NEW YORK, Nov. 10, 2020 /PRNewswire/ -- Spruce Point
Capital Management, LLC ("Spruce Point" or "we" or "us"), a
New York-based investment
management firm that focuses on forensic research and
short-selling, today issued an 89-page report entitled "Under
Pressure And Sensitive To Declining Results," that outlines why
shares of Avery Dennison (NYSE: AVY)
("Avery" or the "Company") face up to 55% downside risk. The full
report can be downloaded and viewed at www.sprucepointcap.com.
Follow us on Twitter @sprucepointcap for exclusive
updates.
Avery is an S&P and Fortune 500 company known for its
products and solutions in pressure sensitive labels, adhesives,
reflective materials and tapes, and retail branding and information
solutions such as RFID tags. Whereas Avery presents itself as a
recession resistant and stable Company with growing Adjusted
Operating Margins, EBITDA, EPS, and Free Cash Flow, Spruce Point
believes its organic financial condition has been inflecting
negative for years as its core product loses share to competing
technologies and changes in consumer packaging preferences.
Our research shows that Avery has resorted to reducing key
financial disclosures and more brazen maneuvers to cover-up its
weakening performance including understating debts. Notably, the
Company has recorded ~$1 billion of
restructuring and impairment charges over the past 20 years. Recent
programs implemented during COVID-19 expose the Company, not only
to lower earnings leverage when global markets recover, but to
financial restatement and investigation risk from the Securities
and Exchange Commission ("SEC"). We find evidence that suggests
Avery recently modified its restructuring accounting methods, and
inaccurately portrayed its historical restructuring accounts to
inflate results and unjustly benefit insiders through inflated
bonuses.
Spruce Point has limited confidence in the current Audit
Committee under Peter K. Barker's
leadership, as well. We find an alarming pattern that Avery has
failed to disclose his connections to multiple companies and
individuals that the SEC has investigated related to recognition of
impairment charges. Therefore, Spruce Point calls on Avery to form
an independent committee and hire an independent investigator to
thoroughly evaluate our findings.
A high-level overview of some of the detailed findings in Spruce
Point's 89-page report includes:
- Avery is facing numerous mounting business headwinds,
including differentiated competitor offerings. We believe
Avery's organic financial condition has been trending negative for
years as its core product – the pressure-sensitive label – loses
market share to competing technologies and changes in consumer
packaging preferences. The two biggest disruptive movements against
Avery's business (neither of which the Company adequately publicly
discloses) has been the growth of shrink sleeve and flexible
packaging, which do not require a pressure sensitive label. Our
research shows that shrink sleeves have captured 15-20% of share in
the decorative label market. We have identified at least 10
headwinds that the Company has downplayed, ignored, or failed to
disclose, including: consolidation through private equity roll-ups
among Avery's customers; pressure to move toward more sustainable
solutions through R&D expenditures with no discernable payback;
the slowing of apparel sales and a shrinking retail footprint as
the work from home trend persists; an increase in re-fillable
bottle solutions; and customer backward integration of personal
laminate machines.
- We believe management is pulling numerous, brazen maneuvers
to paper over weak performance to portray margin and cash flow
growth to investors. Like many retail dependent businesses, the
COVID-19 pandemic has been an absolute body blow to Avery's bottom
line. We believe this has pushed the Company to take drastic
measures such as:
-
- Accelerated Omission of Key Financial Disclosures. This year,
Avery ceased disclosing R&D expenses, operating lease costs
(leading to an understatement of debt), and deferred revenues. Over
time, Avery has also stopped disclosing price and volume drivers of
revenue, revenue from new products, sales return liability,
advertising costs and non-cash Capex.
- Dubious Restructuring Charges. We believe Avery has grown so
dependent on restructuring charges to perpetuate growth that it has
pivoted toward accounting manipulation.
-
- Over the past 20 years, Avery has recorded nearly
$1 billion in restructuring
charges. As this frequency and magnitude has increased, Free
Cash Flow has not structurally increased.
- In a recent 10-K filing, Avery modified its discussion of
restructuring accounting methods, and restated its 2018
restructuring charges lower by 62% – without any explanation –
leaving its restructuring charge accounts unbalanced by segment. We
believe this move allowed the Company to inflate historical
Adjusted Operating Income, EBITDA, and EPS.
