Avery Profit Drops 3.4% as Demand for Labels Slows

Label maker Avery Dennison Corp. said Tuesday that second-quarter earnings fell 3.4% on higher-than-expected costs and slowing demand for label material in the U.S. and Europe.

Avery, which makes office supplies and labels, including self-adhesive stamps for the U.S. Postal Service, reported net income of $71.3 million, or 71 cents a share, for its second quarter ended June 28, down from $73.8 million, or 74 cents, a year earlier.

Results were in line with Avery’s revised earnings guidance and exceeded the 70-cent average estimate of analysts surveyed by Thomson First Call.

Revenue climbed 14% to $1.19 billion from $1.04 billion, reflecting acquisitions and favorable currency exchange rates.

Executives said the company was unable to raise prices as rivals discounted their goods. Moreover, costs mounted from bad debt, and legal fees rose because of the Justice Department’s investigation of possible anti-competitive practices in the label business.

“It was a tough quarter, and we’re not banking on strengthening economic conditions in the near term,” Avery Chief Financial Officer Daniel O’Bryant said during a call with investors.

The company Tuesday forecast earnings for the year at $2.84 to $2.93 a share, above last year’s per-share profit of $2.59 but below analysts’ forecasts of $2.93 to $3.15.

“This quarter was worse than expected, but even more worrying was the outlook,” Lehman Bros. analyst Ghansham Panjabi said, noting management’s concerns about sluggish demand this year. “Consumer product companies are cutting back on new product introductions,” Panjabi said, and therefore, cutting back on labels. Still, he rates the stock “positive.” He does not own the shares.

Separately, the company said it agreed to sell some European label making operations to Toronto-based CCL Industries Inc. for $60.3 million in cash.

Despite the downbeat profit report, Avery shares rose $1.73 to $53.75 on the New York Stock Exchange. The stock is down 12% this year.