Shares of On Holding remained down slightly since the company’s Investor Day last week due, apparently, to concerns that On’s third-quarter results will miss estimates. However, two analysts upgraded On’s stock and a number of other upbeat reports arrived in recent days as most analysts were left impressed by its ambitious long-term growth strategy.
At its Investor Day held at On’s Zurich headquarters, the company’s leadership team released a three-pronged growth strategy:
- Elevate market share in core running, with growing brand awareness
- Expand geographic footprint through premium multi-channel distribution, owned retail and China; and
- Establish credibility in training, tennis and head-to-toe looks across existing verticals.
On reiterated its previous guidance for 2023 and provided targets for the next three. The projections call for sales between 2023 and 2026 to reach at least CHF3.55 billion, or approximately $3.95 billion at the average September 2023 conversion rate, reflecting a compounded annual growth rate (CAGR) of over 26 percent based on the outlook for the full fiscal year ending December 31, 2023.
On expects gross margins to exceed 60 percent gross profit margin by 2026 and adjusted EBITDA margin to reach at least 18 percent.
On Investor Day, however, shares of On fell 94 cents, or 3.6 percent, in over-the-counter trading in the U.S. to $25.04. By Monday, On’s shares had shown minimal recovery, closing at $25.19
Among analysts covering the stock, Jonathan Komp, at Baird, upgraded his rating on On’s stock to “Outperform” from “Neutral” while maintaining his price target at $33.
In a note, Komp wrote that On’s shares are down 23 percent since early April and are only 5 percent above its September 2021 IPO price of $24. Komp wrote, “With the in-person portion of last week’s Zurich investor day reinforcing our confidence in current brand health and the upcoming three-year pipeline of growth drivers (raising 2024-2025E margin assumptions), and with current valuation consistent with the low end of our early-stage growth factor framework, we see increasing appeal for ONON on a one- and multi-year basis.”
Komp said On’s senior leaders presented “credible strategies to become a global premium Sportswear brand spanning running/outdoor/training/tennis/court, and ‘performance all day’” with the brand still having low brand awareness in key markets, including 9 percent in the U.S. and 6 percent in the U.K.
He further wrote that management struck a “bullish tone” about the business, implying the stock’s softness may have been tied to a hoped-for upward guidance adjustment. Komp stated, “While some investors were hoping for a 2023E update (targets simply reiterated), we believe strong consumer demand and positive orders for spring 2024 support upside potential to estimates.”
Sam Poser, at Williams Trading, upgraded the stock to “Hold” from “Sell” with a price target of $26.
“We came away from the analyst day more impressed than we expected to be, but with ongoing concerns,” Poser wrote.
On the positive side, Poser was impressed with “how well the ONON team worked together and shared the ONON’s vision of becoming the ‘most premium global sportswear brand’ and mission to ‘ignite the Human Spirit Through Movement’.” On the product front, he highlighted the promise of new performance footwear offerings in running, tennis, and newly introduced training offering supported by a prototype factory across the street from its headquarters as well as the “breadth, look and quality” of its apparel range.
Among the concerns, Poser believes On may be “attempting to do too much too fast, and putting potential growth ahead of brand equity.” He called out the risks of offering opening price-point product in running and tennis to attract a younger, lifestyle consumer. Poser wrote, “The opening price point items do not do justice to the more performance-oriented product.”
He also believes On could be moving into Dick’s Sporting Goods, Foot Locker and JD Sports too soon. Poser wrote, “We recognize that ONON wants to reach a younger consumer, but it should, in our view, be done in a more measured manner.”
Abbie Zvejnieks, at Piper Sandler, reiterated her “Outperform” rating at a $39 price target.
“We thought ONON’s Investor Day and financial targets were strong, and frankly, we don’t understand the stock reaction,” she wrote in a note. Zvejnieks noted that with the recent weakness, On’s enterprise value is now about 1.9 times its 2026 revenue target, well below Lululemon’s enterprise value is 3.6 times its 2026 revenue target. She said, “We thought the focus on performance innovation and the product pipeline, the emphasis on DTC growth, and the fact that 7 silhouettes each
drive 5 percent+ of revenue should have tempered concerns on both over distribution and trend risk. While we are slightly decreasing our estimate to account for the updated algo (which we believe is conservative), we came away from Zurich more confident in ONON’s LT potential, and we reiterate our OW rating as we believe this is an attractive entry point.”