- We estimate that Avery experienced underlying EBIT contraction
between 2015-2019, adjusted for cumulative cost savings from
disclosed restructuring programs and acquisitions.
- Obscuring Its Rising Debt Load. Avery is much more expensive
and levered than it appears on paper. Our research suggests that
the Company not only inflates Adjusted EBITDA and EPS with dubious
and annually recurring "one-time" restructuring add-backs, but it
also ignores pension and environmental liabilities and obscures
operating leases. In total, we believe Avery ignores $364 million of debts in its financial
presentation.
- Potentially Misleading and Aggressive Free Cash Flow
Presentation. We believe Avery is vastly overstating performance
through highly aggressive and analytically flawed methods. Though
Avery depicts its Free Cash Flow as growing ~$91 million between 2017-2019, our analysis
shows it has actually declined by ~$118
million. Absent extreme 2020 cost cutting measures –
targeting $150 million short-term and
$65 million of long-term
restructuring – cash flow would contract even further. We believe
Avery's actions will be a headwind when the global economy
recovers, and show how it has been willing to sacrifice long-term
earnings potential to meet short-term Wall Street earnings
pressures.
- Financial Actions Not Aligned with Forecasts. Avery has waffled
on its statement that it can generate $500
million of Free Cash Flow in 2020. Its recent dividend
increase of 7% – the lowest growth rate in years – is well below
potential. Further, Avery's share repurchases have fallen 75% year
over year and are also well below potential given previous
forecasts.
- Peter Barker, former Audit
Chairman and current Audit Committee member, has obfuscated ties to
companies investigated by the SEC. We question why Mr. Barker
omits from his biography prior roles at two companies investigated
by the SEC. At Stone Energy Corporation (NYSE: SGY) and Fluor
Corporation (NYSE: FLR), Mr. Barker served on the Audit Committee
when there were full multi-year financial restatements and SEC
inquiries into the recognition of charges. At GSC Investment Corp.,
Mr. Barker served as a director on multiple committees before GSC's
external manager GSCP (NJ) L.P. was issued a cease and desist order
by the SEC for its selection of certain investments. Further,
Avery's proxy statements fail to disclose that Mr. Barker has been
a Director at Riverstone Energy Ltd. (LSE: RSE) since 2013. This
role connects him with a former Goldman Sachs (NYSE: GS) colleague,
David Leuschen, who settled with the
New York Attorney General in a
state corruption scandal. It also further connects him with an
executive whose company is currently under SEC investigation
related to impairment charges.
- Avery's Shares Are a Poor Risk / Reward With Up to 55%
Downside Risk. Avery's end markets and businesses have yet to
recover from COVID-19 and its cost cutting measures have exposed
accounting weaknesses and potential loss of competitive position
when a rebound occurs. Despite sell-side analysts rewarding Avery
with price upgrades to all-time highs, we believe that downside
catalysts outweigh upside potential. Avery has consistently missed
revenue estimates, while beating "Adjusted" EPS estimates through
aggressive cost cuts and lower tax rates. Avery trades at premium
to its material and specialty chemical peers on EBITDA and FCF, two
metrics which we believe are highly manipulated. In addition, Avery
trades 4% above the current sell-side consensus price target of
$146.40, which suggests it is
overvalued. At 20x our estimate of normalized FCF, and 8.0x-10.0x
normalized EBITDA, we estimate a price target of $68 - $99 per
share.
Please note that the items summarized in this press release are
expanded upon and supported with data, public filings and records,
and images in Spruce Point's full report. As a reminder, our full
report, along with its investment disclaimers, can be downloaded
and viewed at www.sprucepointcap.com.
Spruce Point Capital has a short position in Avery Dennison (NYSE: AVY) and owns derivative
securities that stand to benefit if its share price falls.
About Spruce Point
Spruce Point Capital Management, LLC is a forensic
fundamentally-oriented investment manager that focuses on
short-selling, value and special situation investment
opportunities. Spruce Point Capital Management, LLC is a member of
the Financial Industry Regulatory Authority, CRD number 288248.
Contact
Daniel Oliver
Spruce Point Capital Management
doliver@sprucepointcap.com
212-519-9813
Spruce Point Capital Management, LLC is a member of the
Financial Industry Regulatory Authority, CRD number 288248.
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SOURCE Spruce Point Capital Management, LLC