Avery Dennison Below Expectations - Analyst Blog

Avery Dennison Corp. (AVY) posted fourth-quarter earnings of 44 cents per share, below the Zacks Consensus Estimate of 67 cents and down 32.3% from last year’s earnings of 65 cents. The lower than expected earnings in the quarter was primarily a result of increased investment in marketing and business development.
 
Net sales of $1,521.8 million reported in the fourth quarter were slightly higher (+0.7%) than the prior-year revenue of $1,511.5 million. Currency translation had a positive impact of 4.5% on the fourth quarter sales, which was partially offset by a 0.6% decline in organic sales. The reported quarter had one week less compared to the fourth quarter of 2008 and this had a negative impact of 3.2% on year over year growth.
 
The Pressure-sensitive Materials segment posted a 5% growth (organic growth of 2%) in sales on a year-over-year basis, primarily due to higher sales of Roll Materials, led by low double digit increase in emerging markets. Sales continued to decline in the Graphics and Reflective Products business.
 
Net sales in the Retail Information Services segment were down 2% from the corresponding quarter of 2008, reflecting weak apparel demand in the U.S. and Europe, and caution on the part of retailers.
 
In the Office and Consumer Products business, net sales fell 9% due to slower corporate purchase activity. Net sales in Avery’s other specialty converting businesses improved 1% year over year due to favorable currency translation impact.
 
Gross profit margin increased 230 basis points to 27.3% in the fourth quarter of 2009, from 25.0% in the comparable quarter of 2008. This growth was primarily a result of restructuring and productivity initiatives as well as the company’s ability to raise and maintain prices.
 
However, the operating margin declined 10 basis points year over year to 4.8% in the fourth quarter of 2009 due to a 190 basis points increase in marketing, general and administrative (MG&A) expenses as a percentage of sales. The increase in MG&A expenses was led by higher employee costs, currency translation and increased investment in marketing and business development, partially offset by productivity initiatives.
 
In response to the tough market conditions, Avery started a restructuring program in the fourth quarter of 2008 to reduce costs across its segments. During the reported quarter, the company increased its target to $180 million in annualized savings (previous target was $160 million) from this program by mid-2010. The company delivered approximately $75 million in savings, net of transition costs, in 2009. At the end of 2009, Avery achieved run-rate savings of approximately 75% of its restructuring target.
 
Avery generated free cash flow of $465.7 million in 2009 and estimates $300-$350 million for 2010. The company had a target of reducing its debt by at least $350 million from the end of the second quarter of 2009 through the end of 2010. It already succeeded in reducing its debt by $300 million during the second half 2009.
 
While the end-market demand continues to remain soft, Avery forecasts organic sales growth of 0% to 5% for 2010. At 0% organic growth scenario, the company expects full year earnings of $2.00-$2.30 per share. Assuming a 5% organic growth, the company projects 2010 EPS in the range of $2.70 to $3.
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