Avon Products Inc posted a steeper-than-expected drop in quarterly profit, hurt by weak sales and restructuring charges, and shares of the world's largest direct seller of cosmetics fell more than 4 percent.

The company suffered from service disruptions in Brazil, weak results in Russia and a sharp drop in the number of women selling its goods in China. Even sales growth in Latin America, Avon's biggest market, was weaker than in the previous three quarters of the year.

Sales fell short of expectations, and costs were higher than expected, said Stifel Nicolaus analyst Mark Astrachan.

Avon planned to spend $85 million to $95 million in 2010 on an internal investigation into bribery allegations that began in China. [ID:nN13186804] It also spent $83 million, up from $56 million in 2009, to study and improve its direct-selling model and rewards for representatives.

Avon's stock price depends largely on its ability to improve operating margins, something the company has failed to do in recent years, Astrachan said in a note to clients.

Still, he kept his buy rating on the stock, seeing a long-term opportunity.

Avon does not issue earnings forecasts. The company expects revenue, in constant dollars, to rise in a mid-single digit range this year after increasing 6 percent in 2010.

It also expects improving operating margins, which it forecast at a mid-teens range by 2013.

Operating margin fell 1.8 percentage points to 11.2 percent in the fourth quarter.


Avon earned $229.5 million, or 53 cents per share, in the quarter, down from $269.4 million, or 62 cents per share, a year earlier.

The company recorded restructuring charges of $58 million, or 9 cents per share, in line with what it said last week.

Adjusted earnings from continuing operations fell to $259 million, or 59 cents per share, from $293 million, or 68 cents per share, a year earlier. Analysts had expected a profit of 67 cents per share, according to Thomson Reuters I/B/E/S.

Revenue rose 1.3 percent to $3.18 billion, missing the analysts' average target of $3.28 billion.

Revenue rose 8 percent in Latin America, or 13 percent in constant currency.

North American revenue rose 1 percent, but was flat excluding currency fluctuations. The acquisition of jewelry company Silpada helped results.

In North America, the number of active representatives selling Avon's goods fell 7 percent, and the number of items sold dropped 14 percent.

Sales in China fell 45 percent, or 47 percent in constant dollar terms, the steepest drop this year. The number of items sold fell 44 percent, and the number of active representatives selling Avon's goods in China plunged 68 percent.

China is a small but important growth engine for Avon. The company is overhauling its business there.

Advertising spending fell 15 percent to $92 million, due mainly to reductions in China.

Shares of Avon were down 4.3 percent at $28.10 in trading before the market opened.

(Reporting by Jessica Wohl, editing by Maureen Bavdek, Dave Zimmerman)