Executive Summary / Key Takeaways

• Digital Transformation Catalyst: Avery Dennison is strategically shifting its portfolio towards high-value, differentiated solutions, particularly through its Intelligent Labels (IL) platform, which is poised for significant growth in nascent markets like food and logistics, exemplified by major partnerships with Kroger and Walmart .
• Resilient Core Business: The Materials Group, anchored in consumer staples, consistently delivers strong margins and GDP-plus growth, demonstrating resilience against macroeconomic fluctuations and effectively mitigating direct tariff impacts through strategic sourcing and pricing.
• Innovation-Driven Competitive Moat: The company's proprietary UHF RFID technology, coupled with its material science expertise, provides a distinct competitive advantage, enabling solutions for complex challenges in diverse environments, from cold-chain protein tracking to sustainable packaging.
• Disciplined Capital Allocation: Avery Dennison maintains a strong balance sheet and a disciplined capital allocation strategy, balancing significant shareholder returns (dividends and share repurchases) with strategic M&A, such as the recent W.F. Taylor Holdings acquisition, to accelerate growth in high-value categories.
• Outlook for Accelerated Earnings: Despite near-term macroeconomic and trade policy uncertainties, management anticipates an acceleration in earnings growth throughout 2025, driven by high-value solution rollouts, base label volume recovery, and ongoing productivity initiatives, targeting 7% to 12% adjusted EPS growth excluding currency.

Avery Dennison: Pioneering the Physical-Digital Frontier

Avery Dennison Corporation stands as a global leader in materials science and digital identification solutions, a position meticulously built since its founding in 1935. The company's core business revolves around providing essential labeling materials that both decorate and inform, alongside advanced digital identification solutions that connect physical items to the digital world. This dual expertise places Avery Dennison at the forefront of industries ranging from consumer goods and apparel to logistics and healthcare. Its overarching strategy, refined through a comprehensive transformation initiated in 2012, focuses on driving outsized growth in high-value categories, profitably expanding its base businesses, and leading the convergence of physical and digital realms.

The company's competitive landscape is diverse, featuring direct rivals like 3M , CCL Industries , UPM-Kymmene , and Berry Global , each with distinct strengths. Avery Dennison differentiates itself through its specialized focus and global reach, particularly in high-quality, customized applications and integrated branding solutions. While competitors like 3M offer broader portfolios and CCL excels in digital printing, Avery Dennison's unique value proposition lies in its established expertise in retail and healthcare materials, fostering strong customer loyalty. The company's market positioning as a niche leader, especially in item-level identification, allows it to command a significant share in its key segments.

A cornerstone of Avery Dennison's competitive advantage is its proprietary technology, particularly in Ultra-High Frequency (UHF) RFID. This technology is not merely a product but a comprehensive solution, offering tangible benefits across various applications. For instance, in the burgeoning food sector, Avery Dennison has developed innovative adhesive technologies crucial for cold environments and products that undergo defrosting or microwaving. Its uniquely designed antennas are capable of sensing within densely packed, high-dielectric items like meat, a challenge that had historically hindered RFID adoption in fresh food categories. This innovation directly addresses critical grocer needs for maximizing freshness, reducing waste, improving labor effectiveness, and enhancing customer experience. The company's commitment to R&D extends to sustainable solutions, such as the first RecyClass-certified label for high-density polyethylene packaging, and linerless solutions addressing productivity challenges for converting partners. These technological advancements contribute directly to Avery Dennison's competitive moat, enabling higher average selling prices (ASPs) for specialized products, strengthening market positioning, and driving long-term growth. The company envisions a future where all physical objects possess a digital identity, a vision it is actively pursuing through its core UHF RFID technology and strategic partnerships with other sensing technologies like Williot, which focuses on pallet and case-level tracking.

Broad industry trends further underscore Avery Dennison's strategic alignment. Secular tailwinds such as item-level digitization, enhanced consumer engagement, product customization, and the increasing need for business productivity are directly aligned with a growing portion of its business. The adoption of Intelligent Labels is accelerating, particularly in the food segment, which is estimated to be a 200 billion-unit addressable market. Overall, the company sees a 350 billion-unit opportunity in item-level identification. These trends, coupled with the indirect demand for materials driven by the growth of AI and data centers, position Avery Dennison for sustained relevance and expansion.

Strategic Evolution and Operational Resilience

Avery Dennison's journey has been marked by strategic foresight and operational agility. The 2012 transformation laid the groundwork for its current segmented approach, focusing on high-value products and solutions. This strategic shift has been instrumental in navigating dynamic market conditions, including the downstream inventory destocking experienced in 2023, from which its base businesses recovered strongly in 2024. The company's global network, built over decades, has proven invaluable in assisting customers with apparel sourcing migration across various countries, a testament to its operational flexibility.

