Avon's "billion-dollar opportunity" in jeopardy? (AVP 2Q05 conf call)

Avon (ticker: AVP) reported Q2 2005 earnings results today. Here are key quotes from Chairman and CEO Andrea Jung, COO Susan Kropf and CFO Bob Corti discussing surprising results from Avon's China operations (from management's earnings
results conference call):

On Q2 results

....we entered the quarter with the expectation that revenues in China would increase at least 30%....instead, they declined 19%, close to 30 million lower that our expectations.

....because of the nature of our direct selling test and our requirement to comply strictly with government regulations, we have been unable to provide specific details to our Beauty Boutique dealers of how to explain to them their earnings opportunity and that it will remain intact when direct selling reopens. And given some of the natural uncertainties surrounding the change, as well as our inability to communicate the specificity, the announcement of the direct selling test triggered the Beauty Boutique owners to react by reducing their overall volume, moving into what appears to be a wait-and-see mode....the suddenness and the magnitude....were totally unexpected.

....actual test in....three cities, but the fear or the perception
that when it goes national, not just for Avon, that the Beauty Boutique
format will have no relevant or competitive earning opportunities,
which is not true.

....on a positive note, Beauty Boutique activity rates remain high, customer sell-through continues to be very strong....

On the timing of direct selling regulations from the Chinese government

....but I can't call…the government dates of regulation being issued.

(Quotes are from the CCBN StreetEvents transcript.)

Comment: Management discussed becoming the first company to test direct sales in China on Avon's Q1 2005 earnings results conference call.

You may remember that Barron's expressed concerns about direct selling in China.

AVP chart.

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