Shoes made by Switzerland's On Holding (ONON -1.35%) are among the most in-demand in the world. But not content with its impressive recent market-share gains, On's management is setting two goals for the remainder of 2024 that seem quite ambitious.
Regarding its market share gains, On's growth has been nothing short of spectacular since it went public. The company has enjoyed net sales growth of 69%, 47%, and 24% in 2022, 2023, and the first half of 2024, respectively. That growth far outpaces growth for the industry and is better than many of On's peers.
On says it's winning because of its differentiated cushioning. The company calls it CloudTec -- there are individual cushioning pockets that more easily adapt to a runner's stride. The company claims this makes it feel like you're "running on clouds."
Whatever it is about this shoe brand, it's working. Not only is On growing its sales, but the growth is fueled by direct-to-consumer sales. This is noteworthy. With regular sales, a consumer might buy On's shoes after stumbling upon them in a store. But with direct sales, consumers are intentionally seeking the shoes out, suggesting a deep brand awareness.
Things are going great for On. But even so, the company has a couple of goals that I find perhaps too ambitious.
On's bullish outlook
For 2024, On's management says it should grow its net sales by 30% compared to 2023 (adjusted for currency fluctuations). Moreover, it expects a full-year gross profit margin of 60%. This guidance assumes that growth accelerates in the second half of the year and that its gross margin also improves.
As mentioned, On's net sales grew by 24% in the first half of 2024 (before adjusting for currency fluctuations). Management says it expects to generate sales of 2.26 billion Swiss francs for the year, which is about $2.6 billion. Considering it had just less than 1.1 billion Swiss francs in the first half of the year, it assumes sales of nearly 1.2 billion in the back half of the year.
For perspective, if it hits this goal, On's net sales would need to jump 28% year over year in the second half of the year (before adjusting for currency fluctuations). That would represent an acceleration in sales growth.
Moreover, On had a gross margin of a little less than 60% in the first half of 2024. With its guidance of a 60% margin for the entire year, this implies a slight margin improvement in the back half of the year.
Why this sounds ambitious
Not only is On's management saying that it expects its shoes to be in higher demand from here, but it also expects consumers to pay full price. If the company achieves this, it will have truly pulled away from its competition.
E-commerce giant Amazon has its finger on consumers' pulse perhaps better than any other company. In its second quarter, CEO Andy Jassy mentioned that its customers were being "careful" and trading down to cheaper products. With On positioning itself as a more premium athletic brand, it's ambitious to expect sales growth acceleration when consumers are behaving this way.
Also consider that On's top competitor in the running shoe category is likely Nike. For its part, Nike is dissatisfied with its recent financial results and is working hard to reestablish itself as the leader. It's launching new running shoes in the back half of the year while simultaneously upping its investments in marketing.
Consumers are stretched thin and On's competitors may be desperate to win sales wherever they can. In short, it won't be easy for On's growth to accelerate in this environment.
Turning to gross margin, On is already a top dog. Not only is it better than Nike by a mile, it's even better than another key rival, Deckers Outdoor, which is commendable.
ONON Gross Profit Margin (Quarterly) data by YCharts
Can On's margins widen in a challenging macroeconomic environment when it's already one of the very best? I'm not saying it's impossible. But it's certainly ambitious.
What it means for investors
On has a great business and likely has years of profitable growth ahead. That said, trading at a price-to-sales (P/S) ratio of 9, the stock isn't cheap. An expensive valuation implies that investors have high expectations for the company. And management clearly has high expectations as well, given its bullish guidance. But in my view, it will be hard to hit these numbers in the back half of 2024.
If On comes up short, it would disappoint investors and likely lead to a lower stock price, at least in the near term. I do believe On could rebound over the long term. But I would wait before buying On stock. And if I were a shareholder with a long-term outlook, I'd brace myself for the possibility of near-term volatility.