The company's high-value categories, excluding Intelligent Labels, have contributed approximately 2 points to annual organic sales growth over the past four years, with Intelligent Labels adding another 1 point. These categories now represent 45% of the total business year-to-date, underscoring a successful strategic shift towards higher growth and higher margin opportunities. The Embelex platform, a high-growth area driven by personalization and fan engagement in team sports and performance athletic categories, has grown approximately 15% annually on an organic basis over the last six years, reaching roughly $325 million in revenue in 2024. Similarly, Vestcom, the market-leading suite of productivity and media solutions for the retail shelf edge, is poised for strong growth in 2025, following a new partnership with CVS Health (CVS).

Segment Performance and Financial Health

Avery Dennison operates through two primary segments: Materials Group and Solutions Group, with the Intelligent Labels platform spanning both.

The Materials Group, the company's highest-returns business, demonstrated strong operational excellence in the third quarter of 2025, driving margin expansion. Segment adjusted operating income increased to $230.1 million for the three months ended September 27, 2025, up from $222.2 million in the prior year period. For the nine months ended September 27, 2025, segment adjusted operating income was $702.9 million. This performance was primarily due to productivity initiatives and favorable volume/mix, partially offset by the net impact of pricing and raw material input costs. Organic sales in Q3 2025 decreased due to raw material deflation-related price reductions, despite modest volume/mix growth. North America's organic sales were comparable, while Europe, Asia Pacific, and Latin America experienced low single-digit declines. Management anticipates that inventory adjustments in graphics and performance tapes, which caused modest revenue declines in Q3 2025, will be short-lived, expecting these high-value categories to return to growth in Q4 2025.

The Solutions Group delivered 4% organic sales growth in Q3 2025, driven by a high single-digit increase in high-value categories. Net sales to unaffiliated customers for the three months ended September 27, 2025, were $699.5 million, with segment adjusted operating income of $69.7 million. For the nine months ended September 27, 2025, net sales were $2,038.0 million, and segment adjusted operating income was $204.9 million. VESCOM and Embellix both grew over 10% in Q3 2025. Overall apparel sales rose low single digits, exceeding expectations, with high-value category apparel sales growing high single digits. However, base apparel was down low single digits due to soft retail and brand demand impacted by tariff policies. Profitability was affected by higher employee costs, continued growth investments, and network inefficiencies stemming from tariff policy changes.

Intelligent Labels (IL), an enterprise-wide platform, saw sales grow approximately 3% year-over-year in Q3 2025, driven by mid-single-digit growth in apparel, food, logistics, and industrial categories. Apparel partially recovered, while general retail remained soft due to tariff policy changes. Strong growth continued in food, propelled by the strategic collaboration with Kroger for item-level RFID tagging in bakeries. A significant partnership with Walmart was announced in Q3 2025 to deploy RFID solutions in fresh grocery categories (bakery, meat, and deli), a key industry milestone reinforcing the growth potential of this large addressable market. This partnership is expected to contribute high single-digit to low double-digit growth to total 2025 enterprise IL revenue over a two-year period, ramping up over time.

Financially, Avery Dennison reported net income of $166.3 million for Q3 2025, down from $181.7 million in Q3 2024. For the nine months ended September 27, 2025, net income was $521.6 million, compared to $530.9 million in the prior year. This decrease was primarily due to raw material deflation-related price reductions, higher income taxes, and growth investments, partially offset by productivity benefits and higher volume/mix. Gross profit increased in Q3 2025 due to volume/mix and productivity, despite raw material price reductions and higher employee costs. Marketing, general and administrative expenses increased due to growth investments and higher employee-related costs. The effective tax rate for Q3 2025 increased to 29.2% from 24.1% in Q3 2024, primarily due to lower discrete tax benefits and a higher net charge related to U.S. tax on foreign earnings.

The company's liquidity remains robust. Net cash provided by operating activities for the nine months ended September 27, 2025, was $504.6 million, a decrease from $587.6 million in the prior year, mainly due to higher incentive compensation and tax payments. Adjusted free cash flow for the same period was $404.5 million, down from $420 million, primarily due to lower operating cash flow. Avery Dennison maintains a strong balance sheet with a net debt to adjusted EBITDA ratio of 2.2 at quarter-end Q3 2025. The fair value of total debt increased to $3.71 billion at September 27, 2025, from $3.01 billion at December 28, 2024. The company successfully repaid $500 million of senior notes and $30 million of medium-term notes in 2025. In September 2025, it issued $500 million of senior notes due 2035 at a 4% interest rate, with proceeds intended for general corporate purposes, including acquisitions and commercial paper repayment. The company's disciplined capital allocation strategy includes significant shareholder returns; in the first nine months of 2025, approximately $670 million was returned through share repurchases and dividends, and the quarterly dividend was increased by 7% to $0.94 per share.

