Avery Dennison (AVY) Q2 2023: Intelligent Labels Up 50% in Non-Apparel, Delays $10 EPS Run Rate
Non-apparel Intelligent Labels surged 50% as Avery Dennison’s core recovery lagged, pushing out its $10 EPS run rate target. Prolonged inventory destocking in labels and apparel weighed on sequential improvement, with management emphasizing cost actions and portfolio shift. Guidance signals steady volume recovery but a more measured ramp than typical post-downturn cycles, sharpening focus on margin discipline and platform expansion.
Summary
- RFID Acceleration Outside Apparel: Non-apparel Intelligent Labels growth hit 50% as adoption in logistics and food gathers pace.
- Volume Recovery Lags Historical Patterns: Inventory destocking in labels and apparel is moderating, but at a slower pace than anticipated.
- Delayed Profit Trajectory: $10 EPS run rate now expected in early 2024, reflecting persistent macro and channel uncertainty.
Business Overview
Avery Dennison is a global materials science and manufacturing company specializing in labeling and functional materials, RFID (radio-frequency identification) solutions, and external embellishments. The business operates primarily through two segments: Materials Group, which provides pressure-sensitive materials for labels and packaging, and Solutions Group, which includes Intelligent Labels (RFID and digital ID solutions), apparel labels, and external product embellishments. Revenue is generated through the sale of these products to manufacturers, brands, and retailers across industries such as logistics, food, apparel, and general retail.
Performance Analysis
Sequential improvement was evident, but recovery remains slower than management expected, with Q2 sales down double digits year-over-year due to lingering inventory destocking and muted demand, particularly in June. The Materials Group saw volumes improve sequentially as destocking moderated, yet North America and Europe volumes remained 25% to 30% below prior-year levels, while China and Latin America offered modest sequential growth. Margins in Materials expanded to nearly 16%, benefiting from productivity and cost actions, even as raw material costs entered a deflationary phase and price reductions were passed to customers.
Solutions Group sales declined mid-single digits, with soft apparel volumes offsetting low single-digit growth in high-value categories. Notably, non-apparel Intelligent Labels surged roughly 50%, driven by logistics and food, while apparel-related Intelligent Labels declined due to channel destocking. The recent acquisition of Lion Brothers, external embellishments provider, added a $65 million revenue platform to Solutions. Adjusted EBITDA margins in both segments improved sequentially, though Solutions Group margins remained pressured by volume and mix headwinds.
- Inventory Destocking Drag: Persistent destocking in both label and apparel channels delayed the anticipated volume snap-back, especially in North America.
- Productivity and Cost Actions: Temporary and structural cost reductions cushioned earnings, with restructuring savings raised by $15 million for the year.
- Portfolio Shift: Management continues to prioritize investments in Intelligent Labels and high-value categories, paring back capital in legacy businesses.
Free cash flow generation and capital return to shareholders remained disciplined, with $216 million returned in the first half via buybacks and dividends, and $194 million deployed for M&A.
Executive Commentary
"Our results for the quarter were below our expectation due to lower revenue, particularly in June, something the team was able to largely offset through cost reduction actions. Clearly, our intel in April understated the magnitude of the market challenges, particularly inventory builds. That, combined with the fact that the drop-off in volume was steeper in Q4 and Q1, we assumed the duration of the lower volume period would be shorter. We got that part wrong."
Mitch Boutier, Chairman and Chief Executive Officer (Outgoing CEO, continuing as Executive Chairman)
"Enterprise-wide, intelligent labels in non-apparel categories, including logistics, food, and other category expansions, continues to ramp significantly, which can be seen on slide 7, and we're up roughly 50% in the quarter. This growth was offset by a decline in apparel, driven by destocking in existing programs. We expect non-apparel growth to further accelerate throughout the second half of the year, enabling us to achieve roughly 20% growth for the platform overall in 2023, despite softer apparel volumes."
Dion Stander, President, Chief Operating Officer, and Incoming CEO
Strategic Positioning
1. Intelligent Labels Platform Expansion
Avery Dennison’s Intelligent Labels business, which provides RFID and digital identification solutions, is seeing outsized growth in non-apparel verticals such as logistics and food. Management expects this platform to reach a billion-dollar run rate in the coming quarters, with 20%+ annual growth as adoption broadens beyond retail apparel.
2. Margin Resilience Through Cost Actions
With volume recovery slower than anticipated, management is leaning on both structural and temporary cost reductions, raising restructuring savings targets and maintaining pricing discipline even as raw material deflation is passed along. Productivity gains are expected to be retained longer-term, supporting margin improvement as volumes normalize.
