Avon Products Inc. (AVP) said the U.S. Securities and Exchange
Commission proposed last month a potential settlement to resolve a
multiyear bribery probe with monetary penalties "significantly
greater" than the beauty-products company previously suggested, and
it warned such a settlement would materially hurt its business.
The bribery probe has dogged Avon since 2008, costing it
hundreds of millions of dollars in legal and other bills relating
to an internal investigation, according to securities filings. The
investigation centers on whether Avon violated the Foreign Corrupt
Practices Act by making payments or providing gifts to officials in
China to secure licenses to sell its products there. It began with
a tip to former Chief Executive Andrea Jung and spread to other
countries, including key markets in Latin America.
"We disagree with the SEC staff's assumptions and the
methodology used in its calculations and believe that monetary
penalties at the level proposed by the SEC staff are not
warranted," Avon said Thursday in a filing with the SEC, without
disclosing the size of the proposed settlement. If the company were
to enter into settlements with the SEC and Department of Justice at
such levels, Avon said its earnings, cash flows, liquidity,
financial condition and ongoing business "would be materially
adversely impacted."
The company said in August it has offered $12 million to settle
the probe, a deal that was rejected. The Wall Street Journal has
reported Justice Department and SEC officials expressed their
belief in early discussions that Avon's penalty should exceed $100
million, citing a person familiar with the matter.
The company also reported swinging to a third-quarter loss as
the door-to-door cosmetics vendor recorded a drop in sales amid
headwinds in North America and China.
Shares fell 5% to $21.27 in light premarket trading as both the
top- and bottom-line missed Wall Street's expectations.
"The third quarter was tough," said Chief Executive Sheri McCoy.
"Our quarterly performance was negatively impacted by macroeconomic
headwinds and continued weakness in some parts of our business,
particularly North America," which saw sales fall about 19%.
The China operations, meanwhile, posted a 67% decline in
revenue, due in part to a decline in unit sales. Avon said the
company recorded a write-down of $42 million and a valuation
allowance for deferred tax assets related to China that hurt
per-share earnings by 12 cents in the period.
The New York-based company is trying to reverse a years-long
slide in sales and has also been facing questions about its
business model, which depends largely on sales generated by women
who sell makeup, perfumes and lotions to friends and family
members.
Under Ms. McCoy, who was hired in April 2012 to replace
long-running Ms. Jung, Avon has been cutting costs and jobs and
exiting some markets where it underperformed, including South
Korea, Vietnam and Ireland. The U.S. and U.K. have also been weak
spots for Avon, but Ms. McCoy said she is committed to turning
around the business in those countries.
Overall, Avon reported a quarterly loss of $5.5 million, or a
penny a share, compared with a year-earlier profit of $31.6
million, or seven cents a share. Excluding the impairment charge
related to the company's China operations, restructuring charges,
the negative impact of the devaluation of Venezuelan currency and
other items, adjusted earnings from continuing operations totaled
14 cents a share.
Total revenue fell 7.5% to $2.32 billion, or 1% in constant
dollars.
Analysts polled by Thomson Reuters recently projected earnings
of 19 cents a share on $2.44 billion in sales.
Sales in the main beauty business fell 6% to $1.66 billion.
Sales in Latin America--which accounts for the bulk of the
company's business--were down about 5% at $1.21 billion.
Through Wednesday's close, the stock has risen 56% since the
start of the year.
Write to Anna Prior at anna.prior@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires