Avery Dennison Is Well Positioned to Capitalize on RFID Adoption but Apparel Headwinds Remain

Equity Analyst

Spencer Liberman

Revenue segments as reported by the company.

Label and Graphic Materials

Retail Branding and Information Solutions

Industrial and Healthcare Materials

Materials Group

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Avery Dennison is the largest supplier of pressure-sensitive adhesive materials and passive radio frequency identifiers in the world. Rising consumer packaged good penetration in emerging markets should benefit label growth, while growth in omnichannel retailing and increased radio frequency identification, or RFID, adoption in other industries should aid RFID sales at Avery Dennison.

Avery sells pressure-sensitive materials to a highly fragmented customer base that converts specialty film rolls into labels for companies such as Kraft Heinz or Amazon. Avery operates in highly fragmented industries that are mainly serviced by regional players. In most of these industries, it's the largest competitor with significant market share versus closest peers. The materials group segment accounts for about 70% of Avery's revenue. They convert paper, vinyl, and adhesives into composite films that become shipping labels, automotive graphics, and special-use tapes and films. While demand for these products is somewhat stagnant in developed markets, we expect Avery's large emerging market footprint (around 40% of revenue for these segments) to drive mid-single-digit revenue growth.

Avery's solutions group makes up approximately 30% of sales and produces a mixture of apparel graphics, product tags, and radio frequency identifiers. While RFID products account for about 30% of the segment's revenue, it has grown rapidly in recent years and has increasingly become the focus of Avery's solutions segment. RFID products are typically integrated into product tags in industries that have both a diverse inventory and where universal product code scanning is cumbersome or labor-intensive, such as apparel. We think Avery’s recent strategy shift to focus on reducing costs and prices of the technology to gain share demonstrates the commoditized nature of these products. Even so, we think Avery should at least be able to grow with the market, or between 15% and 20% per year. The remainder of segment revenue comes from the application and production of apparel graphics and tags.

Business Strategy & Outlook

We think Avery Dennison benefits from durable competitive advantages that should support economic profits for at least the next 10 years. We assign the company a narrow moat rating based on its cost advantage. Avery Dennison produces adhesive materials, labels, graphics, and tags for a variety of end markets. Avery operates in highly fragmented industries that are mainly serviced by regional players. In a majority of these industries, Avery is the largest player by a wide margin. It maintains roughly 40% and 30% market share in its base label and retail label businesses, respectively. The firm's high-growth intelligent labels business accounts for over 50% of the global market.

Recently, Avery has shifted its strategy to focus on high-value products that generate better returns and are less commoditized. This dynamic has enabled the firm to earn stronger returns on its invested capital over the last decade. In its base labels business, Avery has grown its portfolio of specialty and durable labels organically and through acquisitions. These products are less commoditized than its base labels, commanding premium pricing and yielding stronger returns. In the company's solutions group segment, the intelligent labels business has grown organic sales at a roughly 18% compound annual growth rate over the last seven years. This business earns stronger returns than the segment’s base tags and labels and should provide a strong tailwind for growth. While we were skeptical of RFID adoption growth, it is clear to us now that RFID use should continue to grow across multiple industries, with Avery well positioned to capitalize on this surging market. 

A sizable part of Avery's materials business is composed of the production of a wide variety of commoditized labels and graphics. In this business, Avery has roughly 40% of the global market share and is more than twice as large as its next closest competitor, UPM Raflatac. Avery manufactures its base label and graphics products across one or a few large manufacturing plants in most regions, which enables the firm to leverage its fixed costs through sizable manufacturing plants, reducing its overall cost per unit. Avery is then able to offer attractive volume incentives to customers while earning returns well above its cost of capital. The firm purchases materials, produces products, and sells those products within each region, minimizing the need to ship its products over long distances. Through its global manufacturing and distribution footprint, Avery services numerous converting customers while managing its transportation costs.

Avery’s scale is unrivaled, with most competitors only operating with a regional presence and offering a significantly smaller portfolio of products. While many focus on a specific product or application type, Avery offers its customers a large portfolio of products and solutions while incentivizing high-volume purchases. Avery sells its base labels and graphics to converters, who print and cut blank labels from rolls that are then sold to end customers. The converters operate in a highly fragmented industry, with Avery’s 10 largest customers representing just 16% of 2023 revenue. This dynamic limits the bargaining power of converters as many compete in the same regions and source their products directly from Avery or UPM. While there has been some consolidation in recent years, we do not think it is a material threat as many regions are still served by multiple competitors. 

In Avery’s materials business, the firm mainly produces commoditized products. Its scale enables the firm to manufacture large quantities while running its production assets up to twice as fast as its competitors. Avery is protective of its trade secrets, including its manufacturing processes that facilitate efficient production that has been refined over multiple decades. While many competitors produce largely similar labels, most lack the production efficiencies and scale that Avery has leveraged for years. In our opinion, Avery’s robust manufacturing throughput provides additional support for its cost advantage moat source. 

