Let’s talk about everybody’s favorite shoe brand right now, On

On Holding (on to gains) $ONON

I fear this is a Nike hate post almost, On> Nike, actually, Hoka, Asics, New Balance, Jesus sandals, big red boots > Nike in this current state

In the past year, I’ve probably seen this shoe a billion times and it was one of those investments where you barely even check the numbers before you take a position. That was back in March at $32, at the time of this writing On is trading at $40 with a little drawdown from the early June highs of $43. The stock is up almost 50% YTD and the market is expecting some serious growth from On as they are trading at a 44x forward p/e, this p/e falls almost hand in hand with Adidas (43.8x) but well above other industry peers Nike, Puma, Deckers, Under Amour, and Asics.

A quick overview of their financial statements shows that they hold a major cash position of $648 million and a debt position of $302 million. This large amount of cash is enabling them to grow their B2C presence by opening new stores that will add to their amount of over 50 stores globally. They even opened a store in Paris, just in time for the summer Olympics. This is shown by net PPE jumping from $365 million in q4 2023, to $453 million in q1 2024. I do think a risk is opening too many stores at once and having their inventory sit would kill their margins, which have gone from 58% in q1 2023 to 59% in q1 2024.

This past quarter, On reported earnings of 36 cents per share, significantly exceeding the 17 cents per share reported last year and surpassing FactSet analysts' expectations of 15 cents per share. Revenue increased by nearly 20% to a record $561 million, beating analyst forecasts of $548 million, though sales growth has slowed for the fifth consecutive quarter. Direct-to-consumer (DTC) sales grew by 48.7% year-over-year on a constant currency basis, now accounting for 37.5% of On's total net sales. The fundamental bet on the company is that it can reach its margins goal of 60% this year, as stated in its most recent earnings call.

What I think differentiates On is they know how to appeal to multiple crowds. They are dominating the running game and are looking to make even more noise with athlete, Hellen Obiri, running with their new spray-on shoe in the Olympics. I see the Olympics being big for On with this groundbreaking technology being debuted, management states, “During the Olympics, our two stores will serve as hubs for the running community to connect and move. Many of our athletes have already qualified or been nominated by their respective countries. We expect over two dozen On athletes to hit the starting lines across track, triathlon, tennis, and of course, the marathon. And we are ready to support them with our fastest, most innovative, and most sustainable performance products yet.”

Taking a look at their tennis segment, their Roger franchise has grown 45% in the past quarter and it looks like this is just the beginning of this multi-decade partnership. On is also represented by tennis mens #14, Ben Shelton, and women’s #1, Iga Świątek.

Oh yeah, they recently also signed Zendaya to a multiyear partnership, no biggie. I think this shows their commitment to standing out in the fashion landscape too as Zendaya isn’t an athlete but still loves the feel and look of the shoe, she states, “It’s no secret that I’ve been a big fan of On for a long time. I’m always wearing them on set, or when I’m traveling, rehearsing, or running around with my dog. So it’s a full-circle moment to make this partnership official.” I definitely think we will be seeing more of these types of deals from On continue as their push into the fashion scene continues.

I have a couple more reasons why On is such a great company but I think only one really matters.

• People are starting to shift away from legacy brands, and On is capitalizing on that

On is a company that is in the beginning stages of its expansion in an athletic shoe and apparel market that the same brands have tirelessly dominated, their biggest market is running and they are quickly expanding into Tennis as they are taking massive advantage of their partnership with Roger Federer. I think On stands out with its financial efficiency and product sustainability. Their shoes are super comfortable and are made with their patented Cloudtec technology. They hold a good amount of pricing power currently as they rarely discount their items and have seen shoe sales specifically grow by 21% since 2023. Obviously the big dawg in the industry is Nike, sporting a $110 Billion market cap, Nike is a company that has been at the top of the game for decades and has signed top athletes such as Michael Jordan, Tiger Woods, Ronaldo, and King James.

But it’s been pretty quiet the past couple of years as the Donahoe era has been a showcase of mere financial engineering rather than actual performance. It’s just been a lack of innovation over at Nike, with a failed launch of Devin Booker’s signature shoe the brand has failed to capitalize on major athlete signings and the performance category of sneakers.

Nike missed recent revenue estimates by only bringing in $12.61 billion versus estimates of $12.83 billion. They also lowered their guidance due to macro uncertainty in China.

Compare this with other players such as $DECK (Hoka) or $ONON, we are seeing major growth as new technology arises and these niche brands present a certain “cool” factor about them that Nike is shedding year by year.

Consumers just don’t want to buy Nikes as much as they used to, Adidas ($ADDYY) increased their earnings guidance for the rest of the year after surprising earnings results this past quarter. They state “current momentum” as a reason for this. This might be biased but I think mini Jordan (Anthony Edwards), had something to do with this. wink wink. This move in Adidas’s earnings is also attributed to them bringing in a new CEO, Bjorn Gulden, on board. Gulden has shaken things up at the company even after the loss of the popular Yeezy line. Lastly, the Samba is everywhere. The $99 shoe works with almost every outfit and has seriously resonated with the Gen Z crowd.

I can’t remember the last time anyone was excited by any new shoe technology that Nike is gonna release. Their management team is failing them and it’s time for them to hit the door. On has runners super excited for their new shoe- that doesn’t even have laces. Those new trendy run clubs or irl dating apps are gonna love this one in my opinion, which will lead to more retail sales.

Also, On hosts its own run clubs and running events, these events foster a sense of community between the brand which I think will only boost them further.

Immediately after seeing that video earlier this week I added a couple shares (i am poor ☹️ ). I have a price target range of $45 to $51, based on a pretty loose DCF. I expect revenue of $2.64 billion this year representing a 32% growth rate YoY. This comes above consensus estimates of $2.5 billion (base case), and right in line with bull case estimates of $2.65 billion. One thing I did notice though was On historically has experienced some higher seasonality in q4 but consensus estimates predict a lower q4 than usual, to put in perspective here are their quarterly numbers from the past two years:

2022 Revenue

Q1: $255.1

Q2: $305.6

Q3: $332.4

Q4: $396.7

2023 Revenue

Q1: $459.3

Q2: $496.4

Q3: $524.9

Q4: $531.6

This is what my Koyfin reads:

I might be missing something but the pattern shows they usually perform better in Q4, analysts might have their revenue stalling for a bit as the growth is obviously unsustainable but I still think q4 outperformance is gonna happen. Especially in the views of a better economy. In the latest retail sales print, online sales rose 1.9% and clothing and accessories stores rose 0.6%.

A quote from footlocker’s earnings states, “And I think we're reiterating our return to growth at holiday with our Nike partners,” I don’t see why On wouldn’t gain exposure to this same growth, especially if they’re in the same store…

On an ending note I don’t see anyone catching up to their innovative spirit for a while. They also have such a cash abundance that it’s hard for them to stay complacent.