At a time when many companies are citing consumer-spending headwinds or challenging macroeconomic conditions, On Holding(NYSE: ONON) has stood out as an exception. Shares of the high-performance footwear and athletic apparel maker are up nearly 60% this year on the heels of stellar operating trends and financial results.
There's a lot for investors to cheer about here, but does this rally in On Holding stock have legs to keep running? Here's what you need to know.
A recap of Q2 2024 earnings from On Holding
It's been an impressive start to the year for On Holding as it continues a global-expansion strategy. In the second quarter, the company posted net sales growth of 29.4% from the prior-year quarter on a constant currency basis, with strength between its direct-to-consumer and wholesale channels.
The company is capturing strong momentum for its brand across all regions. Even as Asia-Pacific still represents just 10% of the overall business, Q2 sales climbed 84.7% year over year on a constant currency basis highlighting a breakthrough in customer awareness in markets like China and Japan. The 24.6% sales growth in the Americas region has also been solid.
During the earnings conference call, management noted that current demand is exceeding supplies globally -- which is a good problem for most companies. On Holding is translating that dynamic into premium pricing and higher profitability. A combination of rising volumes and the growing operational scale drove the Q2 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin to reach 16% from 14.1% last year.
On Holding is reiterating its full-year forecast for "at least 30% net sales growth on a constant currency basis" with some optimism for a positive outlook. Despite the exceptional Q2 results, some near-term inventory constraints are seen as the only limitation for an even stronger forecast.
Image source: Getty Images.
The early stages of a significant opportunity
The attraction of On Holding as an investment starts with a sense that the company is in the early stages of a long-term transformation into a globally recognized fitness and lifestyle brand. Whether it's a reputation for quality products or the differentiated design, it's clear that On Holding is connecting with consumers.
The company is on track to generate approximately $2.7 billion in sales this year, a significant figure, but still tiny next to the $51 billion in sales from competitor Nike or even $10 billion by Lululemon Athletica in the past year as a reference point. It's telling that On Holding's recent success has come at a time when both Nike and Lululemon are struggling to revive growth.
The potential that On Holding takes an increasingly larger slice of the worldwide footwear and apparel market represents a major runway for the company.
Keep in mind that several categories for On Holding are largely untapped. Currently, shoe sales represent 96% of the business, with apparel and accessories still tiny. The ability of the company to reach new customers in new markets and also offer a wider variety of products supports some confidence in the growth opportunity.
In terms of valuation, On Holding shares are trading at 43 times the average Wall Street estimate for 2024 earnings-per-share (EPS) at $1.01 as a forward price-to-earnings (P/E) ratio.
While this level represents a premium compared to peers like Nike at 26 times earnings or even Lululemon at 18, there's a case to be made that the spread is justified given On Holding's stronger-earnings momentum. Looking out into 2025 and beyond, the company has plenty of room to grow into its valuation as a tailwind for stock.
ONON PE Ratio (Forward) data by YCharts.
I'm staying bullish on shares of On Holding
On Holding's latest results have helped reaffirm the bullish case for the stock. As long as macroeconomic conditions remain, I believe there's a good chance shares of On Holding will continue rallying higher.
Monitoring points over the next few quarters include the trend in profitability margins and sales growth by region. For investors with a long-term time horizon, the On Holding stock can work as a part of a diversified portfolio.
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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool recommends On Holding and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
