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On Holdings: Running the Distance Despite Market Hurdles

  • Declan O’Flaherty

    Declan holds a Bachelor of Commerce from the University of Alberta and has over 4 years of experience investing in financial markets. As a fundamental investor, Declan embraces the investment principles of Warren Buffett and his disciples. This puts a focus on finding businesses with healthy financials, competent and accountable leader, enduring competitive advantages, and those that are selling at discount to what they are worth.

    View all posts

On Holdings (ONON), the renowned running shoe and apparel company backed by tennis champion Roger Federer, recently faced a setback as its shares experienced a 17% decline on Tuesday following a significant miss on Wall Street’s earnings expectations. However, a closer look at On Running’s overall performance, financials, and growth prospects suggests that the market reaction might be a temporary deviation from the company’s long-term trajectory.

On’s Earnings Miss and the Market Reaction

On Running reported an earnings per share (EPS) loss of 6 cents, significantly below the expected net positive EPS of 11 cents. The revenue for the period was $509 million, falling short of the $516.8 million expected by Wall Street. This outcome marked a notable deviation from On Running’s previous two quarters, which witnessed more than 200% growth.

While the earnings miss raised concerns among investors and led to a sharp decline in share value, there are underlying factors that paint a more nuanced picture of On Running’s current standing and its potential for sustained growth.

On’s Financial Snapshot and Growth Trajectory

For the full year 2023, On Running reported robust financials, with revenue reaching $2.04 billion, reflecting a significant YoY growth of 46.6%. Net profit also saw a substantial increase, reaching $90.64 million, a YoY surge of 37.9%. The company’s operating cash flow stood at $264.29 million, further indicating its financial stability.

Despite the recent earnings miss, On Running displayed an improvement in gross profit margins, increasing to 60.4% from 58.5%. This suggests an enhancement in operational efficiency, which could positively impact the company’s bottom line in the long run.

On Running’s growth trajectory, while slowing from previous quarters, remains impressive. The company reported its seventh consecutive quarter of record sales, reflecting the sustained demand for its products. It anticipates a net sales growth rate of 30% for 2024, targeting 2.25 billion Swiss francs ($2.57 billion).

In the first quarter of the year, On Running expects direct-to-consumer net sales to grow by 26%, amounting to 495 million Swiss francs ($564.8 million). The company attributes this growth to the comparison with a strong wholesale quarter in the first quarter of 2023.

Edge Insights: Fundamental Strength Amid Market Volatility

On Running has rapidly become one of the most recognizable apparel brands globally. With a presence in over 60 countries and sales exceeding 50 million units, the company has made a significant mark in the competitive sportswear industry.

The recent market reaction, driven by the earnings miss and slowing growth, raises questions about the company’s valuation and short-term investor sentiment. On Running has demonstrated strong fundamentals, achieving substantial revenue and profit growth, as well as consistently setting sales records.

It’s crucial for investors to look beyond the immediate market reaction and focus on the company’s long-term potential. On Running has reported record-high traffic to its website and retail stores, achieving a 46.2% direct-to-consumer share, the highest in its history. Additionally, the gross margin improvement of 60.4% indicates operational efficiency.

On’s Valuation Considerations: A Balancing Act

While the company’s fundamental performance is strong, the market’s reaction might be indicative of valuation concerns. On Holdings currently boasts a trailing price-to-earnings (P/E) ratio of 122.81, a forward P/E of 37.04, a price-to-sales (P/S) ratio of 10.94, and a price-to-book value (P/BV) ratio of 8.57. These metrics suggest that the company might be currently overpriced, contributing to the recent decline in share value.

Investors are urged to exercise caution and consider the potential for continued market volatility. The overvaluation indicated by various metrics implies that On Running might need to undergo a market correction to align with a more reasonable valuation.

Conclusion: On Holdings, A Business Worthy of Monitoring

In conclusion, On Holdings presents a compelling business with a strong track record, global recognition, and robust financials. The recent market turbulence, triggered by an earnings miss and potential overvaluation, offers an opportunity for investors to reassess their positions and consider the company’s long-term potential.

As the sportswear industry continues to evolve, On Running’s innovative products and strategic partnerships, including the endorsement by Roger Federer, position it as a key player in the market. While short-term challenges may impact share prices, the company’s fundamental strength suggests that it deserves a place on investors’ radars. However, a cautious approach is recommended, keeping an eye on valuation metrics and market sentiment to make informed investment decisions.

  • Declan O’Flaherty

    Declan holds a Bachelor of Commerce from the University of Alberta and has over 4 years of experience investing in financial markets. As a fundamental investor, Declan embraces the investment principles of Warren Buffett and his disciples. This puts a focus on finding businesses with healthy financials, competent and accountable leader, enduring competitive advantages, and those that are selling at discount to what they are worth.

    View all posts

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