The world of sports footwear and apparel is witnessing a sea change, or so it would seem. The long dominance of Nike(NYSE: NKE) and Adidas is being challenged by smaller, specialty brands like On Holding(NYSE: ONON) and Deckers Brands' Hoka.
To be sure, Nike still owns the largest slice of the pie, but its grip is slipping and its stock price has taken a beating for it. Nike shares are down 24% so far in 2024, having plunged nearly 20% in a single day after its fiscal fourth-quarter 2024 earnings were released in June.
On Holding, on the other hand, saw its share price soar this year, up nearly 70% since the markets opened in January. The two companies look to be on different trajectories, at least at first glance, so which is the better stock?
Nike is trying to make some big changes
Nike CFO Matthew Friend tried to assuage fears in the latest earnings report, for the period ended May 31, saying the company is "taking actions to reposition NIKE to be more competitive, and to drive sustainable, profitable long-term growth." It's needed. Nike's revenue growth has been anemic for a few years now, even reversing in its last quarter. Take a look at the chart below showing its growth curve. Not the shape investors like to see.
NKE Revenue (TTM) data by YCharts
What's being done then? The company is cutting costs by instituting major layoffs this year, cutting about 2% of its global workforce. As much as 40% of these were from its leadership, including 32 VPs and 112 senior directors. This may be good news in the short term for the company's bottom line -- operating expenses dropped 15% year over year for the quarter -- but I'm wary of what cutting a significant portion of top staff does to Nike's ability to find success.
On the other side of the balance sheet, Nike is focusing on pricing, hoping to gain ground by shying away from the premium image it has tried to lean into, starting with a sub-$100 footwear line. This will likely help it with a broad demographic that feels priced out. Of course, this will also likely come at the cost of eroding profit margins making the net benefit unclear.
So what happened? How did Nike get here? There are myriad reasons, but one of the biggest blunders is its shift to a direct-to-consumer (DTC) model. Nike has been pushing DTC for years. DTC removes wholesalers and retailers from the equation. Consumers buy directly from Nike at either its own stores or on its website. It makes a lot of sense in theory -- it would help the company have more control over its brand and pricing and potentially boost margins.
It didn't work out quite so well in practice. One, it comes at a major cost of operating its own retail spaces and building out fulfillment and logistics infrastructure that wasn't needed before. Critically, however, the company voluntarily gave up shelf space in major retailers where a lot of consumers still do their shopping. And, unfortunately for Nike, it opened the door to brands like On and Hoka to fill that empty shelf space. Nike Direct's global revenue was up just 1% in 2024, having actually shrunk in North America.
On Holding is gaining ground rapidly
Things look a whole lot better right now at On. The company's revenue growth is anything from flat, up nearly 30% year over year for the second quarter of 2024. Just look at this growth curve compared to Nike's from earlier.
NKE Revenue (TTM) data by YCharts
On's growth is driven by a strong, premium brand focused on performance. The company's shoes are unmistakable -- whether you can see a logo or not -- thanks to its distinctive soles built with proprietary technology. It's moved beyond its shoes to apparel as well, broadening its consumer base, while maintaining its performance and high-end image, and recently made a very successful push into Asian markets.
This growth is certainly impressive, but last quarter's $568 million in revenue is a far cry from Nike's $12.6 billion. The company has a long way to go before it truly rivals Nike and this gives the shoe giant time to adjust and win market share back or at least stem the tide.
So what is the better stock? On or Nike?
This one is tough. Here's why: On is in a much better position at the moment than Nike. Nike is attempting to right the ship but I'm unimpressed with what I've seen thus far. I think Nike could continue to slip before any major reversal happens while On is clearly on a path upward. The problem is valuation. On has a price-to-earnings ratio (P/E) of 83.4 at the moment. That is wildly high. It's about 4 times that of Nike. It's even more than Nvidia's at its height this summer.
That's the thing that's keeping me from recommending On's stock wholesale. That being said, it is still the better stock at the moment, I believe, just with a major asterisk attached.
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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike and Nvidia. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.
