On to launch tennis apparel line

Investment Analysis Clubs Saul’s Investing Discussions
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-This is pretty exciting. A big part of the On thesis is that they eventually will be able to generate significant revenue from Apparel. This is their first tennis specific apparel.

"On made waves in the tennis world almost exactly a year ago, when it announced world No. 1 Swiatek and rising American star Shelton had signed head-to-toe deals with the brand—joining a team that boasts 20-time Grand Slam champion Roger Federer as an investor.

But while fans of both players haven’t been able to buy the outfits worn by Swiatek, Shelton or fellow ambassador Joao Fonseca, the players themselves have regularly talked about [giving the brand their feedback] during [various points in the partnership].

The result will be a comprehensive racquet-sports focused collection that goes from on-court to off-court with ease, comprising 17 pieces across apparel and footwear. From Shelton’s pink-accented tank top to Swiatek’s signature two-piece match outfits, this collection will emphasize “sleek, modern designs that make a statement” and are designed to be snug yet flexible for ease of movement around the court."

-On Also just dropped the new Roger Federer shoe: “designed for today’s “casual but competitive tennis player.” Think of it as the perfect middle ground between its pinnacle performance shoe THE ROGER Pro—worn by players like Shelton in professional competition—and the heritage off-court style from other “Roger” models.”

Full Article:

First look: On to launch tennis apparel line in collaboration with Iga Swiatek and Ben Shelton

Long ONON, 3.8% position

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Down 15% after ER today. “Surprise loss” is the headline. Mgmt reaffirmed 30% YoY growth for the next 3 years, though.

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Yes, the market was hoping for more. Lots of headwinds from strong Swiss Franc. I don’t think the thesis is broken, however.

  • On achieves strong full year results in 2023, significantly exceeding the expectations set at the beginning of the year, reaching net sales of CHF 1,792.1 million. This reflects a reported growth rate of 46.6% year-over-year and over 55% on a constant currency basis. On further reports a gross profit margin of 59.6%, net income of CHF 79.6 million and an adjusted EBITDA margin of 15.5%, showcasing On’s ongoing commitment to combine strong growth with continuously increasing profitability.

  • On reports fourth quarter net sales of CHF 447.1 million, growing by 21.9% year-over-year on a reported basis and over 31% on a constant currency basis. The strength and increasing awareness of the On brand drove record-high traffic to On’s website and retail stores around the globe, resulting in a 46.2% DTC share, the highest in On’s history.

  • Fueled by the elevated DTC share and high share of full-price sales in both channels, On’s gross profit margin in Q4 2023 reached 60.4%, above its stated mid-term ambition to exceed 60%.

Outlook:
For the full year 2024, On expects to achieve a constant currency net sales growth rate of at least 30%. At current spot rates, the corresponding total expected reported net sales for 2024 is equivalent to at least CHF 2.25 billion. On further expects to achieve a gross profit margin of approximately 60% and an adjusted EBITDA margin in the range of 16.0 - 16.5% for the full year 2024.

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For me, the question is whether the growth is sustainable for years. They’re following the standard playbook of moving beyond shoes into fashion, but I think success there depends on brand awareness and prestige. And that’s not guaranteed, nor does On have any specific advantage I can see.

My wife likes her On shoes. I like my Hokas. Neither of us buy clothes from those brands. The shoes are comfortable and not too ugly.

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One thing I noticed is that the fourth quarter is always negative OM’s yet this quarter it was positive. They had negative earnings mostly because of FX. I don’t think it was a terrible quarter but I am not happy with them guiding into the Teens next quarter (YOY). It seems Revenue growth is slowing pretty fast.

Andy

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They guided 26% for next quarter and at least 30% for the full year 2024 on a constant currency basis. So, this is right in line with their long term growth plans.

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I have them guiding for 495,000,000 CHF at the top next quarter and in Q123 they made 420,200,000 CHF. So growth would be17.8 percent. Can you show me where you are getting 26 percent?

Andy

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I got it from the conference call transcript.

“For Q1, we are seeing strong demand, but we are also compounding against a strong wholesale performance in Q1 '23, driven by the initial expansion into some of the larger key accounts. As a result, for Q1 specifically, we expect a significantly increased DTC share and to achieve constant currency net sales growth of 26%, translating into reported Swiss Francs net sales of CHF495 million.”

The delta might have to do with FX translation issues, haven’t dug into that.
Constant currency vs CHF.

Full Transcript:

On Holding AG (ONON) Q4 2023 Earnings Call Transcript | Seeking Alpha

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That is exactly it Jeff but the math isn’t clear to me. I can understand how adjusted profits are made because the companies that use it spell it out very specifically. Onon is throwing this number out and it has to do with FX currency but they do not specifically spell it out on how they calculate it. “Oh we are going to grow at 26 percent next quarter, I know we state 17.8 percent but it is going to be 10 percent more, how do we know? Well the currency rate is already going up so that will make up for it.” That is what they basically said on the conference call. Maybe they are correct but it seems a bridge to far to me. I would much rather that they just give what they assume their growth will be rather than try to figure out what the exchange rate will be.

That being said I think it would be much better to follow this company on a yearly basis rather than a quarter to quarter basis. That is probably why Onon usually only guides to the year. I had 9 percent of my portfolio in this company but decided to take it down to 2 percent now because it seems much more risky now. A lot of talk on currency risk on the conference call.

