Avery Dennison's Fall from Grace: A Cautionary Tale of Fundamentals and Index Demotion

The removal of Avery Dennison (AVY) from the Russell 3000E Growth Index on June 27, 2025, marks a significant shift in the company's standing within the investment community. Once a stalwart in the materials sector, AVY's demotion highlights a convergence of weakening fundamentals, strategic missteps, and macroeconomic headwinds. For investors, this event underscores the risks of clinging to legacy businesses in a fast-evolving market. Let's dissect the factors behind AVY's decline and what it means for its future.

Declining Fundamentals Undermine Growth

Avery Dennison's struggles are rooted in deteriorating financial performance. In Q1 2025, the company reported net sales of $2.1 billion, down 8% year-over-year, with adjusted EPS of $0.57, a 39% drop from 2024. The declines stem from rising raw material costs, supply chain bottlenecks, and softening demand in key markets like packaging and consumer goods. Despite cost-cutting measures, gross margins narrowed to 15.6%, reflecting intense competitive pressures.

The company's debt load has also grown to $4.3 billion, with interest expenses climbing by 18% in 2024. This financial strain limits AVY's ability to invest in innovation, leaving it vulnerable to competitors like Ball Corporation (BLL) or International Paper (IP), which have better capitalized on sustainability trends.

Strategic Challenges in a Hostile Market

Avery Dennison's strategic initiatives, such as expanding its RFID and sustainable materials businesses, have yet to deliver meaningful growth. While these segments represent long-term opportunities, they remain overshadowed by declines in core divisions like labeling and retail solutions. Management's focus on “operational excellence” and cost discipline has not offset the drag from macroeconomic pressures.

The company's reliance on cyclical industries—packaging and consumer goods—is another liability. As inflation and interest rates remain elevated, discretionary spending has softened, reducing demand for AVY's products. Meanwhile, competitors leveraging automation and AI-driven supply chains are outpacing AVY in efficiency and scalability.

Macro Headwinds Exacerbate Weaknesses

The broader economic environment has amplified AVY's challenges. The Federal Reserve's prolonged tight monetary policy has increased borrowing costs, squeezing margins for companies with high debt. Inflation, though moderating, persists in key input categories like plastics and adhesives, further pinching profitability.

Additionally, global trade tensions and geopolitical risks have disrupted supply chains, complicating AVY's ability to source materials cost-effectively. These macro factors are unlikely to abate soon, leaving AVY with few near-term tailwinds.

The Index Demotion: A Systematic Signal

The Russell 3000E Growth Index's removal of AVY was not arbitrary. Russell's methodology prioritizes companies with high growth rates, liquidity, and market capitalization. AVY's declining EPS, shrinking revenue, and slipping valuation metrics—its P/E ratio dropped to 11x in 2025 from 20x in 2020—likely triggered its exclusion. The reconstitution process, which evaluates companies based on their total market cap as of April 30, 2025, reflected AVY's diminished standing in the growth-oriented segment.

Investment Implications: Proceed with Caution

The demotion from the Russell 3000E Growth Index could pressure AVY's stock further. Passive funds tracking the index will sell their holdings, while active investors may question the company's long-term viability. Shares have already underperformed peers like Ball Corporation (BLL) and Waste Management (WM) by 22% over the past year.

Investors considering AVY should demand clear signs of turnaround: margin stabilization, debt reduction, or breakthroughs in high-margin segments like smart packaging or industrial IoT. Until then, the stock's valuation—despite being near cyclical lows—fails to compensate for the risks.

Final Take

Avery Dennison's fall from the Russell 3000E Growth Index is a symptom of deeper issues. While the company has a solid reputation in labeling and materials, its inability to navigate cost pressures, innovate, and capitalize on secular trends leaves it vulnerable. For now, investors are better served by focusing on companies with stronger growth profiles and balance sheets. AVY's story is a reminder that even legacy players must evolve—or risk becoming relics.