Avery Dennison: Pre-Buys, Intelli-Labels, and the Cost of Inflation

The Quarter That Was

Avery Dennison's second quarter was a study in momentum and its perils. Organic sales accelerated 8% year-over-year, adjusted EBITDA margins expanded 50 basis points to 17.1%, and adjusted EPS jumped 19% to $2.89. But the engine behind that growth was not all organic demand: CFO Gregory Lovins acknowledged in prepared remarks that “we estimate that roughly half of the organic growth was from customer pre-buy activity.” — Gregory S. Lovins, Senior Vice President and Chief Financial Officer · 2026-07-30 The company's customer inventory builds, concentrated in Europe and Asia, have been driven by accelerating raw material inflation and concerns over supply certainty amid an uncertain environment.

CEO Deon Stander framed this as a timing issue, not a demand problem: “Looking forward, while it is difficult to predict the timing of when the unwind will happen, due to continued geopolitical uncertainty, we anticipate the majority of the unwind in the third quarter with a smaller carryover into Q4.” — Deon Stander, President and Chief Executive Officer · 2026-07-30 That destocking expectation is now embedded in full-year guidance of $10.00–$10.30 EPS and 3–4% organic growth, a reinstatement after abandoning annual guidance a quarter ago.

The inventory behavior is a textbook response to inflation—customers are customer pre buying to lock in costs and ensure supply. It is also a global theme: many across the tape are citing tariffs and supply-chain dislocations. But Avery's exposure is amplified because it sits at the point where label materials meet consumer staples. The result is a sequential headwind of roughly $0.50 in Q3 as the pre-buy reverses to a negative.

The Intelligent Label Mosaic

Beneath the macro noise, the Intelligent Labels platform is showing encouraging bifurcation. Apparel and general retail grew ~10% in Q2, powered by program expansions and a rebound in general merchandise. Logistics, however, was down double digits, with Deon explaining: “we are expecting this continued share and volume challenge relative to 2025 when we grew outside share. And volume in that period. And we expect that to persist for the remainder of the year, while we continue to also expand pilots with our existing customers that we have and some new customers in logistics pipeline.” — Deon Stander, President and Chief Executive Officer · 2026-07-30 The company's share gain in 2025, won from struggling competitors, is now being normalized.

The beat of the story is food. Deon reiterated confidence in the Walmart rollout, which he first framed in the October 2025 call as “a critical validation of the effectiveness of our technology and solutions to solve challenges that all grocers really have—which is around freshness of perishable products, labor effectiveness, gross margin expansion, and Net Promoter Score increases” — Dion Stander, President and Chief Executive Officer · 2025-10-22. This was consistent with his April outlook: “I still believe we are going to see growth through the whole of 2026 relative to 2025 overall... we are going to see the second half of the year when some of the new programs ramp, particularly in food.” — Deon M. Stander, President & Chief Executive Officer · 2026-04-28 In Wednesday's call he noted the rollout is progressing on plan and the protein pilot with Kroger will test in H2. More tellingly, he cited AI as an accelerant:

every time an item is tagged at source and has data available about how it was made, where it has made its way through the supply chain into retail, how it gets used in retail, and ultimately to the end consumer... you are generating significantly more data at the item level than ever historically. Now AI, I think, is going to be an enabler to parse out and make a lot more sense and inference from that data.

The High value categories, including Intelligent Labels, remain the growth engine, and the company is pitching the portfolio as resilient even as base labels face volume pressure.

Financing the Growth

Margins held up thanks to the productivity playbook, but the company is walking a tight line between inflation, price, and volume. Materials Group expanded EBITDA margins by 20bp despite mid-single-digit raw material inflation, while Solutions posted 150bp expansion. The balance sheet is comfortable: Effective Net Cash showed a net debt of $2.9B as of Q1, but the company's leverage ratio is 2.3x, and Q2 free cash flow of $365M funded both dividend increases and accelerated buybacks.

The reinstated guidance is a confidence signal, but the risk is real: if the destocking lasts longer than anticipated, or if inflation forces a more aggressive pricing war, the second half could disappoint. For now, Avery Dennison is betting that its innovation-led differentiation—and the tireless adoption of RFID in food—will carry the day.

So we feel confident and good about what our teams are doing to perform there. And second, I think as Deon mentioned earlier, we have got a little bit more uncertainty as we have talked about here with timing of destocking given continued uncertainty in the Middle East and how that will play out in the quarter and will we see more destocking or less destocking between Q3 and Q4? So we think it is a little bit better for us to give full-year guidance at this stage.