This Nike Rival Just Reported Record Sales, But is the Stock a Buy?

Scorched by high inflation in the U.S. and major struggles in its key market of China, shares of athletic apparel industry bellwether Nike (NKE) have been free-falling, with the stock among the worst performers on the Dow Jones Industrial Average ($DOWI) this year. With the stock down 29% in 2024, a legacy CEO has been called back in to try and turn around NKE as the stock bleeds market share to more nimble rivals.

Chief among those rivals is a certain celebrity-backed Swiss-based lifestyle brand, which just hiked its guidance for revenue and profits for the year. Moreover, analysts are bullish about the sneaker stock, hinting at further upside from current levels.

About On Holding

Based in Zurich, Switzerland, On Holding (ONON), commonly known as On, is a company specializing in innovative sports footwear, apparel, and accessories. Known for its distinctive "CloudTec" cushioning technology, the brand has gained significant traction globally, particularly among runners and active lifestyle enthusiasts. The company's market cap currently stands at $33.5 billion.

ONON has had a stellar 2024, with the stock soaring by 92.5% YTD - clearly outperforming rivals like Nike, Skechers (SKX), and Deckers Outdoor (DECK).

Raised Guidance

The recent uptick in the company's stock was primarily due to ONON's increased revenue and profit margin guidance for the year.

Fueled by the company's robust performance in the first nine months of the year, and heightened brand visibility from exposure at the Paris Olympics, On now anticipates sales growth of at least 32% and an improved profit margin of 60.5%. This marks an upgrade from its prior guidance of 30% sales growth and a profit margin of approximately 60.0%.

On reported record quarterly sales at CHF 635.8 million, indicating yearly growth of 32.3%, with both direct-to-consumer (DTC) and wholesales channels reporting growth - up 49.8% and 23.2% to CHF 246.7 million and CHF 389.1 million, respectively.

However, earnings per share dropped to CHF 0.09 from CHF 0.18 after a notable rise in the cost of sales (CHF 250.5 million, +30% YoY).

Cash flow activities also ticked higher for the nine months ended Sept. 30, coming in at CHF 341.8 million compared to just CHF 110.7 million in the year-ago period. Overall, On fortified its cash balance to CHF 749 million from CHF 494.6 million at the start of the year, significantly higher than its short-term debt levels of CHF 281.8 million.

Long-Term Drivers

On's strong balance sheet is just one of its many attractive qualities. Its focus on product innovation, particularly its proprietary CloudTec technology, distinguishes On in the market. Additionally, the company targets a premium segment where consumers are willing to pay higher prices, allowing it to serve a niche, yet growing, market.

A prime example of On’s appeal to this elite demographic is its collaboration with Roger Federer and expansion into tennis apparel, tapping into the sport's increasing cultural significance as both a lifestyle and performance sport. Partnerships with prominent celebrity influencers like Zendaya and FKA Twigs further reinforce On's image as a premium, culturally relevant brand.

On's growth strategy includes successful global expansion efforts, especially in the U.S. and Asia-Pacific, where demand has surged. In Q2, the company opened its flagship store in Paris, aligning with the Olympic spotlight. It also saw impressive growth in Asia, where quarterly net sales rose by 73.7% year-over-year.

The recent launch of On’s LightSpray shoe technology is another key growth driver. By integrating robotics and materials innovation, this process reduces a traditional multi-part production to a minimal-waste, three-minute step. As a result, On has created its lightest elite-level shoe, cutting CO2 emissions by 75% compared to other racing shoes.

On has also pioneered a subscription-based model with its Cyclon offering, where subscribers pay $30 per month. After six months, they can exchange their shoes for a new pair through a recycling initiative, reinforcing the brand’s commitment to sustainability.

Finally, the twin drivers for On's margin expansion are its channel mix and logistics improvements. The company anticipates that e-commerce will grow faster than wholesale, which has been crucial for expanding beyond Europe. It plans to grow its DTC footprint by adding 20-25 stores per year, with half in China.

On the logistics side, On benefits from lower freight rates and is actively automating distribution and packaging facilities. The company has already automated high-volume distribution centers in Los Angeles and Zurich, further enhancing efficiency and supporting its margin growth.

Analysts Say ONON is a Strong Buy

Given its solid financial position, and with improvements in efficiencies expected to aid margins, analysts remain bullish about On stock. Overall, Wall Street has an average rating of “Strong Buy” for the stock, which trades close to its mean price target of $54.83. The Street-high price target suggests additional upside potential of about 23.3% from here.

Out of 18 analysts covering the stock, 16 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 1 has a “Hold” rating.