Shares of On Holding (ONON 2.66%), better known as On Running, got hit immediately following the company's last earnings update. The last 12 months have been bumpy for the running shoe company due to currency exchange rate headwinds, an effect that the market seems to forget about every three months when the Swiss company provides an earnings update.
Leaving out these economic forces beyond its control, though, On actually had a stellar 2023 as shares rallied from bear market lows. On is expecting its growth sprint to continue into 2024. Is it time to buy the dip?
What the franc?
First, in full disclosure, after following this shoe company since its IPO (and my wife, a runner, since before the IPO), I finally bought my first batch of On stock late in 2023. But as explained in past analyses, this has been (and will continue to be) a stock at the mercy of the Swiss franc -- at least to some extent.
The reason is simple: On is based in Switzerland. And since most of its running shoe sales are made outside of that small country, On's reportable revenue will fluctuate depending on the strength of Switzerland's currency, the Swiss franc.
One currency in particular, the U.S. dollar, is having an outsized effect, since On logged just over half of its revenue for fiscal 2023 in the "Americas" region. Most of that revenue comes from the U.S. The U.S. dollar spiked in value in 2022 along with the U.S. Federal Reserve's interest rate hikes, but the Swiss franc (CHF) has been steadily gaining back ground against the dollar ever since. That effectively reduces the value of a sale made in U.S. dollars when On converts that sale to CHF for financial reporting purposes.
This should have come as no surprise given that the U.S. dollar's moderating value has been well-broadcast this past year. The end result, though, was On reporting a 31% year-over-year growth rate in fourth-quarter 2023 when excluding currency conversion headwinds, but just 22% growth when including the strength of the Swiss franc. That's why the market reacted negatively to the last earnings update.
On is more than just fine
Don't expect this currency exchange effect to moderate anytime soon, especially as the U.S. is one of On's top growth markets right now. Management has said to expect similar offsets to reported sales growth to continue through at least the first half of 2024.
However, when excluding exchange rates, On thinks it will grow its business another 30% in 2024 and reach CHF2.25 billion in sales (or $2.55 billion using recent exchange rates). And along the way, management remains focused on increasing its profit margins. Its gross margin on products sold is expected to rise 60% this year as the brand reaches a more efficient scale from its recent expansion into new parts of the world.
The premium running shoes are paired with a premium stock valuation, as On stock currently trades for over 60 times trailing 12-month free cash flow. The price tag should take care of itself over the next three years if management reaches its milestones (targeting an average compound annual growth rate of 26% through 2026). So far, so good.
Expect lots more hills for On Running to climb in the years ahead, especially as the market continues to grapple with currency headwinds. But with the stock still down a bit from its highs in the last year, this top shoe company's progress has me feeling fine about continuing to build a position over time.
