Avery Dennison (AVY) Q3 2026 earnings review
Avery Dennison sales hold up, but label profits narrow
Avery Dennison, the maker of package labels and wireless retail tags, held up well in the third quarter while its main growth project stayed slow. Sales from businesses owned a year ago rose 4%, because customer inventory cuts were only half as large as feared. Profit per share excluding one-offs rose 2% to $2.42, as higher costs in the main label materials division offset a rebound in clothing tags. Chief executive Deon Stander nudged the full-year profit outlook up by two cents at the middle of the range.
| Sales from businesses owned a year ago | +3.7% 6% excluding customer inventory cuts |
|---|---|
| Profit per share, excluding one-offs | $2.42 +2.1% from a year ago |
| Materials Group operating margin, excluding one-offs | 14.1% -1.1 percentage points from a year ago |
| Full-year profit per share outlook | Raised $0.02 middle of the range: $10.17 (+6.7%) |
⚖️ Verdict: ⚪ Neutral
The story is unchanged because the delayed inventory pullback simply moved from the third quarter into the fourth. By our math, the full-year plan leaves fourth-quarter profit per share down about 2% from a year ago. Meanwhile, two concerns grew: smart-label sales rose only at a low-single-digit rate as the big US grocery rollout has not yet lifted revenue, and price increases in label materials failed to prevent a 1.1 percentage point margin drop.
The question now is whether customer buying in the first half was lasting market-share gain or temporary stockpiling that still has to unwind. Either fourth-quarter volume holds up and beats the cautious outlook, or the delayed unwind hits orders just as raw-material and staff costs bite. Fourth-quarter volume in the Materials Group and a firm start date for the grocery rollout will settle it.
🐂 Bull Case
Materials Demand Held Up and Delayed Half the Unwind
Avery Dennison's largest division, the Materials Group, sells pressure-sensitive label materials for consumer goods and industrial products. In the first half of the year, customers bought extra stock ahead of price increases, and the company warned that this stockpiling would reverse in the third quarter.
That pullback was milder than feared. Sales from businesses owned a year ago rose 4.9% in the Materials Group and 3.7% across the company. The inventory unwind shaved about 2 percentage points off total sales growth, which was "roughly half of what was anticipated for Q3", Avery Dennison wrote. Stripping out inventory swings, underlying sales rose about 6%, up from 4% in the second quarter.
What to watch: fourth-quarter underlying sales in the Materials Group. If volume stays positive while the remaining customer stockpiles clear, it will confirm that the division took lasting market share this year.
Apparel Recovery and Cost Cuts Lifted Solutions Margin
The Solutions Group makes branding tags, store shelf labels and radio-frequency identification (RFID) tags for clothing and retail stores. After tariff worries hurt clothing orders last year, apparel demand is recovering and cost cuts are lifting profit margins.
Clothing categories grew at a mid-single-digit rate in the third quarter, while smart labels in apparel and general retail rose about 10%. Operating margin in the Solutions Group, excluding one-offs, rose 0.8 percentage points from a year ago to 10.8%. Across the whole business, Avery Dennison raised its full-year target for pre-tax restructuring savings for a third straight quarter, to more than $65 million from more than $60 million.
What to watch: Solutions Group operating margin in the fourth quarter. A second straight quarter of expansion against a tougher year-end comparison would show that the cost savings are sticking.
🐻 Bear Case
Higher Prices in Materials Did Not Protect Its Margin
"Our focus on innovation and service-led differentiation drove mid-single digit organic growth in both our high-value categories and base businesses," chief executive Deon Stander said. Stander has argued that pricing power and efficiency can protect profits against raw-material inflation.
In the third quarter, they did not. Although the Materials Group raised prices at a mid-single-digit rate, its operating margin excluding one-offs fell 1.1 percentage points from a year ago to 14.1%. The company blamed "negative volume/mix and higher employee-related costs", noting that "Majority of 2025 temporary savings, largely incentive compensation, remains a headwind". Across Avery Dennison, the cost of making products rose 0.6 percentage points to 71.9% of sales.
What to watch: Materials Group operating margin in the fourth quarter. Another drop of more than a full point while customers work down their remaining inventory would show that price increases are lagging behind factory and staff costs.
Smart Labels Still Wait on Grocery and Fight Logistics
Intelligent Labels, Avery Dennison's RFID business that tracks goods wirelessly, brings in about $900 million a year and is meant to be the group's main growth driver. Over the past year, management has repeatedly pointed to a second-half acceleration led by fresh-food tagging at Walmart, the largest US grocery retailer.
Instead, underlying sales in Intelligent Labels grew only at a low-single-digit rate again in the third quarter. Sales in food and logistics fell in the mid-teens, because of "soft logistics customer demand and lapping outsized share gains in 2025". In grocery, the presentation said Avery Dennison is still "continuing to move towards commercialization with largest U.S. grocery retailer" rather(than) reporting full commercial volumes.
What to watch: Intelligent Labels underlying growth in the fourth-quarter report. Anything below mid-single-digit growth would mean the grocery rollout did not offset logistics weakness in the second half.
Delayed Inventory Unwind Pushes Profit Drop Into Q4
When third-quarter customer destocking came in at half the expected rate, the rest of the overhang did not disappear; it moved to the end of the year. The updated full-year plan "Assumes vast majority of the remaining customer inventory stocking from first half of year will largely unwind in Q4".
