Swiss shoemaker On Holdings (ONON 1.58%) -- better known by the global running enthusiast community as On Running -- recently made its public debut with a warm investor reception. In fact, the stock paced a 46% surge during the IPO before initial public trading, and as of this writing on September 27, shares have been up as much as 17% since then to nearly $41. The company has a market cap of over $11 billion based on a share price of just over $35.
As you might have guessed from the investor response to the IPO, On Running is a growth company. But is it a smart buy after getting off to such a hot start?
Image source: Getty Images.
These lap times are the real deal
On Running's CloudTec cushioning system has picked up serious steam with consumers. From hiking to casual running to all-out competitions, On has the running community covered. The company has also benefited from some high-profile VIP wins too. 2016 Olympic Triathlon silver medalist Nicola Spirig is part of the On team, as is 2019 Long Distance Triathlon World Champion Javier Gomez Noya. Tennis great Roger Federer has his own On shoe and was an early investor in the company.
Paired with its digital marketing and e-commerce-driven distribution, On (which was only founded in 2010) has scored some big wins and has a growing fan base. The numbers tell the story:
|
Metric |
2020 |
2019 |
YoY Change |
|---|---|---|---|
|
Wholesale revenue |
$286 million |
$217 million |
32% |
|
Direct-to-consumer revenue |
$173 million |
$71.7 million |
141% |
|
Total revenue |
$459 million |
$288 million |
59% |
|
Adjusted EBITDA |
$53.8 million |
$32.3 million |
67% |
|
Net income (loss) |
($29.7 million) |
($1.59 million) |
N/A |
Presented in U.S. dollars using the exchange rate from Swiss Francs as of Sept. 27, 2021. Data source: On Holdings. YoY = year over year.
|
Metric |
First Half 2021 |
First Half 2020 |
YoY Change |
|---|---|---|---|
|
Wholesale revenue |
$216 million |
$106 million |
104% |
|
Direct-to-consumer revenue |
$124 million |
$79.2 million |
57% |
|
Total revenue |
$340 million |
$185 million |
84% |
|
Adjusted EBITDA |
$51.1 million |
$17.3 million |
195% |
|
Net income (loss) |
$4.06 million |
($35.7 million) |
N/A |
Presented in U.S. dollars using the exchange rate from Swiss Francs as of Sept. 27, 2021. Data source: On Holdings. YoY = year over year.
Given its rapid expansion during the pandemic -- both from its direct-to-consumer business primarily via its online store and sales to retailers -- it's no wonder On raised $746 million in fresh cash for its balance sheet during the IPO. Additionally, On had nearly $107 million on hand at the end of June and no debt. This is now one well-funded shoe and apparel company as it seeks to maximize its pace of global growth, and it's only just beginning to reach a profitable scale this year in spite of elevated marketing and sales expenses.
Is all-out speed a reasonable long-term expectation?
It's clear On is riding incredible consumer demand for its shoes, especially with renewed interest in running, hiking, and other outdoor activities in the wake of the pandemic. And with revenue surging 84% year-over-year through the first half of 2021, this stock has earned a premium valuation. Shares trade for about 18 times trailing-12-month sales and about 128 times trailing-12-month adjusted EBITDA -- although profitability is scarce for now as the company has been spending heavily to maximize growth. But with its focus on online sales and wholesale to select retail partners, this is an efficient shoe business that should be highly profitable over time.
Given the massive size of the global shoe industry, On is still a relatively small player. There's ample room for it to increase brand awareness as well as infiltrate new markets and consumer groups. Peeling away just a small chunk of Nike's and Adidas' sports empires could really add up for On, not to mention the massive opportunity still up for grabs in emerging markets like China. This could be a long-term growth story in the making.
But at 18 times sales, this company is priced more like a tech firm than it is a consumer products and apparel brand. Shares are white-hot after the IPO, and the elevated valuation is dependent on whether On can deliver similar growth during the rest of 2021 and into 2022 as it did during the first half of this year. If a slowdown in its trajectory is hinted at when the company provides its first quarterly earnings update as a public company, shares could take a serious breather. With the most recent quarterly sales booming because the initial effects of the pandemic were lapped from early 2020, I fully expect a slowdown in sales growth to transpire.
Given this, my standard rule of waiting for two quarterly earnings reports before deciding whether to buy On or not applies here -- so I'll be holding off on any possible purchase until 2022. Nevertheless, given its rapid rise to running shoe relevance, this athletic apparel company is worth keeping tabs on at the very least.
