2023-03-22 08:35:59 ET
Summary
- On Holding is now down nearly 40% from its all-time high in 2021.
- The athletic footwear company has massive potential that should continue to drive growth.
- Its latest earnings demonstrated substantial growth in both the top and the bottom line, while guidance was also upbeat.
- The current valuation looks compelling considering its prospect.
- I rate the company as a buy.
Investment Thesis
On Holding ( ONON ) went public in late 2021 but it has been performing badly, with shares down nearly 40% from its all-time high, as the market sentiment turned south in the past year. I believe this offers a great buying opportunity for investors. The company has gained a huge following in the past few years and its popularity continues to grow. It also has massive expansion opportunities in the footwear market, especially in the international space. The strong momentum is reflected in its latest earnings with superb top and bottom line growth. Its current valuation remains compelling with multiples similar to peers, yet has much better growth rates. I believe the company has solid upside potential and I rate it as a buy.
Growth Opportunities
On Holding is a Zurich-based athletic brand founded in 2010 that specializes in premium performance shoes, apparel, and accessories. The company put heavy emphasis on comfort and has been pushing the boundary through its innovative and proprietary technology CloudTec. It has gained significant momentum in the past few years thanks to its high-quality products and marketing effort with sports stars like Roger Federer, which has also become one of the company’s investors. The brand is now present in more than 60 countries with over 17 million products sold to date.
Despite the recent success, the company’s penetration rate in the international markets (outside of Europe and the US) remains very low. For context, Europe and the US combined currently account for roughly 87.7% of total revenue. There are still a lot of untapped opportunities in the international segment, which should be a strong growth driver moving forward as its brand awareness continues to grow rapidly.
I believe the performance shoe market also presents huge growth potential as the awareness of health and sports continues to rise. Society is now actively encouraging more physical activities in order to fight preventable diseases such as obesity. According to Grand View Research , the TAM (total addressable market) of athletic footwear is forecasted to grow from $133.1 billion in 2022 to $196.1 billion in 2030, representing a CAGR (compounded annual growth rate) of 4.9%. Considering the company’s annual sales of only $1.2 billion, there is still massive room for expansion.
Q4 Earnings
On Holding just announced its fourth-quarter earnings and the results are extremely impressive, with superb growth in both the top and the bottom line. It is also worth noting that all currencies below are in Swiss Franc as the company is based in Switzerland.
The company reported revenue of CHF 366.8 million, up 91.9% YoY (year over year) compared to CHF 191.1 million. DTC (direct-to-consumer) revenue grew 76.4% to CHF 149.4 million while wholesale revenue grew 104.3% to CHF 217.3 million. The growth was very broad-based but Asia and RoW (rest of world) were the highlights of the quarter, as the penetration rate starts to increase overseas. Asia revenue increased 103.8% to CHF 21.6 million and RoW revenue increased 680.5% to CHF 23.4 million. Gross profit was in-line with revenue, up 91.9% YoY from CHF 111.8 million to CHF 214.6 million. The gross profit margin was flat at 58.5%
The bottom line was also very strong as the company is starting to benefit from increasing scale, which reduces the spending required. Despite revenue almost doubling, SG&A (selling, general and administrative) expenses managed to decline 30.9% YoY from CHF 289.3 million to CHF 199.9 million. The improved operating leverage resulted in the adjusted EBITDA skyrocketing 451.7% YoY from CHF 11.2 million to CHF 61.8 million. The adjusted EBITDA margin was 16.8%, up 1,090 basis points from 5.9%. It also flipped from an operating loss of CHF (177.5) million to an operating income of CHF 14.7 million, or 4% of revenue. Diluted EPS was $(0.08) compared to $(0.60), representing an improvement of 86.2% YoY. The balance remained healthy with CHF 371 million in cash and only CHF 350 million in debt.
The company also initiated upbeat guidance for FY23 despite facing a weakening economy. It expects revenue of at least CHF 1.7 billion, which represents a growth rate of 39%, or 42% on a constant currency basis. The gross profit margin is expected to be roughly flat at 58.5% while the adjusted EBITDA margin is expected to increase to 15%.
Investor Takeaway
I believe On Holding should perform well in the long run. It has huge growth opportunities and the latest earnings were outstanding. The top line should benefit from geographical expansion while the bottom line should improve rapidly thanks to strong operating leverage. The company’s valuation is also very reasonable. It is currently trading at an fwd EV/EBITDA ratio of 27.14x, which is in line with other premium footwear peers. For instance, footwear giant Nike ( NKE ) is trading at a similar fwd EV/EBITDA of 27.73x. However, its revenue growth was only 17.3%, which is significantly lower than On Holding’s 92%. Considering its superb growth rates and fundamentals, the current valuation looks quite compelling and should offer solid upside potential.
For further details see:
On Holding Q4 Earnings: Massive Expansion Opportunities