Avon 2009 Annual Report Download - page 37

ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion of the results of oper-
ations and financial condition of Avon Products, Inc. and its
majority and wholly owned subsidiaries in conjunction with the
information contained in the Consolidated Financial Statements
and related Notes. When used in this discussion, the terms
“Avon,” “Company,” “we,” “our” or “us” mean, unless the
context otherwise indicates, Avon Products, Inc. and its majority
and wholly owned subsidiaries.
Refer to the Key Performance Indicators table on page 23 of this
2009 Annual Report for adescription of how Constant dollar
(“Constant $”) growth rates (a Non-GAAP financial measure)
are determined.
OVERVIEW
We are aglobal 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 65 countries and territories, including the U.S., and distribute
products in 40 more. Our reportable segments are based on
geographic operations in six regions: Latin America; North Amer-
ica; Central &Eastern Europe; Western Europe, Middle East &
Africa; Asia Pacific; and China. We have centralized operations
for Global Brand Marketing, Global Sales and Supply Chain. Our
product categories are Beauty, Fashion and Home. Beauty con-
sists of color cosmetics, fragrances, skin care and personal care.
Fashion consists of fashion jewelry, watches, apparel, footwear
and accessories. Home consists of gift and decorative products,
housewares, entertainment and leisure products and children’s
and nutritional products. Sales from Health and Wellness prod-
ucts and mark.,aglobal cosmetics brand that focuses on the
market for young women, are included among these three cate-
gories based on product type. Sales are made to the ultimate
consumer principally through direct selling by approximately
6.2 million active independent Representatives, who are inde-
pendent contractors and not our employees. The success of our
business is highly dependent on recruiting, retaining and servic-
ing our Representatives.
We view the geographic diversity of our businesses as astrategic
advantage in part because it allows us to participate in higher
growth beauty markets internationally. In developed markets,
such as the U.S., we seek to achieve growth in line with that of
the overall beauty market, while in developing and emerging
markets, we seek to achieve higher growth targets. During 2009,
approximately 80% of our consolidated revenue was derived
fromoperations outside the U.S.
At the end of 2005, we launched acomprehensive, multi-year
turnaround plan to restore sustainable growth. We have approved
and announced all of the initiatives of the restructuring program
launched in 2005 under the turnaround plan (“2005 Restructur-
ing Program”). In 2007, we completed theanalysis of our optimal
product portfolio and made decisions on exit strategies for
non-optimal products under our Product Line Simplification pro-
gram (“PLS”). In 2007, we also launched our Strategic Sourcing
Initiative (“SSI”). We expect our restructuring initiatives under our
2005 Restructuring Program to deliver annualized savings of
approximately $430 once all initiatives are fully implemented by
2011-2012. We also expect to achieve annualized benefits in
excess of $200 from PLS and $250 from SSI in 2010. In February
2009, we announced anew restructuring program (“2009
Restructuring Program”) under our multi-year turnaround plan,
which targets increasing levels of efficiency and organizational
effectiveness across our global operations. We expect therestruc-
turing initiatives under our 2009 Restructuring Program to deliver
annualized savings of approximately $200 once all initiatives are
fully implemented by 2012-2013. These initiatives and programs
are discussed further below. Whenever we refer to annualized
savings or annualized benefits, we mean the additional operating
profit we expect to realize on afull-year basis every year follow-
ing implementation of the respective initiative as compared with
the operating profit we would have expected to achieve without
having implemented the initiative.
During 2009, revenue decreased 3%, impacted by unfavorable
foreign exchange and the depressed global economy. Constant
$revenue increased 6%, with increases in all segments except
North America and China. Sales from products in the Beauty
category decreased 3%, due to unfavorable foreign exchange.
On aConstant $basis, sales of products in the Beauty category
increased 7% due to a4%increase in units and a3%increase
in net per unit. Active Representatives increased 9%. The unfav-
orable impact of foreign exchange lowered operating margin by
an estimated 2.5 points (approximately 2points from foreign-
exchange transactions and approximately 0.5 points from foreign-
exchange translation), year over year. See the “Segment Review”
section of this MD&A for additional information related to
changes in revenue by segment.
Although we expect that the global economic pressures will
continue in the foreseeable future, we expect at least mid-single
digit Constant $revenue growth during 2010.
Our 2010 operating margin will be negatively impacted by the
devaluation of the Venezuelan currency coupled with arequired
change to account for operations in Venezuela on ahighly
inflationary basis.Asaresult of thedevaluation, we expect the
Company’s operating margin to be negatively impacted by
approximately $85 of costs associated with the historical cost in
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