Avery Dennison Pivots to High-Value Categories as Materials Deflation Weighs

Executive Summary and Strategic Context#

AVY delivered a steadying third quarter on 22 October, reporting adjusted earnings per share of $2.37, up 2 per cent year-over-year, whilst simultaneously announcing a first-to-market collaboration with Walmart on radio-frequency identification technology for fresh food departments. The dual announcements revealed a company navigating divergent sector pressures: whilst its core Materials Group contends with deflation-driven organic sales declines of 1.9 per cent, the higher-margin Solutions segment—driven by Intelligent Labels, Vestcom, and Embelex—delivered organic growth of 3.6 per cent. The contrast illuminates Avery Dennison's strategic pivot toward technology-enabled, differentiated products that command pricing power, even as legacy categories face commodity-like pressures.

Throughout the first nine months of 2025, AVY returned $670 million to shareholders via dividends and repurchases whilst simultaneously executing disciplined M&A and debt refinancing. Share repurchases totalled $454 million through September, reducing net share count by 3.1 million shares, or roughly 3.8 per cent of the outstanding base at the beginning of the year. This reduction, combined with adjusted EPS growth of 2 per cent, underpins the reported earnings resilience even as organic revenue growth stalled. The company's net debt-to-adjusted EBITDA ratio stands at 2.2 times, which remains conservative for a business generating adjusted EBITDA margins of 16.5 per cent and free cash flow approaching $405 million year-to-date. Management's full-year 2025 free cash flow guidance remains intact, implying strong cash generation relative to investment, but execution risk around recent acquisitions and the Walmart partnership's path to profitability will be key catalysts to watch into 2026.

Bifurcated Demand Signals Across Segments#

Third-quarter net sales reached $2.215 billion, up 1.5 per cent year-over-year, but organic growth of negative 0.2 per cent masked a profound divergence between the company's two reporting segments. The Materials Group, which generated $1.516 billion in sales (up 1.2 per cent reported), declined 1.9 per cent on an organic basis—a telling metric that subsumes the full scope of Avery Dennison's exposure to macroeconomic fragility. Both Intelligent Labels and the base portfolio contracted in low single-digit ranges, whilst Performance Tapes and Medical fell in the mid-single digits, signalling that even its high-value categories are not immune to customer caution. Deflation-related price reductions overwhelmed modest volume and mix gains, the company noted, a dynamic that management attributed to the "dynamic environment" but which investors should interpret as sustained customer reluctance to absorb pricing.

The Solutions Group painted a starkly different picture. At $699.5 million in sales, up 2.0 per cent reported and 3.6 per cent organically, this segment represents the company's answer to commoditised materials: software, identification platforms, and specialised apparel solutions where lock-in and customisation reduce price sensitivity. Intelligent Labels themselves advanced at a mid-single-digit clip, but the headline growth drivers were Vestcom and Embelex, both accelerating beyond 10 per cent organically. These acquisitions—Vestcom in point-of-sale solutions and Embelex in thermal and polyester label stock—have begun to compound, hinting at the revenue base inflection that management has repeatedly promised investors. The divergence between segment performance illustrates why the Walmart partnership represents such a significant validation: AVY is attempting to migrate its revenue base away from commoditised materials toward technology-enabled solutions.

Margin Defence Through Productivity and Restructuring#

Operating margins tell the story of a company wringing value from productivity even as top-line momentum falters. Adjusted operating margin at the Materials Group expanded 40 basis points to 15.2 per cent, driven principally by restructuring savings realised through the year (approximately $48 million in pre-tax savings realised through the third quarter). For the Solutions Group, adjusted operating margin contracted 130 basis points to 10.0 per cent, however, as higher employee-related costs offset the volume upside. This margin compression warrants investor scrutiny: it suggests that the company's costs are growing faster than revenue in its higher-growth segment, a potentially unsustainable dynamic if macroeconomic conditions remain choppy.