3. Capital Allocation and Portfolio Shift
Investment is being redirected toward high-growth platforms, notably Intelligent Labels and external embellishments, while capital spending in base businesses is pared back. The Lion Brothers acquisition reinforces this shift, expanding Avery’s presence in value-added garment decoration.
4. Navigating Macro and Channel Uncertainty
Management’s decision to withdraw full-year guidance reflects an acknowledgment of persistent uncertainty in consumer and channel demand, especially in apparel. The company is guiding for a more gradual, steady volume recovery, rather than the sharp rebound seen in prior cycles, and is positioning for flexibility in response to continued volatility.
5. Leadership Transition
CEO succession from Mitch Boutier to Dion Stander is described as a planned, multi-year process, with continuity in strategic priorities—particularly the focus on Intelligent Labels and high-value categories—expected under the new leadership.
Key Considerations
This quarter underscores the importance of portfolio agility and disciplined execution as core end-markets remain volatile. Avery Dennison’s ability to manage through cyclical headwinds while investing in secular growth platforms is being tested.
Key Considerations:
- RFID Adoption Beyond Apparel: The company’s Intelligent Labels growth in logistics and food is now the primary engine for future expansion, offsetting apparel softness.
- Prolonged Channel Destocking: Inventory normalization is taking longer than management or customers expected, especially in apparel, with recovery now projected into Q4 and early 2024.
- Cost Discipline as a Margin Lever: Temporary and structural cost actions are supporting margins, but some price concessions are being made as raw material costs deflate.
- Capital Return and M&A: Shareholder returns remain robust, with continued buybacks and targeted M&A (Lion Brothers) to accelerate the shift toward higher-value, less cyclical categories.
Risks
Persistent macro uncertainty, especially in global consumer spending and retail inventory management, could further delay volume recovery. Apparel channel weakness and uneven destocking present ongoing downside risk to Solutions Group growth. Legal liabilities (e.g., the ADASA verdict) and execution risk on major RFID rollouts or logistics disruptions (such as potential strikes) could impact financial targets. Currency headwinds and deflation-driven price reductions add further unpredictability to near-term results.
Forward Outlook
For Q3, Avery Dennison guided to:
- Adjusted EPS of $2.00 to $2.20, representing a sequential increase of roughly 20 cents at the midpoint.
- Continued ramp in label volumes as destocking moderates, with Intelligent Labels volumes in new categories accelerating.
For full-year 2023, management withdrew formal guidance but expects:
- Sequential improvement in Q4, with the $10+ EPS run rate now expected in early 2024 (a couple quarters later than previously anticipated).
Management cited key factors influencing the outlook:
- Gradual normalization of inventory destocking in both Materials and Solutions Group.
- Acceleration of non-apparel Intelligent Labels growth and ongoing productivity actions.
Takeaways
Avery Dennison’s Q2 showed the resilience of its margin structure and the strategic importance of Intelligent Labels, but also highlighted the risks of channel-driven volatility and the challenges of forecasting in a shifting macro environment.
- RFID Platform Is the Growth Engine: Non-apparel Intelligent Labels now drive the company’s long-term growth narrative, with logistics and food adoption offsetting cyclical apparel weakness.
- Volume Recovery Remains Uncertain: Destocking and muted end-market demand are extending the recovery timeline, with management now targeting early 2024 for a return to peak profitability.
- Investors Should Watch Margin Discipline and RFID Execution: Sustained cost control, pricing discipline, and the pace of large-scale RFID rollouts will determine the shape of the recovery and the credibility of long-term growth targets.
Conclusion
Avery Dennison delivered sequential progress but faces a slower-than-expected recovery due to persistent destocking and subdued demand in core markets. The company’s pivot toward Intelligent Labels and high-value categories is yielding strong early results, but the timing of a full earnings rebound now depends on a steadier macro environment and successful execution in RFID expansion.
Industry Read-Through
RFID and digital identification adoption is accelerating in logistics and food, signaling a secular shift for supply chain visibility and automation across industries. Prolonged inventory destocking and channel caution in apparel is a cautionary signal for suppliers and peers exposed to discretionary retail and branded goods. The modest raw material deflation and rapid price pass-through suggest that competitive pricing pressure may intensify for label and packaging providers. Capital discipline and portfolio agility are emerging as key differentiators for materials and identification technology companies navigating cyclical and secular shifts.