Despite challenges from supply chain issues, constraints due to the coronavirus pandemic and inflation, Avery Dennison Corp. showed top- and bottom-line growth in its two primary businesses during the last quarter.
Mitch Butier, chief executive of the Glendale self-adhesive labels, apparel tags and medical products manufacturer, said in a conference call with analysts last month that the company is in a higher demand environment even during challenging times.
“The ramping up of COVID infections and restrictions in some countries, continued supply chain challenges and additional inflationary pressures are taxing the industry, our customers and our teams,” Butier said in the Oct. 27 conference call to discuss fiscal third quarter earnings.
In the labels and graphic materials business in North America, there have been raw material shortages and labor and capacity constraints. In the retail branding and information solutions (RBIS) business, the manufacturing facilities in Vietnam have been constrained in their output due to COVID-19 restrictions, Butier said.
“While we are encouraged by recent trends in these businesses as we’ve been able to increase output in recent weeks, the supply chain constraints continue,” he added.
As for inflation, the pressures are increasing, he noted.
Avery had been expecting some abatement in raw material costs toward the end of the year, but inflation is now expected to continue through the fourth quarter and into the first quarter of next year, Butier explained.
In the labels and graphics materials business alone, Avery will look at an annualized inflation of more than $600 million, or about a 20 percent increase, Butier said.
“(It’s) a rate we have not seen in decades,” he added. “We are thus in the midst of another round of price increases.”
‘Solid results’
Avery Dennison reported on Oct. 27 adjusted net income of $179 million ($2.14 a share) for the quarter ending Oct. 2, compared with adjusted net income of $161 million ($1.91) in the same period a year earlier. Revenue increased 20 percent to $2.1 billion.
The company’s stock price has increased by 56 percent in the last 52 weeks, going from $137.90 to close at $215.29 on Oct. 28. The share price closed at $217.24 on Nov. 3.
John McNulty, an analyst with BMO Capital Markets Corp., called the third quarter results “solid” in a research report.
“Overall, we believe the solid results in a very difficult environment should set many investors minds at ease and have the stock reverse some of the third-quarter weakness,” McNulty said in the report.
McNulty rated Avery shares as “outperform,” while Matthew Miller, an analyst with CFRA, an independent investment research firm based in New York, maintained a “hold.”
He decreased the 12-month target price by $5 to $223 and trimmed 2022’s earnings by 23 cents to $9.48, Miller wrote in a research note after third quarter earnings were released.
To address supply chain issues, Avery raised prices across most product categories and is focused on re-engineering products or materials.
CFRA expects the negative impact on gross margin to peak in the next two quarters and Avery should return to margin expansion by around middle of next year, Miller said.
“(Avery) maintained its strong momentum in organic sales growth, up 13.9 percent (year over year), and despite tough comps in (2022), we forecast high-single digit sales growth next year,” Miller wrote in the report.
Greg Lovins, chief financial officer at Avery, said during the conference call that in the labels and graphic materials business, the organic growth was 14 percent. In North America, the organic growth was up in the low-double-digits “despite raw material availability challenges that have continued to create extended lead times,” he added.
In Europe, the organic growth went up by 20 percent while in Association of Southeast Asian Nations and in Latin America the growth was in double-digits and in mid-single-digits in China, Lovins said.
Ghansham Panjabi, an analyst with Robert W. Baird & Co. Inc. also rated the stock as “outperform” in a research note.