Shifting tides: Can On Running outpace Nike?

In 2024, sportswear giant $NIKE (NIKE.US)$ has faced a challenging year. The latest quarterly report revealed declining revenues, causing its stock price to plummet to a four-year low.

Since then, Nike's stock has struggled to recover, remaining down 25% year-to-date as of September 9. This downturn highlights intensified competition, a shrinking consumer base, and strategic missteps.

According to the Financial Times, Nike's main competitors are no longer traditional players like Adidas; newer, more agile footwear companies are capturing market share.

One standout is the emerging Swiss sports brand $On Holding (ONON.US)$ . While Nike's stock continues to decline, On Running's stock has surged nearly 65% year-to-date, with its market capitalization now exceeding one-tenth of Nike's.

Can this ongoing battle between the giant and the challenger continue, potentially reshaping the industry? Find out in this week's 'Opportunity Mining' as we take a closer look at this company.

Rising star in sportswear

Headquartered in Zurich, On Running was founded in 2010 and went public on the New York Stock Exchange in 2021.

The company was founded by Olivier Bernhard, a triathlon world champion and renowned Swiss athlete, along with two friends. They focused on creating high-performance sports products, especially footwear.

In 2019, tennis legend Roger Federer became On Running's brand ambassador. He also became an investor and shareholder. Federer has contributed to the design and development of the company's products, launching the Roger series tennis shoes.

Since its inception, the brand has primarily targeted the mid-to-high-end market, appealing to high-end consumers who value product experience.

After introducing the shock-absorbing CloudTec technology in 2010, the company has continuously innovated to expand its product range.

In July, On Running unveiled its "Light Spray" technology, enabling automated weaving by robotic arms to create precision, seamless, and laceless shoe uppers.

Source: Company Website. This is for information and illustrative purposes only. It should not be relied on as advice or recommendation.

In terms of distribution, traditional brands like Nike rely heavily on large wholesalers and branded stores, while On Running focuses more on the Direct-to-Consumer (DTC) model. This approach aligns with the growing trend of consumers shifting to online shopping, offering higher profit margins.

The company also attracts consumers through running events and trial experiences. It also builds the "On Running Club" community to enhance brand loyalty among runners.

Emerging brands like On Running are steadily eroding Nike's market share.

YipitData shows that from January to May this year, Nike's market share in athletic footwear dropped from 39% to 32%, with traditional brands like Adidas and New Balance also experiencing declines.

In contrast, On Running's market share rose from 8% to 12%. Hoka (owned by $Deckers Outdoor (DECK.US)$ ), founded in 2009, also saw rapid growth.

Source: Reuters. This is for information and illustrative purposes only. It should not be relied on as advice or recommendation.

According to GlobalData analysts, emerging brands continue to captivate consumers' interest and are still taking market share from Nike, which appears to be on the back foot and slightly "boring."

Sustained performance growth

On August 13, On Running released its second-quarter financial report, showing a revenue increase of 27.8% to CHF 567.7 million, a growth of 29.4% (at constant exchange rates, the same as below). Net profit soared by 834.3% to CHF 30.8 million.

Compared to the same period last year, the gross margin increased from 59.5% to 59.9%, and the net profit margin rose from 0.7% to 5.4%.

Management has maintained its full-year revenue growth forecast of at least 30%, with an expected annual gross margin of 60%, which means a slightly higher second-half gross margin.

The company also plans to advance its warehouse automation project in the U.S. to expand distribution capabilities in North America, addressing current issues of delivery delays and inventory shortages.

Over the past three years, On Running's revenue has grown by more than 200%, significantly outpacing its peers.

Footwear remains dominant in On Running's business, accounting for over 95% of its revenue. In contrast, Nike's footwear accounts for less than 70%, with apparel and sports equipment making up over 30%. This presents an opportunity for On Running to establish a second growth curve.

Management said on the earnings call, "People are now also looking to dress head-to-toe in the On brand."

Although still a small part of the business, On Running's apparel segment grew by 63% in the second quarter, with fall and winter clothing orders doubling.

Technical analysis and potential strategies

Weekly charts show that On Running has been in an upward channel since hitting its low in 2022. The late August rise briefly broke through the upper channel but has since adjusted.

The weekly candle at the end of August marked the best closing week in history, though it still lags behind the historical peak. Investors could watch for a potential breakout above the upper channel or support at the lower channel boundary.

Source: moomoo. Data as of market close on September 9, 2024. The company mentioned is for illustration purposes only, and any statement involved does not constitute investment advice.

Volatility analysis tools show that as of the close on September 9, On Running's implied volatility remains relatively low. Especially after the earnings report, volatility significantly declined.

Implied volatility values, IV Rankings, and IV Percentiles are theoretical estimates, and the actual market conditions may not always align with the theoretical information shown. Investors should exercise caution and use multiple sources of information when making investment decisions. No guarantee or assurance using any tools or data provided on the moomoo app will result in investment success or reduce investment risk.

In a risk-neutral scenario, low implied volatility suggests relatively low premiums, theoretically favorable for option buyers.

If you are optimistic about the company's prospects, consider buying call options (Long Call). If you anticipate a downturn, buying put options (Long Put) could be a viable strategy. For stockholders expecting a stagnant market, selling call options (Covered Call) might help reduce investment costs.

It's important to note that options carry higher risks and volatility compared to stocks. Interested investors are advised to thoroughly learn about options before trying them out.

Related risks

High Valuation: The company's high growth is matched by a high market valuation. As of the close on September 9, ONON's trailing P/E ratio is about 80 times, and the forward P/E ratio is around 40 times.

Zacks Investment notes that the company trades at a premium compared to its peers. Given the significant rise in stock price this year, market optimism might already be fully priced in.

Product Positioning: The company's primary customer base is high-end consumers. As the brand rapidly expands, maintaining its premium positioning and consumer loyalty will be a significant challenge.

Market Competition: Although traditional brands like Nike are experiencing slower growth, they are undergoing strategic adjustments.

These larger companies could regain consumer favor, potentially affecting On Running's momentum.

Exchange Rate Risk: Headquartered in Switzerland with operations in multiple markets globally, On Running's financial statements are denominated in Swiss Francs. Exchange rate fluctuations could impact the company's performance.

Additional Disclosures: This content is also not a research report and is not intended to serve as the basis for any investment decision. The information contained in this article does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Furthermore, there is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct.

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