Avery Dennison Earnings: Inventory Destocking Persists, but Shows Signs of Improvement

Narrow-moat-rated Avery Dennison AVY reported lackluster first-quarter results as destocking trends continued, weighing on Avery’s top line and pressuring margins. Organic sales decreased 9% year over year while adjusted operating margin decreased 210 basis points to 10.1%. That said, this was a roughly 80-basis-point increase sequentially as pricing actions helped offset volume declines. Destocking trends that have troubled Avery over the last few quarters appear to be moderating and as such we expect a rebound in demand in the second half of the year. As a result, we are maintaining our $144 fair value estimate.

The materials group reported a 9.3% year-over-year decrease in organic sales, largely driven by inventory destocking and weakness in North America and Europe. Increased selling prices did little to offset the decline in volume (negative 20% year over year), but management noted destocking is slowing and we expect volume growth in the second half of the year. The solutions group followed trend, posting an 8.9% decline in organic sales as single-digit growth in its high value categories was not enough to offset a roughly 20% decline in its base business. Nevertheless, Avery’s intelligent labels business grew at a low-single-digit rate as strength in other segments, such as food and logistics, made up for weakness in apparel. Management reiterated its expectation of intelligent labels passing $1 billion in sales in 2023, and we think its achievable given a slowdown in destocking and continued growth in non-apparel.

Management lowered its 2023 guidance, now expecting adjusted EPS to be $9.02 (midpoint), down from $9.35 (midpoint) previously. This is not an unexpected revision considering the company’s first-quarter results and management’s expectations of additional destocking in the second quarter. That said, we maintain our view that volumes will recover in the second half of the year while previously announced pricing actions should provide some margin relief.