Adjusted EBITDA margins held steady at 16.5 per cent enterprise-wide, suggesting that management's cost discipline is at least offsetting the inflationary pressures on labour. The company completed $48 million in restructuring savings net of transition costs and incurred $23 million in charges, a metabolism that will likely continue as management seeks to protect earnings in the near term whilst constructing a leaner platform. The challenge for investors is assessing whether this restructuring is sustainable or merely a one-time benefit masking deteriorating underlying demand. Given the Materials Group's organic decline of 1.9 per cent, the former interpretation appears more likely. However, the trajectory of Solutions Group margins—should they stabilise or improve—would signal that the company's strategic pivot is gaining traction.

Strategic Momentum: Walmart Partnership as Market Validation#

First-to-Market RFID Innovation in Fresh Food#

Announced on the same day as earnings, the Walmart collaboration on RFID-enabled labels for fresh food departments represents a significant validation of AVY's Intelligent Labels and Optica portfolio strategies. The partnership addresses a long-standing industry challenge: deploying radio-frequency identification technology in high-moisture, cold environments such as meat cases, previously thought to be intractable. Walmart will deploy Avery Dennison's RFID inlays across bakery, meat, and deli departments, enabling associates to track inventory at the item level, verify freshness in real time, and optimise markdown decisions. The use case directly serves Walmart's 2030 commitment to halve operational food loss and waste intensity globally. For Avery Dennison, this partnership functions as a dual validation: first, it demonstrates that the company has solved a previously insolvable technical challenge, differentiating Intelligent Labels at a time when commodity pressure is acute; second, it confirms that the largest retailer in the world is willing to commit capital and shelf integration efforts around Avery Dennison's identification ecosystem.

Julie Vargas, vice president and general manager of Identification Solutions, explicitly linked the partnership to the company's 90-year anniversary, positioning the technology as emblematic of the company's "commitment to people and the planet." For investors, the partnership signals that Intelligent Labels—a category the company has spent years building and defending—is now moving from pilot and proof-of-concept phase into operational deployment at scale. The scale question is critical: if AVY can convert this Walmart win into a broad roll-out across additional retailers, the fresh-food RFID opportunity could represent a multi-billion-dollar addressable market expansion for the Solutions segment.

Optica Portfolio and Recurring Revenue Potential#

The Walmart deal does not stand alone. It is the visible manifestation of Avery Dennison's Optica portfolio, a suite of solutions designed to create visibility and transparency from source to retail shelf. Management has positioned Optica as a long-term competitive moat, one that can extract recurring revenue through software subscriptions, professional services, and premium labelling materials. The fresh-food use case—where waste, spoilage, and regulatory compliance create clear economic value—is precisely the wedge that the company needs to expand Optica's serviceable addressable market beyond apparel and general retail. For the Solutions segment, which is struggling with margin pressure from employee-cost inflation, the introduction of software-driven, recurring-revenue streams could be transformative to profitability.

Investors should monitor whether the Walmart RFID deployment generates meaningful software subscription revenue alongside the hardware sales. If the partnership evolves to include Optica's visibility platform—allowing Walmart to manage inventory in real time across stores—the margins could improve materially relative to traditional label sales. Conversely, if the partnership remains a product play (RFID inlays and labels only), the upside for Solutions Group margins may be limited. The Walmart announcement does not specify the software component, but management's framing of Optica as a "long-term competitive moat" suggests ambitions beyond hardware sales. This ambiguity will likely be a key question for management on the earnings call.

Capital Deployment and M&A Momentum#

Balanced Leverage Strategy and Debt Refinancing#

In September, Avery Dennison issued €500 million of 4.00 per cent senior notes due 2035, a refinancing that locks in medium-term funding at favourable rates. Management indicated the proceeds would support acquisitions and repay commercial paper obligations. This signalling proved prescient: on 20 October, two days before earnings, the company completed its acquisition of the United States flooring adhesives business of Meridian Adhesives Group for $390 million. The acquired entity, Taylor Adhesives, generated approximately $110 million in revenue in 2025 and is a specialist in adhesive and coating formulations for the domestic flooring industry. This acquisition marks a departure from the company's recent M&A playbook, which has centred on bolt-on acquisitions in identification solutions and point-of-sale software.

