Avery Dennison Earnings: Apparel Market Weakness Adds to Near-Term Headwinds

Narrow-moat-rated Avery Dennison AVY reported lackluster third-quarter results as inventory destocking along much of the supply chain continued to pressure volumes. Organic net sales fell 11.5% year over year, which was driven by lower volume in both segments and heightened weakness in developed markets. That said, management noted sequential gains in volume, signaling potential moderation of inventory destocking that has plagued the packaging industry for much of the year. We’ve decreased our fair value estimate to $151 from $155 per share due to lower near-term revenue and profitability in our forecast.

Avery’s material group reported mixed results in the quarter, with organic revenue falling nearly 16% year over year due to a midteens decline in volume. The segment continues to navigate inventory destocking despite benefiting from sequential volume improvements over the last two quarters. We expect additional destocking will occur in the fourth quarter, but we think Avery’s volumes will benefit from stronger moderation in the first half of 2024.

The solutions group fared better in the quarter but faced its own set of challenges, as apparel markets remain pressured amid heighted inflation and a shift in consumer spending to services from goods. Organic net sales rose almost 1% while segment adjusted operating margins fell over 300 basis points to 9.6%, largely due to higher employee-related costs and investments in its intelligent labels business. Avery’s intelligent labels business continued to perform well but hit a slight speed bump this quarter due to the downturn in apparel markets. Management noted the business grew roughly 10% year over year and expects full-year growth in the low to midteens. That would be below management’ expectations of 20% annual growth but is impressive given the weakness in apparel markets, nonetheless. Additionally, nonapparel categories increased roughly 75% year over year as RFID adoption continues to ramp up.