This Nike Rival Just Reported Record Sales, But is the Stock a Buy?

As inflation continues to affect markets globally, companies like Nike (NKE) are facing significant challenges. With a staggering 29% decline in 2024, Nike’s struggles are compounded by difficulties in its key market, China, as well as competition from more agile brands. Amid piracy and market share losses, the company’s legacy CEO has returned to steer the ship, but it appears that another company, On Holding (ONON), is making waves in the industry. With the Swiss-based lifestyle brand reporting impressive growth, potential investors are left wondering whether Nike is still a sound investment.

A Look at On Holding

Headquartered in Zurich, Switzerland, On Holding is renowned for its cutting-edge sports footwear, apparel, and accessories, especially its celebrated “CloudTec” cushioning technology. Recently, ONON has established itself as a formidable player in the athletic apparel market, boasting a market capitalization of $33.5 billion and achieving a remarkable 92.5% year-to-date (YTD) stock increase in 2024, significantly outpacing Nike, Skechers (SKX), and Deckers Outdoor (DECK).

Record Sales and Raised Guidance

The latest surge in ONON’s stock price can be attributed to its positive guidance for revenue and profit margins this year. After a strong performance in the first nine months, On Holding has upgraded its sales growth expectation to at least 32% with a profit margin of 60.5%. This marks an improvement from the previous projection of 30% sales growth and a 60.0% profit margin.

In its most recent quarterly report, On Holding recorded sales of CHF 635.8 million, up 32.3% year-over-year. This growth encompassed both direct-to-consumer (DTC) and wholesale channels, which increased by 49.8% and 23.2% respectively, reaching CHF 246.7 million and CHF 389.1 million. However, it is noteworthy that earnings per share fell to CHF 0.09 from CHF 0.18, primarily due to a spike in cost of sales, which climbed by 30% year-over-year to CHF 250.5 million. Nevertheless, cash flow saw a significant uptick, rising to CHF 341.8 million compared to CHF 110.7 million in the previous year.

Long-Term Drivers of Success

Beyond a strong balance sheet, On Holding stands out in the athletic industry due to its innovation in product development, particularly its proprietary CloudTec technology. The company aims for a premium segment of the market where consumers are willing to invest in quality. On’s collaboration with tennis star Roger Federer and new expansions into tennis apparel signal its commitment to merging sports performance with lifestyle trends. Additionally, partnerships with cultural icons like Zendaya and FKA Twigs highlight the brand’s relevance to a stylish consumer base.

On’s growth is further bolstered by its successful global expansion, particularly in the U.S. and Asia-Pacific regions. The company recently opened its flagship store in Paris coinciding with the Olympic Games, and saw impressive net sales increases in Asia, with a 73.7% year-over-year quarterly growth.

Innovative Strategies and Sustainability Initiatives

The launch of On’s LightSpray technology, which significantly reduces manufacturing waste, showcases its commitment to sustainability while producing lightweight, high-performance shoes. Furthermore, On has introduced a subscription-based model through its Cyclon program, allowing customers to pay a monthly fee for rotating shoe pairs. This initiative emphasizes its dedication to sustainability while appealing to eco-conscious consumers.

Analysts Bullish on On Holding

Analysts have expressed strong optimism regarding ONON, citing its solid financial position and anticipated efficiencies that could help bolster margins. On Wall Street, the average rating for On Holding’s stock remains a “Strong Buy”, trading near its mean price target of $54.83. This suggests a potential upside of approximately 23.3% from current levels.

Final Thoughts

With Nike navigating turbulent waters fueled by inflation and fierce competition, On Holding is emerging as an influential player with promising growth potential. Investors looking to diversify their portfolios may find On Holding an enticing option, while Nike seeks to regain its footing in a dynamically evolving landscape. As the athletic apparel industry continues to transform, those keeping an eye on financial performance and innovation will likely be keen to explore opportunities presented by both companies.

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Nike’s Decline: Is On Holding the New Athletic Investment You Should Consider?