ACCO (ACCO) Q2 2023: Gross Margin Recovers 450bps as Technology Sales Remain 20% Below Peak
ACCO Brands delivered a decisive margin rebound in Q2, offsetting persistent volume declines and a tepid demand outlook with disciplined pricing and cost control. The company’s technology accessories business remains 20% below peak, and management struck a notably cautious tone on second-half demand, even as margin restoration efforts take hold. Investors should focus on execution around inventory, product innovation, and the pace of international gaming accessory expansion as the business transitions leadership and navigates a still-uncertain macro environment.
Summary
- Margin Recovery Lead-in: Gross margin rebounded sharply, driven by pricing and restructuring discipline.
- Technology Drag Lead-in: Computer accessories weakness and cautious channel behavior weigh on top-line visibility.
- Leadership Transition Lead-in: CEO handoff signals continuity in cost focus and organic growth priorities.
Business Overview
ACCO Brands is a global supplier of branded office, consumer, and technology products, operating through three main segments: North America, EMEA (Europe, Middle East, Africa), and International. The company generates revenue by selling products such as notebooks, binders, gaming and computer accessories (including Kensington, computer peripherals, and PowerA, gaming controllers), and school supplies, with a mix of business-to-business, retail, and direct-to-consumer channels. Growth is increasingly tied to technology accessories and international expansion, while legacy office products remain a significant revenue base.
Performance Analysis
ACCO’s Q2 results highlight the company’s ability to restore profitability in a challenging demand environment. While sales declined across all segments, gross profit rose on the back of a 450 basis point improvement in gross margin, reflecting the cumulative effect of price increases and cost reduction actions. Adjusted operating income also grew, as margin gains more than offset volume-driven top-line pressure.
North America and EMEA both posted mid-single-digit sales declines, with EMEA particularly challenged by macro headwinds and consumer trade-down, but saw significant margin expansion due to pricing and restructuring. The International segment was more resilient, buoyed by Latin America’s back-to-school strength, offsetting weakness in Asia and Australia. Technology accessory sales, especially computer peripherals, remained a drag, down approximately 20% from peak, with management no longer expecting a full-year recovery in this category.
- Margin Expansion Outpaces Volume Decline: Pricing and cost actions drove margin gains even as volumes fell, especially in EMEA where operating margin rose over 600bps.
- Inventory and Working Capital Discipline: Inventory was reduced by 16% year-on-year, unlocking improved operating cash flow and supporting a lower leverage outlook.
- Technology Accessories Remain Soft: Computer accessories failed to rebound, with management guiding for continued weakness, while gaming accessories showed sequential improvement.
Despite the headwinds, ACCO’s operating model proved flexible, with strong cash flow improvement and a reinforced commitment to dividends and debt reduction. However, the outlook for the second half remains subdued as channel partners and consumers remain cautious.
Executive Commentary
"We made significant progress in our margin recovery efforts in the second quarter, with gross margins increasing at 450 basis points and adjusted operating margins increasing by 220 basis points year on year."
Boris Ellisman, Chairman and Chief Executive Officer
"Our margin profile significantly improved in the second quarter, which allowed us to deliver adjusted EPS above our outlook... The improvement in adjusted operating income was due to our pricing and cost reduction actions."
Deb O'Connor, Executive Vice President and Chief Financial Officer
Strategic Positioning
1. Margin Restoration as Top Priority
Management placed gross margin recovery at the center of its 2023 strategy, leveraging cumulative global pricing and cost reduction initiatives to recapture profitability lost to inflation. This has driven margin rates above pre-pandemic levels, with sustainable gains expected to carry forward as inflation moderates.
2. Technology Portfolio Reset
Technology accessories, especially computer peripherals under Kensington, remain structurally below prior peaks, down roughly 20% from their high. Management acknowledged that earlier expectations for a rebound were too optimistic, now forecasting only sequential improvement in the back half. Gaming accessories (PowerA) are a growth lever, but international rollout delays and transitional distribution issues have muted upside.
3. Inventory and Working Capital Optimization
Disciplined inventory reduction (down 16% YoY) and tight expense management have improved cash conversion and reduced leverage. The company is targeting further asset rationalization and SKU reduction, especially in North America and EMEA, to align with evolving hybrid work and consumer demand trends.
