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Friday, Mar 29, 2024

Avery Dennison Peals Off Labels

When Avery Dennison Corp. announced last month it was leaving its Pasadena headquarters and moving into a smaller leased space in Glendale, it was about more than cost cutting. It reflected a historic downsizing for a company that was built on a once voracious demand for envelopes, folders and all the other paper office supplies that facilitate business. But in a digital age that demand has waned. Avery Dennison has had to slim down, selling its office supplies division and reducing its corporate footprint. “It was the move that had to be made,” said Todd Wenning, an equity analyst that covers the company for Chicago investment research firm Morningstar Inc. “The traditional office products business, like folders and binders, are having a volume issue. It’s all online.” On July 1, the Fortune 500 label maker completed the sale of its office products division and engineered-solutions division to CCL Industries Inc. of Toronto, a printing and label company. The sales are expected to fetch about $400 million when they close Oct. 1. With that, by early next year, Avery Dennison will leave behind not only its Pasadena headquarters, but a Brea office that ran the office products division. Avery Dennison is not the only company in the office supplies business to suffer from lower demand. At the retail end, longtime competitors Office Max Inc. and Office Depot Inc. are seeking regulatory approval for a $1.2 billion merger. And industry leader Staples Inc. of Framingham, Mass., which had a proposed merger with Office Depot rejected in 1996 amid monopoly concerns, began carrying cell phones in 2011 to stay competitive. David Frail, spokesman for Avery Dennison, said that as a result of the sales, the company can put all its energy into its two strongest businesses: a pressure-sensitive materials segment that sells self-adhesive roll-labels used on a wide range of consumer products and reflective highway-safety signs; and the retail-branding-solutions division, which designs graphic and barcode tags for woven and printed labels. “Office products are in a period of consolidation – that much is clear,” he said. “The consolidation and streamlining has been focused on putting our resources where they will best serve customers.” The predecessor company of Avery Dennison was founded in 1935 in Los Angeles. It has had several different names through the decades and became its current incarnation in 1990 after merging with Dennison Manufacturing Co., a Framingham, Mass. company that produced paper products. A decade ago, the office products division accounted for more than half of the company’s net sales. But as more and more information moved online, it slowed. And by last year, office products accounted for only $726 million, or about 12 percent, of total company sales. That decline prompted the company in July to sell the office products division. And in April, it sold and began leasing back its three-story Avery Corporate Center headquarters, which was built for the company in 1981. Foster City commercial and real estate investment firm Legacy Partners bought the 100,000-square-foot building at 150 N. Orange Grove Blvd. for $19.8 million. The sale included a three-building, 12-unit apartment complex at 120 N. Orange Grove Blvd. that happened to be on the parcel, Frail said. Early next year, all corporate employees will move into 54,488 square-feet on two floors at 207 Goode Ave. in Glendale. “We weighed renovation and leasing new space. But the best move for us was to move to a newer space,” Frail said. The streamlining has downsized its corporate employee count from about 350 to 250, comprising about 150 in Pasadena and 100 in Brea. The sale of the two divisions also reduced the company’s total workforce from about 30,000 to 25,000 people. “The business is on track to meet its cost reduction and productivity targets for the year,” said Dean Scarborough, chief executive of Avery Dennison, it its second quarter earnings call. In its report for the quarter ended June 29, Avery Dennison reported net income of $68.8 million (68 cents a share), about 7 percent higher from the same period last year. Its net sales grew about 4 percent to $1.55 billion. “The financials are strong and the business is healthy,” said Wenning, the analyst. “They’re transitioning and adapting to the market as they should.” And the stock price reflects investors’ optimism. The stock has climbed more than 30 percent this year and sits within a dollar of its 52-week high, closing at $46.15 on Aug. 13. The company’s future is heavily tied to its pressure-sensitive materials segment, which accounted for almost 70 percent of sales in the second quarter. Pressure-sensitive labels can be found on anything from beer and wine bottles to shampoo. The company has more than a 50 percent market share in the pressure-sensitive business in the U.S., by Wenning’s estimates, and nearly 50 percent worldwide. Still, Morningstar rates the company only as “neutral” and Wenning said the best investment strategy is to sit and wait to see how the smaller footprint strategy pays off. “One of the reasons I don’t have a stronger outlook on Avery Dennison is that I’m not sure how much margins can grow,” Wenning said. “It’s a really low-margin business.” The new headquarters building on Goode Avenue had sat vacant for years after its 2007 construction by MPG Office Trust Inc., the downtown Los Angeles real estate developer that is winding down its business after a disastrous series of investments at the height of the real estate boom. The property is now owned by Lincoln Property Co., a Los Angeles real estate investment firm that bought it in 2010. The landlord scored a coup when Whole Foods Market’s moved its Southern Pacific regional headquarters from Sherman Oaks into the 144,000 square-foot tower about 18 months ago. Avery Dennison signed a seven-year lease that gets its exterior signage on the south side of the building, visible to drivers on the Ventura (134) Freeway. Financial details of the deal were not disclosed, but the building is marketed at about $2.50 a square foot, according to CoStar Group Inc. R. Todd Doney, vice chairman at the L.A. office of CBRE Group Inc., who represented Avery Dennison, would only say the company negotiated a rate that is a “little better.” Avery Dennison’s move should have the secondary effect of boosting Glendale’s long-suffering office market, which had 21.6 percent vacancy rate in the second quarter, higher than Burbank’s 20.7 percent and Pasadena’s 14.7 percent. Adding a major corporation to the tenant list is always good news, but the Glendale office market is still far from healthy, said William R. Boyd Sr., senior managing director at the Glendale office of Charles Dunn Co. “This deal alone will double the absorption experienced in the second quarter, but there’s a long way to go still,” he said. “At this pace, we have 14 years to go till we get to a healthy 10 percent vacancy.”

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