Andy

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I have a 5% position in ON and this was my first conference call. The FX issue is definitely something to keep in mind with them as a short-term risk. Hopefully it will be more of a tailwind for 2024 than a headwind.

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Here is a Motley Fool Guy who discusses the FX issues for ONON.

The Truth Behind On Holding’s Earnings Miss | The Motley Fool

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Hi Jeff,

Here is my spreadsheet. If you look at it you can tell where I track the currency issue between Franc and USD. This company is more of a gamble because of that. Although everyone can say “See they grew at 30 percent on a constant currency basis” They didn’t grow at 30 percent in the money they reported in. Now they want to say the Swiss franc will be lower next quarter so the growth will go up. So I guess if I lived in Switzerland I could take all my United States business’s and say " Hey next quarter their growth will go up if you base it on the Swiss Franc." That is why this is a trickier investment and everyone has to gamble on the movement of currencies. That is just another wrinkle in this investment and one everyone needs to realize. So in my mind this company deserves a lower P/S ratio just because of that risk. Anyway here is my spreadsheet. Notice the USD/Franc exchanges and the OM.

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Andy

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Completely don’t agree with that Andy. I appreciate that most on this board are American citizens based in and invested in the US but…

Firstly if you wanted to report in a currency you couldn’t pick a more stable asset backed currency in the world with stronger fundamentals than this Swiss Franc.

https://lfa.ch/investing/swiss-francs-investing-in-one-of-the-worlds-most-stable-currencies/#:~:text=WHY%20INVESTORS%20AROUND%20THE%20GLOBE,in%20their%20global%20investment%20portfolios.

Whether it be currency stability rates, low inflation rates, budget surpluses or Total National debt / GDP (US is at 99% Switzerland is at 21%), if it wasn’t for the fact that the US is the word’s reserve currency and the de facto Petro Dollar, then the US Dollar would be a highly volatile and relatively declining force. We will see what happens to the USD probably in our lifetime after de-carbonisation.

Secondly, every multinational corporation on earth faces currency risks in transacting overseas. Most choose not to report it which gives you a transparency issue or on occasions do report it but only if it serves to illustrate a desperate narrative in a more positive light. Even worse many companies have treasury hedging programmes that in itself represents risk when out of the ordinary currency movements happen.

Thirdly - the trading operations of On represent revenue generating distribution and sales in mature established currency (across Europe and North America), it’s not like they are a trading company operating predominantly in Africa or other unstable currency jurisdictions.

I get as a US investor your return on investment is calculated in USD, however unless you want to restrict yourself to US domestic operating companies only (of which there are very few), then offering the transparency of constant currency reporting is actually hugely beneficial to understanding the underlying business performance.

I am not familiar with On and I have no interest in the forecast/guesswork involved by the TMF guy who is making predictions about which way next quarter’s exchange rates would go - that was his perspective NOT On the company, however…

I for one wouldn’t be penalising ON or other similar companies that have no more currency risk than any other multinational company but offer far greater transparency than most!

If you want to penalise then why not simply only invest in US companies and ignore all non US corporations but know that you are still dealing with currency risk exposure but without the reporting transparency, unless you go the whole hog and only invest in US companies that only do business inside US.

Ant

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Ant I think you missed my point altogether. I think everything you said about the Swiss Franc is absolutely true and I think investing in companies there is one of the safer options. With that being said, I never said not to invest in it but that it didn’t deserve a bigger part of my portfolio. If you were invested in it, would you have 10 percent of your portfolio in it or 3 percent like I do?

Andy

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Stopped by the local outdoor store today, which has always had really knowledgable shoe people and are really good at fitting.

So, my wife and I asked about On, which they sell and which my wife happened to be wearing at the time. He asked her about how she liked them, and she said she likes them, but they can be a bit “hard” or “stiff.” He told us that’s because of the unique construction that is On’s claim to fame - the hard spine down the middle of the shoe, recessed into the bottom (you can see it if you look at the sole). It’s a hard plastic, designed to give rigidity, but to also let the sides of the shoe adsorb impact and flex as you move side to side.

He also mentioned that another of their successes was in shoes for triathlon races, which don’t have the hard spine, and have elastic laces as well as a soft upper. The idea is that they’re quick and easy to slip on when it’s time to run (time to put on matters), and they’re light to not drag you down. Without the spine they’re a bit more squishy, but that’s OK for racing. Customers complained that the shoes didn’t hold up, but he says for racing durability isn’t important - they just get new shoes each season, or multiple times a season. So, he always asks what people intend to do in their shoes to steer them appropriately.

He also said what’s popular now is The Roger line - Roger Federer. They’re “clean” looking leather or mesh upper shoes that mostly aren’t good for tennis (there are a few models that are good for tennis, though), but look good and are comfortable. He thinks the shoes are still growing in popularity and they’re still a “hot thing” right now.

Anyway, FWIW, that is one salesman’s take on On. He didn’t have anything to say about apparel.

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I think what some people are missing about ON running is that they have a cult-like following.

What convinced me to purchase the stock after a lot of other research was to read through thousands of TikTok comments. This is one of Chris Camillo’s go to methods for social arb investing.

After reading through thousands of comments on TikTok, I saw that the large majority of the comments were very positive and many of them said things like “most comfortable shoes ever” or “couldn’t get through my 12-shift without them”, etc.

-Long ONON (5.5% position)

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