Outlook and Strategic Imperatives

Avery Dennison anticipates continued uncertainty in trade policy and the macroeconomic environment. For the fourth quarter of 2025, the company expects reported sales growth of 5% to 7%, with organic growth projected between 0% and 2%. This includes a 2% benefit from currency translation, 2% from extra days due to the fiscal year transition to a Gregorian calendar, and 1% from the W.F. Taylor Holdings, Inc. acquisition. Adjusted earnings per share for Q4 2025 are guided to be in the range of $2.35 to $2.45, reflecting benefits from organic growth, productivity, and share count, partially offset by wage inflation, investments, and higher interest expense.

For the full year 2025, management projects adjusted EPS in the range of $9.80 to $10.20, representing 7% to 12% growth excluding currency translation. This outlook is supported by an anticipated 3% to 4% organic sales growth, with mid-single-digit volume growth driven by high-value categories. Restructuring savings, net of transition costs, are expected to reach approximately $60 million, an increase from previous expectations, as productivity efforts ramp up. The effective tax rate is expected to be in the mid-twenty percent range. The company targets roughly 100% adjusted free cash flow conversion for the year.

The strategic rationale underpinning this outlook is clear: accelerate growth in high-value categories and leverage the robust Intelligent Labels platform. The Walmart partnership, while starting with a small rollout in Q4 2025, is expected to significantly ramp up through 2026 and 2027. Embellix is also expected to see strengthening growth later in 2025, partially driven by preparations for the 2026 World Cup. The acquisition of W.F. Taylor Holdings, Inc. for $390 million in October 2025 is expected to immediately strengthen the Materials Group's high-value category adhesives franchise, with clear cost synergies and strong growth potential.

Competitive Positioning and Differentiated Advantages

Avery Dennison's competitive advantages are deeply rooted in its specialized portfolio, global scale, and innovation leadership. Compared to diversified industrial conglomerates like 3M (MMM), Avery Dennison's focused approach in pressure-sensitive materials and digital identification allows for greater agility and tailored solutions. While 3M boasts a broader R&D scope, Avery Dennison's targeted innovation in areas like RFID for perishable foods demonstrates a superior ability to solve specific, complex industry challenges. Its strong brand recognition and extensive distribution channels foster deep customer loyalty, providing a stable revenue base that can withstand competitive pressures from players like UPM-Kymmene (UPM), which, despite its sustainability focus, may lack Avery Dennison's breadth in specialized applications.

In the labeling and packaging sector, Avery Dennison competes with CCL Industries (CCL), which has strengths in digital printing. However, Avery Dennison's comprehensive solutions for brand embellishments, compliance labeling, and its leadership in UHF RFID technology provide a distinct edge. The company's intellectual property in inlay design and attenuation for diverse applications (food, logistics, apparel) is a critical differentiator. Furthermore, its role as a predominant supplier in large-scale RFID rollouts, often being the sole or majority provider, ensures significant market share capture as new segments adopt the technology. Against Berry Global (BERY), which specializes in flexible packaging, Avery Dennison's focus on high-value branding and regulatory compliance for durables and pharmaceuticals offers a quality and reliability advantage.

Avery Dennison's competitive moat is further strengthened by high barriers to entry in its industries, including significant capital requirements for manufacturing and stringent regulatory compliance. The company's continuous investment in process engineering and manufacturing capabilities, producing billions of units, maintains its low-cost leadership in the RFID space. While potential vulnerabilities exist in supply chain dependencies and the speed of digital integration compared to some tech-focused rivals, Avery Dennison's strategic response involves leveraging its resilient global network to mitigate disruptions and accelerating innovation to close technological gaps. The company's proactive engagement in the entire RFID ecosystem, from inlay design to software applications, positions it as the go-to partner for large-scale adoption, ensuring it disproportionately benefits from the industry's growth.

Conclusion

Avery Dennison stands as a compelling investment proposition, underpinned by its strategic evolution into a materials science and digital identification powerhouse. The company's deliberate pivot towards high-value categories, particularly its Intelligent Labels platform, is unlocking significant growth opportunities in vast, nascent markets like food and logistics. The recent partnerships with Kroger (KR) and Walmart (WMT) serve as powerful validations of its differentiated technology and its ability to solve critical industry challenges, from waste reduction to enhanced supply chain visibility.

Despite a dynamic macroeconomic environment and ongoing trade policy uncertainties, Avery Dennison's resilient business model, anchored by its Materials Group's consistent performance and robust cash flow generation, provides a strong foundation. Its disciplined capital allocation strategy, balancing shareholder returns with strategic acquisitions and organic investments, further enhances its long-term value creation potential. With a clear technological roadmap, a strong competitive position, and a proven playbook for managing various macro scenarios, Avery Dennison is well-positioned to deliver accelerated earnings growth and maintain top-quartile returns, solidifying its leadership in the evolving landscape of physical-digital convergence.