Flooring adhesives, by contrast, represent an entry into a new vertical within materials science—a business that sits between AVY's core Materials Group and its Solutions Group in terms of margin profile and customer base. However, the acquisition aligns with management's stated strategy to drive "outsized growth in our high-value categories." Flooring, a sector with exposure to both residential and commercial construction, is less commoditised than base label stock and carries premium pricing for performance adhesives. The $390 million price tag implies a valuation of approximately 3.5 times annual revenue, a premium that suggests competitive dynamics around specialty adhesives. Management must demonstrate that Taylor Adhesives' margins and growth trajectory justify this valuation relative to organic alternatives.

Strategic Rationale and Integration Risks#

The integration of Taylor Adhesives into the Materials Group should provide management with a larger addressable market in specialty materials, one less subject to the deflation pressures that have constrained the base portfolio. However, integration risk is material. The company is absorbing a $110 million revenue business during a period when its existing Materials operations are declining organically. If management's attention is diverted to Taylor integration, there is a risk that restructuring efforts in the base Materials portfolio will lose momentum. Conversely, if the integration is executed well, Taylor's higher margins could pull up the Materials Group's overall profitability.

Investors should scrutinise guidance on Taylor's expected contribution in 2026 and beyond. The company has not yet provided specificity on margin expectations or revenue growth assumptions, leaving uncertainty around whether this acquisition represents a strategic pivot (toward higher-margin specialty materials) or a defensive move to offset base business decline. The timing—just two days before earnings—suggests management views the acquisition as strategically important and worth announcing alongside strong financial results. However, the lack of fanfare in the earnings release itself (compared to the Walmart announcement) hints at some caution about the integration pathway.

Outlook: Two Trajectories in Tension#

Q4 Guidance and Near-Term Catalysts#

Avery Dennison enters the final quarter of 2025 with management guidance of $2.15 to $2.25 in reported EPS (or $2.35 to $2.45 adjusted) for the fourth quarter. This implies an acceleration in adjusted earnings relative to the third quarter ($2.37), a modest beat relative to consensus expectations, but management cautioned that "dynamic" macroeconomic conditions persist. The company remains "prepared for various scenarios," suggesting management hedges against a deterioration in demand into the year-end. The guidance band—spanning 10 cents of EPS—is wider than typical, reflecting this uncertainty. For investors tracking quarterly progression, the midpoint of $2.40 adjusted EPS in Q4 would represent a 1.3 per cent sequential acceleration from Q3, a modest reassurance that cost discipline is outpacing revenue headwinds but hardly a signal of robust organic growth momentum.

The Walmart RFID partnership represents the most material near-term catalyst. If management provides colour on the partnership's deployment timeline, scope (number of stores and departments), and expected revenue contribution, investors can begin to assess whether this is a pilot programme or a genuine scaling opportunity. Similarly, the Taylor Adhesives acquisition will demand specificity on margin contribution and integration timetable. Without such guidance, the market will remain uncertain about whether management's M&A strategy represents a credible answer to the Materials Group's structural challenges.

Strategic Risks and the Case for Optimism#

The central tension for investors is crystalline: the company's high-value categories—Intelligent Labels, Vestcom, Embelex, and now the fresh-food RFID opportunity via Walmart—are growing and commanding premium valuations, yet these gains are being offset by deflationary pressure in the base Materials portfolio. Productivity measures and restructuring can defend margins in the near term, but they are not a substitute for organic revenue growth in a premium multiple environment. The Walmart partnership and Taylor Adhesives acquisition suggest management is optimistic that innovation and adjacency moves can drive the company's growth profile higher over the next two to three years. However, the 1.9 per cent organic decline in Materials and the 130 basis point margin compression in Solutions due to labour costs warrant caution.

If the macroeconomic backdrop deteriorates further, dampening even the higher-value segments, AVY's share repurchase programme and acquisition pipeline may prove insufficient to offset the headwind. The company's strong free cash flow generation (now approaching $405 million year-to-date) and conservative leverage (2.2 times net debt to EBITDA) provide a financial cushion, but execution risk around Taylor Adhesives integration and the Walmart partnership's path to profitability remain the critical variables. Investors should view the next two earnings cycles as pivotal: if Solutions Group margins stabilise and the Walmart RFID partnership generates early revenue traction, the market may reward AVY for successfully navigating the transition from commoditised materials to high-value technology solutions. Conversely, if Materials Group deflation accelerates and integration missteps emerge, the thesis will require meaningful reassessment.