Introduction to On (ONON)

Let me first just begin by saying this company has the worst name I have ever heard of (shout out to Broadway Dan). I mean seriously, who names their business On? I suppose the logo is pretty cool but I personally can’t stand the name.

Anyways, with that out of the way, I think this is a relatively promising business that I have not seen shared on the board yet. Disclaimer - this is not a SaaS business so I expect it may not be deemed worthy but their growth warrants discussion.

On is a Switzerland based sportswear brand that is primarily focused on running shoes. Their goal is to become the top running footwear maker and they are off to a strong start.

I first learned about this company when one of my friends starting wearing a pair of their shoes. I had never seen that type of shoe before so I asked him about it. He went on to rave about how light and comfortable they were. Several months later, I noticed both my sister and mom wearing On shoes. They also shared the same excitement for the shoes.

I had to see what all the rage was about and purchased a pair for myself and my wife. I can certainly say they are easily one of the lightest and comfiest shoes I have ever owned. I am not a runner by any means. I use them as fitness shoes to wear throughout the day. After about a year of nearly daily wear, they are near the end of their life and I plan to replace them in the near future.

I now also own a pair of their sneakers, as do several friends and family members. Side note, their sneakers are called The Roger since they inked a deal with Roger Federer. He is an ambassador and also invested in On. I am seeing the brand more often as it is becoming a hot item in my circles. But enough of the anecdotes, let’s talk about the business.

ONON

On went public via an IPO in September 2021. The stock price took off shortly after the IPO as did many stocks a year ago. It traded up to $40 a share days after hitting the market resulting in a market cap of roughly $11B and a TTM EV/S of nearly 20.

Since then, the stock has decreased steadily like just about everything else. Today, it trades at $18 a share, giving On a market cap of only $5.5B and a TTM EV/S of just over 5.

The business is seeing fantastic revenue growth. They have been growing steadily north of 60% and forecasted to bring in over $1.1B in revenue this year. They sell through both wholesalers and D2C (direct to consumer). Sales are about 60-40% with the majority via wholesale.

On offers three product lines - shoes, apparel and accessories. Shoes make up ~95% of all sales, while the majority of the rest comes from apparel. Ultimately, I believe their apparel line could be successful but as of today, this story is pretty much singlehandedly riding on the success of their shoes.

Geographically, On derives the majority of its revenue from North America and Europe. North America makes up roughly 60% while Europe is 30% of sales. Asia-Pacific & ROW is responsible for the remaining 10% of sales.

It is important to note these splits will continue to lean more heavily towards North America. In their most recent quarter, North America sales increased 103% to $182M while Europe sales only increased by 18%. As a result, I believe there is a good chance On could see their revenue growth accelerate as North America becomes an even greater percent of the overall sales.

Here are some of the more important metrics (this is all the data I could find). Please note, all reported figures are in Swiss Franc (CHF). The good news is the current conversation rate is 1 Franc to 1.01 US Dollar so you can think of the below numbers as USD.

Revenue

Q1 Q2 Q3 Q4 FY
Revenue
2020 $130.1 $124.3 $425.3
2021 $140.4 $175.1 $218.0 $191.1 $724.6
2022 $235.7 $291.7
Q1 Q2 Q3 Q4
QoQ Change %
2021 13% 25% 25% -12%
2022 23% 24%
Q1 Q2 Q3 Q4 FY
YoY Change %
2021 68% 54% 70%
2022 68% 67%

Gross Margin

Q1 Q2 Q3 Q4 FY
Gross Margin
2020 54% 52% 54%
2021 58% 61% 60% 59% 59%
2022 52% 55%

Adj. EBTIDA

Q1 Q2 Q3 Q4 FY
Adj. EBITDA
2020 $22.6 $11.2 $49.8
2021 $19.9 $27.4 $37.9 $11.2 $96.4
2022 $15.7 $31.4
Q1 Q2 Q3 Q4 FY
Adj. EBITDA Margins
2020 17.4% 9.0% 11.7%
2021 14.2% 15.6% 17.4% 5.9% 13.3%
2022 6.7% 10.8%

The revenue growth has remained very consistent which I find quite impressive given the state of the economy, the pandemic, the situation in Europe, and the numerous supply chain challenges to boot. I think it speaks to the strong demand for the brand.

