Avery Dennison's Q3 2025: Contradictions Emerge on Apparel Demand, Tariff Impact, Il Growth, Walmart Pact, and Materials Volumes

The above is the analysis of the conflicting points in this earnings call

Date of Call: October 22, 2025

Financials Results

• Revenue: Reported sales up 1.5% year-over-year; organic sales comparable to prior year (positive volume mix offset by deflation-related price reductions)
• EPS: Adjusted EPS $2.37, up 2% year-over-year (above midpoint of expectations)

Guidance:

• Q4 reported sales growth expected 5%–7%; excluding currency 1%–3%; organic growth 0%–2% (includes ~2% currency translation, ~2% extra days from calendar shift, ~1% from Taylor Adhesives).
• Q4 adjusted EPS guidance $2.35–$2.45; midpoint above prior year driven by organic growth, productivity and share count, offset by wage inflation, investments and higher interest expense.
• Expect relatively stable sequential material costs in Q4.
• Full-year: ~$5M currency benefit to operating income, restructuring savings net of transition ≈ $60M, interest expense ≈ $135M, targeting ~100% free cash flow conversion.
• Taylor Adhesives immaterial to Q4 EPS due to timing/amortization.

Business Commentary:

* Earnings and Volume Trends: - Avery Dennison reported adjusted earnings per share of $2.37, up 2% year-over-year, surpassing the midpoint of expectations. - Organic sales growth was up 3% in the Enterprise-wide Intelligent Labels segment, driven by key growth in apparel, food, and logistics sectors. - The growth was attributed to sequential improvements despite ongoing trade policy changes impacting base apparel volumes and inventory management adjustments.

• Materials Group Performance:
• Materials Group sales were down 2% on an organic basis, with modest volume mix growth offset by low single-digit deflation-related price reductions.
• Graphics and Performance Tapes recorded low single-digit declines, impacted by customer inventory adjustments, while specialty durable labels and adhesives saw strong growth.

• The company mitigated direct cost increases through strategic sourcing adjustments and select pricing surcharges, contributing to a 50 basis point margin expansion.

• Solutions Group Growth:

• Solutions Group reported 4% organic sales growth, driven by high single-digit growth in high-value categories like Embelex and Vestcom.
• Apparel sales rose low single digits, with high-value apparel sales growing high single digits, benefiting from Embelex's performance and World Cup-related growth.

• The growth was supported by strong performance in apparel Intelligent Label sales recovery and continued momentum in high-value apparel.

• Partnership and Market Expansion:

• Avery Dennison announced a partnership with Walmart for RFID innovation and solutions in fresh grocery categories, marking a significant industry milestone.
• This adoption in fresh food is anticipated to drive growth in the large addressable market, following a similar rollout strategy as with Kroger.
• The partnership validates the effectiveness of Avery Dennison's technology, enhancing its position in the food segment and driving future growth potential.

Sentiment Analysis:

Overall Tone: Positive

• Management: "We delivered a solid third quarter...earnings up 2% year-over-year and above the midpoint of expectations." CEO: "We are anticipating both overall sales and earnings per share growth in the fourth quarter." CFO: "We again generated strong adjusted free cash flow of nearly $270 million..." Leadership emphasized confidence in long-term growth drivers and recent strategic wins (Walmart, Taylor Adhesives).

Q&A:

• Question from Ghansham Panjabi (Robert W. Baird & Co. Incorporated, Research Division): Is it your sense that Materials volumes are starting to sequentially weaken given macro uncertainty and tariffs?
  Response: Volumes were slightly positive but below expectations due to muted retail/CPG demand and episodic Graphics/Reflective impacts; management expects remediation and similar growth in Q4 and views Materials as resilient long-term.

• Question from George Staphos (BofA Securities, Research Division): Can you talk about the Walmart announcement and how to size the opportunity over the next 2–3 years?
  Response: The Walmart deal validates the tech and should drive meaningful IL growth—management expects a high-single- to low-double-digit uplift to enterprise IL revenue over a ~2-year rollout, ramping gradually.

• Question from John McNulty (BMO Capital Markets Equity Research): What's the IL pipeline and will Walmart force additional capacity/capex?
  Response: Pipeline is growing in count and value; initially no additional capacity needed due to modular, lower-capital intensity production—capacity will be reassessed toward the end of year two.

• Question from Jeffrey Zekauskas (JPMorgan Chase & Co, Research Division): Is the joint sensor/RF technology with Walmart unique or constrained to that relationship?
  Response: No exclusivity—company developed adhesive and RF antenna innovations for challenging meat/freezer environments that are broadly applicable and unlock wider market opportunities.

• Question from Matthew Roberts (Raymond James & Associates, Inc., Research Division): How much of the initial IL rollout (the '5 points') shifted into 2026; can 2026 support at-or-above long-term growth?
  Response: Rollouts are largely on track excluding tariff impacts; apparel volumes are muted but rollouts not delayed; near-term 2026 visibility is limited by policy uncertainty, though management is confident adoption (e.g., Walmart) will drive growth.

• Question from Anthony Pettinari (Citigroup Inc., Research Division): How do RFID and other IoT technologies like Wiliot coexist at Walmart; are you agnostic?
  Response: UHF RFID is preferred for item-level use; Wiliot-type tech complements at pallet/case level—Avery supports both and will help manage Wiliot's rollout with Walmart.

• Question from Michael Roxland (Truist Securities, Inc., Research Division): Any near-term logistics deployments or share gains after recent weakness?
  Response: Expect share expansion with UPS through year-end; no major new rollouts in 2025 beyond existing plans—pilots have expanded across logistics providers and 2026 will be assessed further.

• Question from Joshua Spector (UBS Investment Bank, Research Division): Sales guide up materially Q‑Q but EPS roughly flat—what mutes typical margin accretion?
  Response: Offsets to margin accretion include network inefficiencies and sourcing changes from tariffs, inventory absorption as inventories are drawn down, higher interest expense and wage/investment costs, partially offset by buybacks and restructuring.

• Question from John Dunigan (Jefferies LLC, Research Division): When will Walmart start flowing through and what is the outlook for Embelex volume trajectory?
  Response: Walmart will contribute a small amount in Q4 and ramp through 2026–27; Embelex saw a World Cup-related spike and management expects mid- to high-single-digit growth longer term from performance brands and customization opportunities.

• Question from Jeffrey Zekauskas (JPMorgan Chase & Co, Research Division): Where do meat tags sit on price/ASP relative to apparel/logistics, and what calendar are you switching to next year?
  Response: Meat tags are in the higher-ASP 'best' range due to proprietary innovation; company is switching to the Gregorian calendar (year-end Dec 31) for 2026, adding roughly ~2 points to Q4 growth from extra days.

• Question from George Staphos (BofA Securities, Research Division): Where is deflation occurring in materials and why did IL outgrow apparel this quarter despite apparel weakness?
  Response: Deflation is concentrated in paper/pulp and some chemicals/films (primarily Europe and Asia) causing low-single-digit price declines; IL outperformance was driven by new rollouts (e.g., Inditex, other apparel customers) even as base apparel volumes remain down low single digits.