Description

On Holding (ONON) is a short because:

·         This is a clear ‘fad’ product. The fad appears to be slowing.

·         Estimates look too high even if trends do not slow.

·         Even if the company achieves their aggressive out-year targets, shares appear fairly valued.

Business Overview

ONON sells athletic footwear under the “On” or “On Cloud” brand. I assume you’ve seen people wearing these (or maybe even own a pair yourself) - they’re running shoes with a distinctive sole consisting of hard plastic ridges the company calls “CloudTec”.

Approximately 66+% of sales are wholesale and the rest is DTC. North America is the largest market accounting for just about 61% of sales with Europe the next largest at 30%. About 60% of manufacturing is done in Vietnam. Nearly all sales are from running shoes with only 5% coming from apparel and accessories. Prices range from $130 - $270 with most models around $150-$190 which puts ONON at the highest end of their market.

ONON is a Fab

The most important question for this stock is; “Is ONON a fashion driven fab or an emerging luxury athletic brand?” I believe the clear answer is “fad” for the following reasons:

ONON has not been able to grow beyond the core product – The company has failed to grow beyond its core running shoe into other products or even other types of athletic shoes. On’s percentage of non-footwear sales has actually fallen slightly over the last couple of years. If this were a true luxury brand the company would be able to expand the product portfolio.

Sales are driven by a fashion gimmick, not performance – While the company markets their shoes as performance athletic products with proprietary technology, ONON is not a favorite among serious runners. Looking at running publications and message bords you don’t see much about ONON and On’s did not win any of the 15 categories in the recent Runner’s World awards.  

https://www.runnersworld.com/gear/a19663621/best-running-shoes/

In reality, ONON is more of a fashion brand than a performance product. This explains why the company has done so well in higher-end fashion retailers such as Nordstrom. They’re comfortable shoes with a novel and distinctive look. It’s a great way to let everyone know that you spent $200, but without looking like an ass because the shoes are supposed to be about performance and technology, not fashion.

Odds strongly favor ‘fad’ – The vast majority of single product fashion companies fail. Only a small minority are able to grow beyond the initial hit product to become a lasting, valuable brand. While we can all point to certain newly-launched athletic wear companies that have become highly successful (LULU, UA) its important to be cognizant of survivorship bias and keep in mind that most fashion companies are not good businesses.

The Fab is Slowing

ONON’s growth has been impressive; sales grew 69% in 2022 and are expected to grow 47% this year. However, growth is now decelerating. The Wholesale segment has been aided by substantial growth into new retailer doors. Door growth slowed dramatically this year and management does not expect significant door growth going forward. Slowing door growth has contributed to decelerating growth overall. As shown in Figure 1 below, sequential growth has been lower year-over-year for year for the last two quarters for both wholesale revenue and total sales. Company guidance suggests lower sequential growth vs 2022 will continue into the current quarter.

Figure 1: Sales Growth is Decelerating

Estimates are Too High

Despite decelerating growth and the lack of tailwind from increased door count, estimates assume a stable levels of $$ growth for the next two years. Generally, once trends in a fashion-driven business crack they do not reaccelerate and as such these estimates appear too high.

Figure 2: Estimates Look Too High

Stock is not Cheap in a Best Case

At the analyst day in October, ONON put out 2026 targets calling for sales to double vs. 2023 and EBITDA margins to expand to 18%. This appears aggressive given the amount of growth ONON has recently experienced and that NKE’s highest ever margin was 16%.

Figure 3: ONON Targets from Recent Analyst Day

Even if ONON does hit these targets, the stock does not appear overly cheap based on where peers trade (note that the peer multiples below do not adjust for IFRS impacts and as such companies using IFRS accounting like ONON should trade at lower multiples of EBITDA).

Figure 4: ONON Comps

Catalyst

Slowing growth, multiple compression