of materials such as glass, plastics and
chemicals. We believe that we can continue to obtain sufficient
raw materials and supplies to manufacture and produce our CFT
products.
As described previously, we have begun implementing SSI to
reduce direct and indirect costs of materials, goods and services.
Under this initiative, we are working towards shifting our pur-
chasing strategy from a local, commodity-oriented approach
towards a globally-coordinated effort.
We are also implementing an enterprise resource planning
(“ERP”) system on a worldwide basis, which is expected to
improve the efficiency of our supply chain and financial trans-
action processes. The implementation is expected to occur in
phases over the next several years. We completed
implementation in certain significant markets, and will continue
to roll-out the ERP system over the next several years.
See Item 2, Properties, for additional information regarding the
location of our principal manufacturing facilities.
Product Categories
Each of our three product categories account for 10% or more
of consolidated net sales. The following is the percentage of net
sales by product category for the years ended December 31:
2007 2006 2005
Beauty 70% 70% 69%
Beauty Plus 19% 19% 19%
Beyond Beauty 11% 11% 12%
Trademarks and Patents
Our business is not materially dependent on the existence of
third-party patent, trademark or other third-party intellectual
property rights, and we are not a party to any ongoing material
licenses, franchises or concessions. We do seek to protect our
key proprietary technologies by aggressively pursuing compre-
hensive patent coverage in major markets. We protect our Avon
name and other major proprietary trademarks through registra-
tion of these trademarks in the markets where we sell our prod-
ucts, monitoring the markets for infringement of such
trademarks by others, and by taking appropriate steps to stop
any infringing activities.
Seasonal Nature of Business
Our sales and earnings have a marked seasonal pattern character-
istic of many companies selling CFT, gift and decorative prod-
ucts, apparel, and fashion jewelry. Holiday sales cause a sales
peak in the fourth quarter of the year; however, the sales vol-
ume of holiday gift items is, by its nature, difficult to forecast.
Fourth quarter revenue was approximately 31% of total revenue
in both 2007 and 2006, and fourth quarter operating profit was
approximately 26% and 37% of total operating profit in 2007
and 2006, respectively. The fourth quarter operating profit
comparison between 2007 and 2006 was impacted by costs to
implement our restructuring initiatives and costs related to our
PLS program. The fourth quarter of 2007 includes $100.9 of
costs to implement our restructuring initiatives and $103.7 of
costs related to our PLS program, whereas the fourth quarter of
2006 includes cost to implement our restructuring initiatives of
$43.7 and $41.6 of costs related to our PLS program.
Research and Product Development
Activities
New products are essential to growth in the highly competitive
cosmetics industry. Our research and development department’s