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Avon Products (NYSE:AVP) announced increased sales Friday. But when you wipe the face cream off, they actually had a Q3 operating profit decrease of 32%. The profit margin dropped from 13.1% to 8.1%.

The culprit has been fingered as a $40 million dollar write down of inventories. Avon also claims to be doubling advertising from last year's levels. Now lets think. Avon is sold by sales reps so as to avoid the need for big advertising. Also where can you spend big advertising dollars? Usually this involves western markets and Japan; both areas are experiencing downward 3Q sales. But where is the growth? Latin America and China do not have a comparable big media spend capability.

Are they really placing their advertising bets in the correct market? Do they remember or recognize their core competency in using representatives?

Look for rocky results until more reality checks reach the boardroom.

AVP 1-yr chart:

AVP 1-yr chart

Avon Q3 2006 Earnings Call Transcript

Source: Avon Misdirects Ad Spending