Avon 2008 Annual Report Download - page 32

PART II
consultation with our outside counsel and other advisors and is
based on an analysis of possible outcomes under various strat-
egies. Loss contingency assumptions involve judgments that are
inherently subjective and can involve matters that are in litigation,
which, by its nature is unpredictable. We believe that our assess-
ment of the probability of loss contingencies is reasonable, but
because of the subjectivity involved and the unpredictable nature
of the subject matter at issue, our assessment may prove ulti-
mately to be incorrect, which could materially impact the Con-
solidated Financial Statements.
RESULTS OF OPERATIONS – CONSOLIDATED
Favorable (Unfavorable)
%/Point Change
2008 2007 2006
2008 vs.
2007
2007 vs.
2006
Total revenue $10,690.1 $9,938.7 $8,763.9 8% 13%
Cost of sales 3,949.1 3,941.2 3,416.5 –% (15)%
Selling, general and administrative expenses 5,401.7 5,124.8 4,586.0 (5)% (12)%
Operating profit 1,339.3 872.7 761.4 53% 15%
Interest expense 100.4 112.2 99.6 11% (13)%
Interest income (37.1) (42.2) (55.3) (12)% (24)%
Other expense, net 37.7 6.6 13.6 * 51%
Net income $ 875.3 $ 530.7 $ 477.6 65% 11%
Diluted earnings per share $ 2.04 $ 1.21 $ 1.06 69% 14%
Advertising expenses(1) $ 390.5 $ 368.4 $ 248.9 (6)% (48)%
Gross margin 63.1% 60.3% 61.0% 2.8 (.7)
Selling, general and administrative expenses as a % of
total revenue 50.5% 51.6% 52.3% 1.1 .7
Operating margin 12.5% 8.8% 8.7% 3.7 .1
Effective tax rate 29.3% 33.0% 31.8% 3.7 (1.2)
Units sold 1% 7%
Active Representatives 7% 9%
* Calculation not meaningful
(1) Advertising expenses are included within selling, general and administrative expenses.
Total Revenue
Total revenue increased 8% in 2008, with foreign exchange
contributing 3 percentage points to the revenue growth. Rev-
enue grew in all segments, except North America. Revenue
growth was driven by an increase of 7% in Active
Representatives.
On a category basis, the 2008 increase in revenue was primarily
driven by an increase of 10% in Beauty sales, with increases in
all sub-categories of Beauty. Within the Beauty category, fra-
grance grew 9%, color grew 11%, skin care grew 10%, and
personal care grew 8%. Fashion sales increased 6%, while Home
sales decreased 3%.
Total revenue increased 13% in 2007 with growth in all seg-
ments. Revenue growth was driven by an increase of 9% in
Active Representatives, while foreign exchange contributed 5
percentage points to the revenue growth. Additional selling
opportunities in Central & Eastern Europe had a minimal impact
on Active Representative growth.
On a category basis, the 2007 increase in revenue was primarily
driven by an increase of 15% in Beauty sales. Within the Beauty
category, fragrance increased 20%, color increased 16%, skin
care increased 6% and personal care increased 21%. Fashion
sales increased 12% and Home sales increased 6%.
For additional discussion of the changes in revenue by segment,
see the “Segment Review” section of this Management’s Dis-
cussion and Analysis of Financial Condition and Results of
Operations.
Gross Margin
Gross margin increased 2.8 points in 2008, primarily due to a
decrease in inventory obsolescence provisions in 2008, which
benefited gross margin by 2.0 points, and from increased pricing