Why Shares of On Holding Were Falling Today
Key Points
On is shfiting strategy, focusing on the direct-to-consumer channel and expanding margins.
As a result, sales growth is slowing, but profits are soaring.
Investors seem skeptical of the move.
Shares of On Holding (NYSE: ONON), the fast-growing eponymous running shoe and athletic apparel brand, were pulling back today after the Swiss company missed revenue estimates in its second-quarter earnings report as its wholesale business slowed.
As of 11:30 a.m. ET, the stock was down 18.6%.
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Image source: On Holding.
On slows down
On, which had been one of the top performers in the footwear industry, reported sales growth of 13.5% in the quarter, or 21.6% on a constant-currency basis, as the Swiss franc significantly strengthened over the last year.
Revenue was 850.3 million CHF, or $1.05 billion, but that was well short of estimates at 879.6 million CHF.
Direct-to-consumer sales remained strong, up 26% or 34.3% in constant currency to a record 45.7% of sales, while wholesale revenue rose just 4.8%, or 12.7% in constant currency, in the quarter as the company seemed to withhold some growth in order to maintain the strength of the brand, wanting to avoid the discounts that have been problematic for its peers.
Further down the income statement, its margins improved with gross margin up 390 basis points to 65.4%, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin up from 18.2% to 19.8% to an adjusted EBITDA of 168.1 million CHF.
Adjusted earnings per share jumped from a loss of 0.09 CHF to a profit of 0.35 CHF, ahead of estimates at 0.34 CHF.
CEO David Allemann said, "We are proving that a brand can achieve global scale without compromising its premium brand positioning. Our Q2 results reflect this discipline-demonstrating
strong net sales growth globally, significant expansion of our own channels, and an exceptional gross profit margin."
Can On bounce back?
Allemann's strategy makes sense, but the market doesn't seem to like it. It also doesn't help that the company trimmed its guidance for the year, calling for constant-currency revenue growth in the low-20% range, down from a previous forecast of at least 23%. Additionally, it said DTC would strongly outperform the wholesale channel in the second half. It did raise its gross margin guidance from at least 64.5% to 65%, and maintained an adjusted EBITDA margin of 19.5%-20%.
Given the company's rapidly improving net income, the strategic shift from sales growth to margin expansion seems reasonable. After today's sell-off, the stock looks cheap at a forward P/E of 22, though its peer group has fallen sharply as well.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends On Holding. The Motley Fool has a disclosure policy.