On Holding (ONON 1.10%), mostly known to running enthusiasts as On Running, continues to follow its successful playbook since its 2021 initial public offering (IPO). The Switzerland-based running shoe company remains in a sprint, venturing into new markets and expanding its lineup of active lifestyle footwear.
Yet, the stock has sold off hard following its mid-year 2023 update. I've been keeping pace with On since the IPO, and might finally nibble. Here's why.
A great quarter, overshadowed by currency exchange rates
On Running has been notching fast and steady expansion from its base in the Swiss Alps, winning over running fans worldwide. More recently, perhaps On has popped up on your radar from its partnership with tennis superstar Roger Federer (an early On investor) and the tennis shoes they've been making.
Either way, On's growth has been impressive. It often taps wholesale distributors to enter a new market and later expands with its direct-to-consumer strategy (online sales and a small retail-store footprint), like it has done recently in the U.K.
Sales from the Americas and Asia-Pacific regions increased 74% and 91%, respectively, during the first half of 2023, far outpacing On's overall year-over-year sales growth of 64%.
This small-ish footwear maker's expansion continues to flow through to even higher profit margins, exactly what investors need to see to justify owning a fast-moving consumer goods business. Operating profit increased 175% year over year in the first half of 2023, coming in at an operating profit margin of 9.4% (compared with just 5.6% in the first half of 2022).
Still, its shares have fallen since the financial update. The problem seems to be the Swiss franc, which On uses to report results as a company based in Switzerland. For a U.S.-based investor, that means currency-exchange issues.
After the U.S. dollar soared in value in 2022 because of the Federal Reserve's record interest rate hikes, the franc is mounting a resurgence and is at multi-decade highs against many other currencies (including the dollar). For On, that means losses based on currency exchange rates, which get deducted from operating profit to calculate net income.
The result for On was essentially no net income reported in the second quarter, after reporting record quarterly net income for much of the last year.
Data by YCharts.
No finish line in sight for this growth story
Excluding currency effects, On is clearly executing very well operationally right now. Expanding a new global sports brand is no small feat, but it has remained a fast-growing business since the IPO. The lineup of running shoes keeps expanding, as does ancillary categories like trail running, hiking, and of course (Roger Federer) tennis shoes. The company is ramping up its most important profit metrics as it embarks on this expansion.
For the second half of 2023, management does see a slowdown. Revenue is expected to be up about 30% versus the second half of 2022, which should equate to about a 44% full-year growth rate. Growth of 30% would be nothing to balk at, though, considering what On has accomplished the last two years.
Data by YCharts. TTM = trailing 12 months.
Profit margins are expected to continue their strong run, too, supported by an On fan base willing to pay full price for its shoes. Talk about shaking off inflation. The average On buyer seems to keep springing for good running gear.
Until it starts generating more-robust profitability, this isn't going to be a cheap shoe stock. Nevertheless, with the shares taking a big dip from the currency headwind, On could be a solid long-term value -- assuming the company keeps up its healthy sprint. I think this is a good dollar-cost averaging candidate for investors looking for long-term growth stories.
