Rising oil costs have a significant impact on personal care companies, adding to its production costs in two ways, impacting both transport costs, as well a significant number of product formulations that are petroleum-based.
Unlike many of the leading US-based cosmetic and toiletry companies, who in the past week have surprised industry experts by posting strong quarterly results, Avon's continuing weakness in the US market has meant a challenging quarter for the company.
And the problem is likely to repeated in the next quarter. The company said that the effects of Hurricane Katrina are also likely to impact its fourth quarter results, a factor that has already registered in the company's US results for the third quarter.
Plans aimed at tackling this specific problem will be discussed in an investor meeting scheduled for November 15, but whereas other cosmetic and toiletry players have been able to pass on price rises to consumer, the extremely competitive natura of the direct sales sector means that this is unlikely to be a viable alternative.
Net income for the quarter ending September 30 came in at $163.8 million, compared to $176.9 million in the same period a year earlier. This figure came despite the fact that sales revenues rose by 4 per cent to $1.89 billion, boosted by much stronger results in Europe and Latin America.
But financial experts were nevertheless surprised, as the results beat expectations, sending the group's share price up when trading closed after the results were announced on Friday.
Avon said that sales in the mainstay US market were down 6 per cent, due to falling customer purchase frequency, combined with the highly competitive state of the market. Beauty Plus sales increased 14 per cent on the back of foundations products, while its Beyond Beauty sales fell 29 per cent due to on-going respositioning.
In Europe sales increased 8 per cent in the quarter, driven largely by strong growth in Russia and Central and Eastern Europe. However, operating profit grew by 4 per cent, half the rate in the corresponding period last year - a figure impacted by an unfavorable product mix and increased production costs.
In Latin America sales increased by 14 per cent, driven by solid results in Brazil and Venezuela. In Asia Pacific sales were down 3 per cent, hit by falling sales in Japan and China.
For the full year results Avon says that the it is still on course to achieve its objectives. Full-year revenues are expected to increase by mid-single digits, with operating profit being flat or slightly down on last year's figures.