4. International and Product Innovation Offense
Latin America back-to-school sales and new product launches in both gaming and ergonomic categories are bright spots, providing a partial offset to sluggish developed market demand. ACCO is investing in consumer-centric innovation to support organic growth as it pivots its portfolio toward hybrid and home-centric use cases.
5. Leadership Transition and Strategic Continuity
The CEO handoff to Tom Tedford, a 13-year veteran and prior COO, signals strategic continuity with an emphasis on operational discipline, margin focus, and organic growth, as the company enters a new phase of transformation. The transition is backed by a multi-year succession plan and continued oversight from outgoing CEO Boris Ellisman as executive chairman.
Key Considerations
ACCO’s Q2 signals a business in transition, balancing margin recovery with the realities of slow demand and evolving category dynamics. The leadership transition and ongoing cost actions are intended to secure near-term profitability and lay groundwork for longer-term growth.
Key Considerations:
- Margin Recovery Durability: Pricing and cost actions have restored margins, but sustainability depends on continued inflation moderation and disciplined expense control.
- Technology Accessories Drag: Computer accessory sales are unlikely to rebound in 2023, with management revising expectations downward and focusing on incremental product launches to drive future recovery.
- Gaming Accessories International Rollout: PowerA growth is limited by distribution transitions, with upside tied to smoother execution in international markets in the second half.
- Inventory and SKU Rationalization: Ongoing reduction efforts are improving cash flow and aligning the product portfolio with hybrid work and consumer trends.
- Leadership Transition Execution: The CEO changeover brings continuity but places pressure on the new team to deliver on organic growth and cost optimization amid macro uncertainty.
Risks
ACCO faces persistent demand risk from macroeconomic uncertainty, with both consumer and business channels remaining cautious on inventory and spending. The ongoing decline in office-related usage and technology accessory sales may not fully recover if hybrid work or IT spending remain subdued. Execution risk around SKU reduction, international expansion, and cost optimization remains elevated, especially during the CEO transition. Inflation, while moderating, continues to impact labor costs, and channel trade-down to private label or lower-priced offerings could pressure margins.
Forward Outlook
For Q3 2023, ACCO guided to:
- Reported net sales flat to down 3% (including a 4% FX benefit)
- Adjusted EPS of $0.21 to $0.24
For full-year 2023, management updated guidance:
- Reported net sales down 1% to 3% (including 1.5% FX benefit)
- Comparable sales down 2.5% to 4.5%
- Gross margin of 31% to 32%
- Adjusted EPS up 4% to 8% ($1.08 to $1.12)
- Free cash flow at least $160 million
- Year-end leverage ratio 3.3x to 3.5x
Management emphasized:
- Continued margin focus and working capital discipline
- Conservative sales outlook given channel caution and macro uncertainty
Takeaways
ACCO’s Q2 demonstrates margin resilience and operational discipline, but the path to top-line growth is clouded by technology category weakness and macro uncertainty.
- Margin Restoration Outpaces Demand Softness: Cost and pricing actions led to a sharp margin rebound, but volume and technology drag remain notable headwinds.
- Strategic Portfolio Pivot Underway: The company is actively rationalizing SKUs and investing in innovation to better align with hybrid work and consumer trends, with mixed early results.
- Second Half Hinges on Channel Demand and Execution: Investors should monitor back-to-school sell-through, international gaming accessory rollout, and the new CEO’s ability to sustain cost discipline and organic growth initiatives.
Conclusion
ACCO delivered a margin-led beat in Q2, with strong cash flow and improved leverage, but persistent demand softness and a cautious channel keep the outlook muted. The leadership transition and continued focus on innovation and operational discipline will be key as the company seeks to balance profitability with the need to reignite growth in a shifting market landscape.
Industry Read-Through
ACCO’s quarter offers a clear read-through for the broader office, school, and consumer products sector: margin recovery is achievable through aggressive pricing and cost actions, but technology and hybrid work-related categories remain volatile. The pronounced inventory and SKU rationalization trend is likely to persist across peers, particularly as demand visibility remains low. Channel partners are prioritizing inventory discipline and value-oriented assortments, suggesting that branded players must defend share against private label and trade-down risk. For companies exposed to technology accessories and office products, the normalization of post-pandemic demand cycles and the need for portfolio pivoting toward hybrid and consumer-centric innovation are now table stakes for sustained relevance and profitability.