- Third-quarter profit per share, excluding one-offs: $2.42, up 2.1% from a year ago
- Fourth-quarter profit per share implied by the full-year outlook: $2.39 at the middle of the range, down 2.4% from a year ago by our math
- Fourth-quarter underlying sales growth implied by the outlook: about 1.8% by our math, down from 3.7% in Q3
What to watch: whether fourth-quarter profit per share beats the implied $2.32 to $2.46 range. A finish above the top end would show that first-half customer buying was real demand rather than temporary stockpiling.
Risks this quarter didn't answer
Three standing questions about targets, buybacks and working capital got no new figures in the preliminary third-quarter release and presentation.
- Long-term growth targets: the 15%-plus Intelligent Labels target and the 2022–2025 profit target have no multi-year replacement yet; the fourth-quarter report is the next natural window.
- Buyback execution prices: the release gave nine-month share repurchases ($257.2 million for 1.5 million shares) without quarterly average prices; the quarterly filing will give the three-month breakdown.
- Supplier finance balances: payables rose 12.5% from a year ago to $1,465.9 million, and the quarterly filing's footnote will show how much relied on supplier financing.
💲 Other KPIs
Free cash flow excluding one-offs fell 8.4% from a year ago in the third quarter as property and equipment spending rose to $47.6 million from $35.9 million. Across the first nine months, cash generation reached $715.8 million, up from $404.5 million last year on smaller working-capital outflows and a 12.5% rise in accounts payable.
Average diluted shares fell 2.7% from a year ago, lifting per-share profit growth by nearly 3 percentage points over net income growth. By our math, the label maker spent $59.0 million on share buybacks in the third quarter, slowing from $137.6 million in the second quarter and bringing nine-month repurchases to $257.2 million.
Net debt — total debt minus cash — stood at $3,343.6 million at the end of September, down from $3,450.9 million in June as third-quarter cash flow paid down short-term borrowings. Leverage eased to 2.2 times trailing 12-month EBITDA from 2.3 times in the second quarter and 2.4 times at the start of the year.
🔮 Guidance
Raised. Avery Dennison narrowed the range and lifted the middle by $0.02 to $10.17, or 6.7% growth for the year. By our math, that leaves $2.32 to $2.46 for the fourth quarter ($2.39 at the middle, down 2.4% from a year ago), because the remaining first-half customer stockpiling is now set to unwind in the final quarter.
Cut. The middle of the GAAP profit range edged down $0.03 to $9.52 (up 8.3% for the year) because estimated full-year restructuring and other charges rose by $0.05 to about $0.65 per share. By our math, the outlook leaves $2.36 to $2.50 for the fourth quarter, up 13.0% at the middle against last year's charge-heavy fourth quarter.
Unchanged. Management kept its full-year underlying sales target at the 3.5% middle of last quarter's 3% to 4% range. After 4.1% growth across the first nine months, the full-year plan leaves about 1.8% underlying growth for the fourth quarter by our math, as the rest of the customer inventory overhang clears.
Unchanged. The full-year reported sales plan stays at 5.5%, including a 1.5% currency benefit, a 1% acquisition boost and a 0.4% drag from returning to the standard calendar year. Because last year's fourth quarter had four extra days, the calendar shift creates a 1.5% headwind in the fourth quarter and leaves implied fourth-quarter sales down about 1% by our math.
Raised. This is the third straight $5 million increase to the annual cost-savings floor: from about $50 million at the start of the year, to over $55 million in Q1, over $60 million in Q2, and over $65 million now. Nine-month realized savings reached $54 million against $43 million in charges.
Cut. The US company trimmed its full-year capital spending plan by $20 million after spending $135.6 million across the first nine months ($115.1 million on property and equipment plus $20.5 million on software). By our math, hitting the reduced $240 million target still requires $104.4 million of spending in the fourth quarter, almost double the third-quarter pace.
Raised. Management lifted the wording on its free cash flow conversion target from roughly 100% to 100% or more of net income, supported by the $20 million cut to planned capital spending. Through the first nine months, free cash flow of $715.8 million is already running at 132% of net income.
❓ Key Questions
When does the Walmart grocery rollout book full commercial revenue?
Slide 9 says Avery Dennison is still "continuing to move towards commercialization with largest U.S. grocery retailer" after previously pointing to a second-half 2026 start. Investors need to know whether commercial shipments began in Q3 or slipped into 2027.
Why did Materials margin drop despite mid-single-digit price increases?
Materials Group operating margin excluding one-offs fell 1.1 percentage points to 14.1% even with mid-single-digit pricing and low-single-digit volume and mix growth. How much of the drop came from higher bonus accruals versus raw-material inflation or lower-margin product mix?
What gives management confidence that destocking finishes in Q4?
Only half of the expected customer inventory unwind happened in Q3, and the outlook assumes the rest clears in Q4. Why did customers hold onto inventory in Q3, and could the overhang spill into early 2027?
When will logistics smart-label volumes stop falling?
Food and logistics Intelligent Labels sales dropped in the mid-teens in Q3 on soft logistics demand and tough 2025 comparisons. When do the tough comparisons fully lap, and can pilot expansions return logistics to growth in 2027?