The other thing I want to highlight is the way On has been increasing their guidance. So far, they have only provide a full year guidance but they have increased it each quarter. They first guided to $960M in Q3 2021, their first quarter as public company. I don’t expect them to provide annual guidance in every Q3, I figure this was a one time thing since it was their first public report. Since then, they have increased this to $990, $1,040 and $1,100.

Sure, On likely gave themselves a lot of wiggle room with their initial guidance in Q3 last year, but I am still impressed with the way they have continually raised this each quarter since. That’s more than Datadog can say who left theirs untouched last quarter! Or Snowflake who increased it by a measly $3M two quarters ago! Or Cloudflare, who increased theirs by $13M to $970M last quarter! My point is, we have SaaS businesses with a high level of visibility thanks to their reoccurring revenue and they are not increasing guidance the way this shoe-maker is, even in this economy! Once again, I believe this exemplifies how strong the demand is for their shoes.

With regards to profitability, On has seen their gross margins deteriorate over the last few quarters. This is primarily due to supply chain related issues. They have been air freighting product to get it to customers in order to meet the strong demand. Per management, they anticipate gross margins to improve in the 2H of the year since they will not need to rely on air freight so often with the improved supply chain/ocean freight.

The same can be said for the adjusted EBITDA figures. Additionally, On has forecasted a goal of an adjusted EBITDA margin of 13.2% for the full year. This means On’s adjusted EBITDA will improve greatly over the remaining two quarters of the year in order for them to reach their goal.

To Conclude

I have no position yet in On. To be honest, it is difficult for me to make room in my portfolio for a business like this given how impressive the software business model has proven to be. Regardless, I think On deserves a closer look, even if they are just selling shoes. What excites me so much about On is the $5.5B market cap. It is difficult to find strong growth businesses at these kind of valuations. Aside from SentinelOne, no other company in my portfolio has a market cap below $14B, and that is after most of them have been cut in half!

On is showing very promising growth, strong guidance, and improving profitability. Add to the fact they are going to report more than $1B in revenue this year with a $5.5B valuation and it makes for a strong combination. My big concern is, how many shoes can they sell? Nike and Lululemon have both been very successful in the sportswear market so it can be done, but I wonder if it is worth chasing when companies like Bill, Snowflake and Cloudflare are available and on sale.

Anyways, as I said earlier, it has been a real challenge to find promising growth companies at a sub $10B valuation recently and this could just be one of them. Thoughts?

-Rex

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Hi Rex, the problem with clothing or sneaker fads is that they do very well until they stop doing very well.

There is a limited number of stores in the world that you can put in profitably, or that will carry your line. You also have gross margins at about 50% or 60% (at most). There are always supply channel issues, there is zero recurring revenue guaranteed. You, personally, bought one pair a year ago, and you may buy one more pair this year, BUT you haven’t gotten around to it. That’s the way it is. (I’ve been in Skechers and Lululemon in the past.) I won’t wear any other shoes but Skechers, but I wouldn’t buy their stock again, no way.
Saul

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Hi Rex,
Nice write up. I have to agree with Saul. Everyone is looking for the next great running shoe, When I go into the store they are always trying to sell me on the next great, last year it was Hoka. I haven’t heard of On yet but I am sure I will the next time I go in. I am a New Balance fan and can’t see myself changing.

Andy

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I have been a distance runner most of my life. I’m over 60 now, and I’ve seen lots of quirky shoe brands come and go, and that’s where I’m categorizing On Running. Their claim to fame is a design that essentially puts multiple channels (i.e. holes) transversely through the midsole of the shoe. They say the holes reduce weight and increase give, supposedly making the shoe lighter and the ride more cushioned.

I watch a few YouTube channels that review running shoes (Seth James DeMoor and EddBud come immediately to mind), and reviews for this brand are decidedly mixed, with no resounding endorsements that I have yet to see.

If you follow major running races, there is usually someone who posts which shoes the high-placed runners (male and female) were wearing. I have seen On once or twice, but very rarely. Usually it’s Nike, Adidas, Saucony, Asics, and New Balance that are on those lists, top to bottom. Runners winning races while wearing Nike shoes make lots of other runners want to buy Nike shoes…it’s great for marketing. That’s not happening much for On.

The five companies I list above are elephants in the room, and unless On Running can effectively market against them, they will not succeed. The race will be run on a steep uphill course, and On will be hard pressed to break through to any degree that would make this stock worthy of being a Saul’s Pick ™.

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