John Kernan, at TD Cowen, reiterated his “Outperform” rating at a $35 price target. He said, “Management hosted a robust investor day in Europe that put on display the company’s culture of performance and innovation. We continue to see a clear path for ON to expand from a premium running brand to a global leader in Sports, performance and lifestyle.”
Kernan said On presented a multi-pronged approach of “Elevate, Expand, and Establish,” to drive growth with Elevate focused on deepening community connections to drive awareness and within broadened verticals. Expand addresses the path to global and channel expansion, including an acceleration of owned retail and tapping growth potential in China. Establish focuses on the build-out of On’s category adjacencies to running, including apparel, training, tennis and lifestyle with a focus on supporting head-to-toe looks.
Kernan said On’s expansion into newer categories should enlarge the brand’s TAM (totally addressable market). He wrote, “ON’s disruptive growth should create more competitive headwinds for larger incumbents.”
Tom Nikic, at Wedbush, reiterated his “Outperform” rating at a $36 price target.
Nikic wrote, “We continue to view ONON as one of the most compelling growth stories in our sector. They have a long runway to grow brand awareness, expand distribution, and branch out into new categories. Margins are strong (and rising), and an increased focus on FCF could add even more juice to the story. Over the long run, we could see this becoming “the Lululemon of footwear” given their premium positioning and focus on innovation. We’re surprised that the stock sold off on the event, and we’d view this as a buying opportunity. We believe investors might have been hoping for an FY23 guidance raise, but CFO Martin Hoffmann emphasized that ‘exceeding our goals creates much more happiness.’ Thus, we believe that there remain opportunities for the company to continue beating expectations, given the momentum in the brand.”
At Stifel, Jim Duffy reaffirmed his “Buy” rating at a $36 price target.
“An upbeat ONON Investor Day provided clarity into the vision to become the most premium global sportswear brand and the organizational roadmap to achieve financial targets for FY26 and beyond,” wrote Duffy in a note. “Discussion of the brand, culture, product innovation, and market approach make tangible the market share opportunity within the CHF 70bn and growing addressable market. We left meetings impressed with the management talent, deliberate approach to growth, and infrastructure investments in place to support additional scale. We remain convinced of opportunities to extend beyond core running, continued franchise development in lifestyle, and support outsized growth in apparel, Retail, and China.”
Jay Sole, at UBS, kept his “Buy” rating and price target of $48.
Sole’s key takeaways from the event included that On’s product assortment is “much more diversified” than investors believe, noting that On now has seven product franchises, each contributing at least 5 percent to net sales.
A second takeaway was that On’s own retail business model “is working,” delivering on both sales and margin objectives. Sole added that On’s team is ready to ramp up expansion to help “unlock big sales growth opportunities in many key geographies, including China, as well as in new categories, such as apparel, all while reinforcing On’s image as a premium, innovative brand.”
Finally, a takeaway was that On’s margin outlook is better than expected with the analyst believing On could achieve a 20 percent EBITDA margin now but is focusing on growth investments.
Sole believes the stock’s weakness was due to concerns over On making third-quarter estimates, but Sole called On “Softlines’ best growth stock,” believing On’s growth should keep earnings surpassing expectations to drive stock performance. He wrote, “We forecast On delivering a 44 percent 5-yr. EPS CAGR and expect strong growth to continue from there. This type of growth would make On one of the world’s fastest-growing athletic wear brands and worthy of a premium multiple, in our view.”
At BTIG, Janine Stichter reiterated her “Neutral” rating, with no price target on the stock.
Stichter said the news at the event was generally in line with what investors were expecting and she attributed the stock’s weakness to “lingering investor skepticism” about On’s ability to continue to outperform and the lack of details around the third-quarter performance. Stichter wrote, “The company’s ’26 targets appear reasonable as the company remains in the early stages of its growth initiatives, but are not without some risk, in our view.”
She said while On’s longer-term margin target of more than 20 percent may be somewhat higher than the market expected and signals management’s confidence around the margin trajectory as the business scales, “we believe the company needs to continue to demonstrate its ability to execute against the market share opportunity ahead.”
Photo courtesy On
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