On Holding brags about Roger Federer connection but is inappropriate (NYSE:ONON)

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Posted on the Value Lab 07/09/22

Pending (NYSE: ONON) is a Swiss company founded in 2010 that designs and sells sports shoes, sportswear and accessories. In 2021, it had a successful IPO on the NYSE, raising $746 million in September. The first one The offering price was $24.00 per share, reaching $38.00 in September 2021 and currently trading at $18.40 per share, representing a market capitalization of $5.6 billion. ONON claims Roger Federer as one of its co-entrepreneurs who helped design and put his name on their collection. Does the involvement of the best tennis player in the world with a huge and loyal fan base contribute to the commercial success of the company? In our view, only to a certain extent, as we don’t see many RF mentions in company posts and social media channels connected to ONON. In addition, competition in the footwear industry is tough, and macro being a major factor for market share in footwear, especially high-end footwear, we don’t care too much about the company’s fundamental outlook. . At the price as it is with a forward multiple of 36.5x, we remain very cautious.

Top Business Concerns

This market segment is dominated by large companies such as NIKE (NKE) and adidas (OTCQX:ADDYY) (OTCQX:ADDDF). The pandemic has had serious consequences by affecting both supply and demand. In 2020, the sports footwear market declined by 8% due to COVID-19. Small players like ONON may see this post COVID-19 period as an opportunity to increase their market share. Brand power is essential in the fight for dominance, so brand building is imperative for growth and success. The successful IPO of ONON, which raised 746 million, offers the financial opportunity. The launch of new products and business expansion into new markets will go hand in hand with the strengthening of the brand.

Today, there are three important and critical areas where sportswear manufacturers need to outpace their rivals in the race for greater market share:

  • Technological advancement of products in terms of improved design, performance and durability. Close cooperation with top athletes and scientists to create shoes that provide better traction, better cushioning and reduced weight.
  • The social impact of the product, the concern and the continued focused effort to source products from manufacturers who treat their workers with dignity. Athletic shoe brands like On also need to be transparent in demonstrating this effort to the public, in every detail.
  • Impact on the environment, ensuring that each new product is more sustainable and uses more recyclable materials than its predecessor. Durability means that customers will use the shoes for a long time because they are satisfied with the product and the product lasts for a long time. Some producers also organize the return and recycling of old sports shoes. On’s new product, the Cyclon Cloudneo subscription, will offer customers the option to return end-of-life footwear for recycling, a one-peer contribution to sustainability. The environmental impact is the reduction in the use of plastic and its replacement with natural or recycled materials such as On shoes which are made in part from recycled plastic bottles. Packaging is made from recycled paper, using less ink, and transport from the manufacturer is planned to use less air transport and more sea transport.

The problem is that these customer proposition leads are already heavily saturated in terms of marketing, especially the footwear industry, where all ONON’s revenue comes from, is linked to very unsavory concerns around the environment and human rights. Nike, among others, have attempted to align themselves with “woke” values ​​on numerous occasions, and with their advertising budgets dwarfing those of their competitors, there is already stiff competition for the attention of these markets. Additionally, with macroeconomic concerns and the general understanding that we are in a recession, discount producers will have a big advantage in claiming a share. ONON products are by no means discounted, and we should expect the strong growth trajectory needed to justify a 36x multiple to struggle to materialize. Ultimately, the Roger Federer Association offers an excellent head start in terms of organic reach, but following up with meaningful marketing will be costly and possibly ineffective given the economic orientation, interacting poorly with the rising cost of money which is driving our recession.

On the finances of Holding

On Holding recorded significant net sales growth of CHF 267.1, CHF 425.3 and CHF 724.6 in the three years from 2019 to 2021. Annual growth of 59.2% and 70.4%. Direct-to-customer (DTC) sales increased from 25% in 2019 to 39% in 2020 to 38% in 2021. sales continuing substantial. DTC understands e-commerce and sales in its own stores. Most of the increase in DTC is due to e-commerce, with 102.2 million visits recorded in 2021 and 66.1 million visits in 2020. This is accompanied by the opening of 5 new own stores in 2021, bringing the total number of owned stores to 10 stores. Stores are open in high-end malls like Harrods in London. We expect On to maintain this COVID-19-spurred increase and that the digital and physical sales component of DTC will continue to grow at a healthy pace.

One operates and sells online only through its own e-commerce platform, thus allowing it to own the customer data and have continuous communication with its customers. In this way, it has the ability to improve CX. This is valuable in the long term, assuming repeat customers return, but can it sustain growth and increase market share in the medium to short term? 91% of these e-commerce sales are in Europe and the US, which make up the largest portion of the market, and using DTC in these higher-margin markets nicely capitalizes on the margin advantages already offered. by DTC rather than wholesale to retailers.

However, EBITDA fell 20% due to supply chain disruptions and logistics costs eating into the margin. Additionally, with inventory management in a disrupted supply environment relying on bloated inventory, cash flow plummeted. Cash consumption is $60 million per quarter and current cash reserves cover approximately 10 quarters. While this is a decent margin, the company will more than likely continue to raise equity at prices that have already fallen over 50%.

ONON Price

ONON Price (Google Finance)


With reflexivity affecting the business as well as major headwinds to EBITDA growth, the forward multiple of 36x, based on EBITDA operating at a rate double that of Q1 2022 EBITDA, looks untenable. A more likely multiple is 72x, and that’s assuming macro headwinds don’t get in the way of growing that EBITDA and hitting volumes. We think the company is still quite expensive given its market and economic orientation. It’s rare to see someone pay so much for the prospect of growth, and it’s hard to rely on ONON’s growth to begin with. We pass ONON despite its association with Roger Federer, whose brand value is undeniable, based on concerns about the business economy and the macro environment.

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