For Avery's base tag and label business, it's the largest player in this industry, with an estimated 30% market share. Unlike other industries the firm operates in, this market is made up of many smaller players, with Avery being roughly 4 to 5 times larger than the next biggest competitor. Like its base labels business, Avery benefits from its scale, producing large quantities of tags and labels that are mainly used in apparel. Avery’s size allows the firm to leverage its fixed costs when producing at scale and fulfil larger orders than its competitors. Avery Dennison is also the world’s largest supplier of ultra high frequency, or UHF, RFID inlays. Following its 2020 acquisition of Smartrac’s RFID inlay business, the firm now has more than 50% share of the global market. As the largest player, Avery is able to leverage its scale to achieve significant purchasing power, specifically when purchasing chips for its inlays. Avery’s intelligent labels business has grown significantly over the last decade as decreasing RFID prices have made them a viable option to track lower-cost items. While apparel is still the largest end market for RFID inlays, many other industries have begun adopting the technology.

Narrow

Economic Moat

Avery Dennison

Avery Dennison Corp. engages in the provision of labeling and packaging materials and solutions. It operates through the following segments: Label and Graphic Materials, Retail Branding and Information Solutions, and Industrial and Healthcare Materials. The Label and Graphic Materials segment manufactures and sells Fasson, JAC, and Avery Dennison-brand pressure-sensitive label and packaging materials, Avery Dennison and Mactac brand graphics, and Avery Dennison brand reflective products. The Retail Branding and Information Solutions segment designs, manufactures, and sells a variety of branding and information solutions to retailers, brand owners, apparel manufacturers, distributors and industrial customers. The Industrial and Healthcare Materials segment manufactures and sells Fasson-brand and Avery Dennison-brand tapes and fasteners, Vancive brand medical pressure sensitive adhesive-based materials and products, and performance polymers. The company was founded by R. Stanton Avery in 1935 and is headquartered in Mentor, OH.

Earnings data Q2 2021

Earnings data Q3 2021

Earnings data Q4 2021

Earnings data Q1 2022

Earnings data Q2 2022

Earnings data Q3 2022

Earnings data Q4 2022

Earnings data Q1 2023

Earnings data Q2 2023

Earnings data Q3 2023

Earnings data Q4 2023

Earnings data Q1 2024

Earnings data Q2 2024

AVY faces inventory destocking challenges but remains confident in growth

AVY faced challenges with inventory destocking impacting revenue and margins, but the company activated countermeasures and remains confident in its ability to deliver value. The management team provided detailed responses to analyst questions, addressing concerns about inventory levels, customer sentiment, destocking timelines, and growth prospects for key segments.

Avery Dennison reports Q2 EPS below expectations, focuses on RFID growth

Avery Dennison's Q2 performance was impacted by lower revenue but offset by cost reduction actions. The company is focused on large-scale RFID projects and anticipates organic volume growth in the coming quarters. Challenges in predicting the pace of recovery and uncertainties in the market were highlighted, while opportunities lie in new apparel accounts and RFID market expansion.

Avery Dennison Q3 Earnings Impacted by Macro Uncertainty, Anticipates Sequential Improvement

Avery Dennison faced challenges due to macro uncertainty and slower consumption but demonstrated strengths in strong margins, volume improvement, and mid-single digit sales growth. The company anticipates opportunities for sequential earnings improvement in Q4 and expects adjusted earnings per share to be in the range of $2.10 to $2.25.

Avery Dennison reports strong Q4 performance and anticipates earnings growth in 2024

Avery Dennison reported strong Q4 performance with sequential earnings growth and significant margin expansion. The company faces challenges related to mixed economic indicators and geopolitical risks but anticipates strong earnings growth in 2024, especially in high-value solutions. Despite unexpected market conditions impacting full-year expectations, Avery Dennison remains focused on productivity, cost management, and capital stewardship to generate strong free cash flow.

AVY reports robust Q1 performance, eyes growth in high-value categories

AVY's Q1 2024 performance reflects strong growth and margin expansion across its business segments. The company is confident in its ability to deliver on its full-year guidance and navigate challenges in the market.

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Avery Dennison Corp. engages in the provision of labeling and packaging materials and solutions. It operates through the Materials and Solutions Group segments. The Materials Group segment manufactures and sells pressure-sensitive label materials, films for graphic and reflective products, performance tapes and other adhesive products for industrial, medical and other applications, as well as fastener solutions. The Solutions Group segment designs, manufactures and sells a wide variety of branding and information solutions, including brand and price tickets, tags and labels, and related services, supplies and equipment. The company was founded by R. Stanton Avery in 1935 and is headquartered in Mentor, OH.

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