SEC probe adds to Avon’s problems

Avon Products has revealed that US regulators are probing its contacts with financial analysts in a disclosure that sent shares in the cosmetics company tumbling.

The news increased pressure on the direct-seller of beauty products, which also reported a fall in quarterly profit and warned that it would miss earnings targets for the year.

The company said it would carry out a review of its long-term business plans after the disclosure, which analysts said would add to investor concerns about the performance of Andrea Jung, chairman and chief executive. Shares fell 18.3 per cent to $18.81 by market close in New York, extending Avon’s fall over the past year to 35.3 per cent.

The US Securities and Exchange Commission is investigating Avon’s contacts with financial analysts in 2010 and 2011.

The regulator subpoenaed documents from Avon on Wednesday to look into a possible breach of “Regulation FD”, a US rule governing “selective disclosure” of company information. Avon said it would not provide any further information while the SEC declined to comment.

Wendy Nicholson, Citigroup analyst, said: “We suspect the cries for change in Avon’s management team will reach a fever pitch.”

Ali Dibadj, an analyst at Sanford Bernstein, said: “While they have had a few management shifts such as bringing in a new chief financial officer and a new head of the Latin America business, these are just rearranging deckchairs on a sinking ship rather than tackling the fundamental issues.”

In the past, the SEC has had mixed success in enforcing Regulation FD. In 2005 the SEC sued Siebel Systems alleging statements its chief financial officer made about the company’s business in private conversations differed from public statements made by the chief executive. A federal judge dismissed the lawsuit, criticising the SEC for its “extremely heightened” scrutiny. The SEC brought only one case from then until September 2009. Since then the SEC has renewed its focus on Regulation FD, filing at least three cases against companies.

Earlier this year Avon fired four executives as a result of an internal probe into its compliance with the US Foreign Corrupt Practices Act, amid reports of bribes allegedly paid to Chinese officials. The company has since extended that investigation to company conduct in other countries.

“The business review will be comprehensive, market by market and role by role,” Ms Jung told analysts on the company’s earnings call.”

Avon said it would not meet its full-year target for at least mid single-digit earnings growth and a 50-basis point improvement in operating margin.

Problems in the restructuring of its Brazilian business had caused disruptions across the company. The company reported income of $165m for the quarter ending September 30 which was $2m lower versus the same quarter last year.