Adhesive manufacturing company Avery Dennison (NYSE: AVY) reported Q2 CY2026 results exceeding the market’s revenue expectations, with sales up 10.9% year on year to $2.46 billion. Its non-GAAP profit of $2.89 per share was 17% above analysts’ consensus estimates.

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StockStory’s Take

Avery Dennison’s second quarter results were well received, with management highlighting the impact of customer inventory stocking in its Materials Group and the continued strength of its high-value product categories. CEO Deon Stander emphasized that organic sales growth was supported by both base and specialty labels, as well as Intelligent Labels, with customer pre-buys—especially in Europe and Asia—providing a temporary tailwind. Stander noted, “Our performance this quarter once again demonstrated the strength and resilience of our portfolio,” citing balanced growth and operational execution. Adjusted EBITDA margins expanded across both business segments, helped by productivity initiatives and pricing actions to offset inflation.

Looking ahead, Avery Dennison’s updated guidance is influenced by expectations of customer destocking and ongoing investments in innovation-led product differentiation. Management anticipates the majority of the inventory unwind to occur in the third quarter, with a smaller effect carrying into the fourth. Stander highlighted, “We continue to expect 2026 growth for our enterprise Intelligent Labels platform to outpace 2025,” noting deepening adoption in apparel and new rollouts in food retail. CFO Gregory Lovins added that productivity gains and targeted restructuring are expected to offset wage and incentive compensation headwinds while maintaining focus on free cash flow generation.

Key Insights from Management’s Remarks

Management attributed the quarter’s outperformance to robust demand in high-value categories, the effect of customer pre-buys in Materials Group, and operational discipline in pricing and productivity.

• Customer inventory pre-buys: Materials Group benefited from significant customer inventory stocking, particularly in Europe and Asia, which added an estimated $0.25 per share to quarterly earnings. Management expects most of this to reverse in the next quarter as customers destock.
• High-value segment momentum: Both specialty and durable labels, along with Intelligent Labels, delivered mid-single-digit growth. Apparel and general retail led the way, with Intelligent Labels growing around 10% in these verticals due to new program rollouts and expanded adoption.
• Operational agility against inflation: Management implemented targeted pricing actions and productivity initiatives to offset higher raw material and wage costs. These measures helped expand EBITDA margins, even amid a volatile cost environment.
• Solutions Group margin expansion: The Solutions Group achieved notable margin improvement through productivity gains and the reversal of prior-year tariff-related inefficiencies. Embelex, a high-value platform in this group, posted robust low-double-digit growth, supported by strong demand during international events like the World Cup.
• Expansion in food retail pilots: The company is accelerating Intelligent Labels adoption in food, with large-scale pilots underway at major U.S. grocers. Stander described this as a “longer term growth opportunity” as digital store initiatives drive retailer interest in item-level tracking and efficiency.

Drivers of Future Performance

Management’s outlook is shaped by the expected timing of customer destocking, continued expansion of Intelligent Labels into new verticals, and persistent inflationary pressures.

• Inventory unwind and volume normalization: Management anticipates a sequential earnings headwind in the third quarter as customer inventory pre-buys unwind, particularly in Materials Group. This is expected to be largely offset by pricing actions and stable underlying volume trends in the second half of the year.
• Growth in Intelligent Labels: The rollout of Intelligent Labels in apparel, general retail, and food is expected to drive above-average growth in 2026. Stander pointed to accelerated pilots and commercial deployments at major grocers and retailers as key contributors to future performance.
• Inflation and cost control: Management expects high-single-digit raw material inflation in the second half of the year, with ongoing productivity initiatives and restructuring efforts aimed at mitigating wage and incentive compensation headwinds. These actions are designed to preserve margin stability despite cost pressures.

Catalysts in Upcoming Quarters

In upcoming quarters, the StockStory team will be watching (1) the pace and impact of customer destocking in Materials Group, (2) the acceleration of Intelligent Labels rollouts, especially in food retail and apparel, and (3) the company’s ability to manage inflation-driven cost pressures through pricing and productivity gains. Execution on large-scale customer pilots and margin preservation will be key performance indicators.

Avery Dennison currently trades at $174.76, up from $167.14 just before the earnings. Is the company at an inflection point that warrants a buy or sell? Find out in our full research report (it’s free).

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