Shares of fast-moving running shoe upstart On Holding (ONON +3.28%) had a solid 2023, rallying some 80% with just a couple of weeks to go in the year and steadily clawing their way back to their price at the initial public offering (IPO) in late 2021.
The Swiss company put up impressive numbers in spite of pressure mounting on the global consumer, and investors have been pleased with management's goals through 2026.
NYSE: ONON
Key Data Points
Nevertheless, this remains a richly valued shoe stock, one that assumes On Holding sails past the 2023 finish line and keeps right on going into 2024. Is it time to buy?
"Running a marathon at the pace of a sprint"
Those were the words of CEO Marc Maurer during the company's investor day in October 2023, when describing what On has been accomplishing since the 2021 IPO.
Indeed, On has been running at a brisk pace. Through the first nine months of 2023, sales were nearly 1.35 billion Swiss francs ($1.55 billion), a 57% year-over-year increase, and up 152% from the same period in 2021.
What's really impressive about this is that On's focus on direct-to-consumer (DTC) sales -- relying heavily on the company's own e-commerce activity, as well as select company-owned retail stores -- has endured quite the storm since 2021. Online purchases took a back seat to in-person shopping in the wake of the pandemic. And this past year especially, rising interest rates and inflation have dented consumer spending on nonessentials.
Clearly, On's small size and high-quality running shoe lineup are winning over enough fans that it's been able to gloss over these macroeconomic issues plaguing some of its larger peers. DTC sales rose 57% during the first nine months of 2023, and On is focused on growing this segment faster than wholesale distribution to retail partners over time.
A new phase of profitable growth?
On has also made some progress in turning a profit since the IPO, though 2023 has been a bit lumpy. In 2021 during the first year as a public company, it was just turning the corner from net losses to breakeven. Through the first nine months of 2023, On has generated a net income margin of 7.9% -- though that is down from 9.8% through the first nine months of 2022.
Using management's preferred operating profit metric, though, the margin for adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) has ramped up to 15.2% so far in 2023, rising from 12.1% last year. During the investor event, it said the goal is to reach at least 18% adjusted EBITDA margin by 2026.
That might sound like a meager profitability goal over the next three years. But bear in mind that management also wants to double its sales from an expected 1.79 billion Swiss francs in 2023 to about 3.5 billion Swiss francs in 2026. That will involve growth in existing markets, but also creating the sales and distribution logistics in countries that it doesn't sell to yet.
Purchasing more inventory along the way to reach what management hopes will be rising demand for its running shoes (and an expanding lineup including tennis and cross-trainers) will weigh on profit growth, too.
And $498 million in cash and short-term investments and zero debt (as of the end of September 2023) could certainly act as fuel for these ambitions.
Is On Holding a buy for 2024?
Given rapid progress the last two years, it seems like a decent bet that On management can achieve its goals of doubling sales and increasing profitability over the next three years. But does that make the stock a buy for 2024?
For the right investor, and done in the right way, On could be a solid buy. As of this writing, the stock trades for a hefty premium of 37 times Wall Street analysts' expectations for 2024 earnings per share. But consider that even Nike, with far more pedestrian growth prospects given its size, also trades at a premium of 28 times expected earnings per share for the next year.
If On can outperform its peers, perhaps its premium price tag is a better long-term value. But much will depend on management's ability to execute on its stated goals.
For a smaller business like this one, and especially one with some stellar growth already priced into the current valuation, I think a dollar-cost average plan makes a lot of sense. Buy in smaller batches over time, and let the business prove its merits while you build a larger position -- and only if the growth story continues to play out.
That said, given all I've seen from On Holding the last couple of years, it meets my criteria as a dollar-cost-average buy for 2024.
