On the Run: A Growth Stock to Buy (NYSE:ONON)

Following a transition period for Nike, at the end of December 2023, our team decided to upgrade to On Holding AG (NYSE: ONON) to a buy rating. This optimistic view was primarily influenced by that of the company vital product innovation, favorable demand trends and favorable results. On Holding AG was also confident in its ambitions for fiscal 2026 targets, with plans for higher sales, new store openings and a key advantage on operating leverage to support its earnings growth story. Since then, the company’s share price has appreciated by almost 65% (Fig 1), making On Holding one of the best investment ideas of 2024.

Fig 1

Q2 results and our positive take

In short, the company reported solid Q2 sales and adjusted EBITDA. In numbers, net sales increased by 27.8% to CHF 567.7 million, with an outperformance of 140 basis points compared to the Street’s growth forecast. Negative currency developments were a 160 basis point headwind in the quarter. Excluding that, ON’s wholesale and DTC channels grew 28.8% and 30.4%, respectively.

Looking at the geographic footprint, On APAC sales increased by 84.7%. That said, EME and the Americas (excluding currency) rose 22.2% and 25.8%. By category, On reported solid sales in footwear, but apparel was up 66.6%. Breaking down to P&L, gross margin increased to 59.9% and OpEx as a percentage of sales reached 48.6%, down five basis points from last year. For this reason, adj. EBITDA increased to CHF 90.8 million with a margin of 16%. This was also above consensus estimates. On a positive note, the stock is down 8% on a year-over-year basis.

In addition to a strong results print, the On strategy is progressing well. Indeed, we see several factors influencing our equity support story:

1. First, the company continues to innovate. There is a new shoe support innovation. For example, the company launched LightSpray™ technology. This new product is ESG friendly, but more importantly offers high performance in racing;
2. The company is moving into new sports such as tennis, hiking and outdoors and training and gym;
3. In addition to new sports, the company is successfully expanding into new product categories, mainly apparel and accessories. This strengthens the company’s focus on its EU business. The company successfully used the Olympics to build brand momentum among local EU consumers. On this occasion, On opened its store in Paris, which is its largest retail location. These initiatives are likely to increase brand loyalty and awareness, increasing its total addressable market;
4. Finally, there is favorable expansion into new geographies, particularly APAC. The turnover in Asia is less than 10% of the company’s total sales (Fig 2), so there is room for growth.

Source: On Holding Q2 press release – Fig 2

While Nike highlighted consumer weakness and macroeconomic pressures, here at the lab, we believe the global athletic apparel industry could achieve single-digit growth for a multi-year period. The latest sportswear market report backs this up as well. Prior to the COVID-19 outbreak, average industry growth was in the single digits; however, we believe the pandemic has amplified consumer trends toward health, wellness, and casual wear. Because of this, we believe On is likely to increase its market share penetration.

By category, the On footwear division has already demonstrated that it can address a large market share. Here at the lab, we think it’s rare to see a brand with global characteristics. We are now pricing a multi-sport brand and category similar to Puma, Adidas and Nike. On Holding, global recognition also remains low; this could indicate room for growth as customers discover the new brand.

Changes and assessment of earnings

Following the Q2 results, we expect Q3 sales to increase by 28% to CHF 620 million. For fiscal year 2024, our total turnover reached CHF 2.26 billion. Based on the insights provided, the company guides for “at least“30% sales growth excluding FX in 2024. Our reported sales were down due to FX sales; we could expect 350 basis points of adverse impact at current spot rates.

Additionally, given higher freight cost expectations, we are lowering our gross margin estimate by 20 basis points. On a positive note, we forecast a gross margin benefit from higher DTC, and coming down to the P&L assumption, we forecast higher marketing spend due to the Paris Olympics.

Combining these negative effects, our net earnings projection falls 7% to CHF 260 million, with EPS of CHF 0.8. That said, our price target is derived from our long-term assumption. In detail, we believe the company could capture 2% of the sports market with a high EBIT margin for teenagers. This is due to its premium price and DTC business. Therefore, we believe that higher market penetration will increase On’s margins in the long term.

Our team forecasts sales growth of 25% over the next five years, with a positive and 45% appreciation in the company’s EPS. This assumes an achievable EBIT margin of 16.5% in 2028. Given this and the visibility of the company (Fig 3), in 2026 based on a target of 40x P/E and EPS of 1.4 CHF, we raised our price target to $55 per share. . This weighted price assumes an FX of $1.10/CHF.

Source: On Holding Investor Day presentation – Fig 3

risks

In our view, downside risks include disruptions in global trade, which could affect the company’s supply chain. In addition, the Company’s products are primarily manufactured by third-party partners. Any disruption to On’s logistics operation would pose a risk to the stock. Compared to Nike, On Holding has a direct-to-consumer business. Therefore, On Holding’s products are not primarily sold through third-party retailers, which could affect end-market sales. This supports our price target. The company still shares many risks within the sector and we report 1) changes in tariffs, which can have a negative impact on earnings and operations, 2) currency fluctuations, 3) inability to maintain a rapid pace of innovation of new products in the market, 4 ) slowing growth in China and 5) increasing competition. In addition, sporting goods are sensitive to fashion risk and economic cycles.

Conclusion

Our team continues to believe in On’s focus on innovation, direct-to-consumer and premium pricing. The company is one of the fastest-growing athletic apparel brands in the world, and after strong Q2 results, our Buy rating target is confirmed.