Weekly Update October 6-10
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A few weekends ago I went to a running store in a popular location. I haven’t been to a running-specific store in quite some time and I was used to seeing Nike and Adidas dominate the selection. Boy, times have changed. It was basically only On, Hoka, and New Balance. New Balance is privately owned but On and Hoka are public. Hoka is a subsidiary of Deckers, who also owns Ugg and Teva. However, Hoka has been the gem of that brand portfolio, having grown at a 40%+ revenue CAGR for the last decade.
On Running is based in Switzerland and has also become incredibly popular. Hoka does about $2 billion in revenue and On does about $3 billion in revenue, while growing at even faster rates than Hoka these days.
It was Nike’s game to lose in running and they have been losing market share for quite some time now. In 2021, Nike had $4 billion in running shoe revenue whereas On had $780 million and Hoka had $570 million. Adidas was a bit over $4 billion around then as well. I don’t think it’s a coincidence that Nike and Adidas no longer report specific running shoe revenue. So four years ago market share was roughly like this between the four companies:
Adidas: 43%
Nike: 43%
On: 8%
Hoka: 6%
Now it would look like this presumably:
Adidas: 30%
Nike: 30%
On: 20%
Hoka: 13%
Those are some big market share gains and they aren’t slowing down, especially for On. The main reasons behind these shifts are technology and wholesale relationships. On and Hoka have gone for cushier, more supportive shoes and have focused on wholesale relationships like small footwear stores and Foot Locker. Nike, on the other hand, focused more on their own stores and digital ordering. That seemed like the natural move but apparently people like trying on running shoes, especially since comfort and the right fit is so important. Now, Nike is trying to rectify these mistakes but On and Hoka have benefitted immensely from this dynamic.
On Running, with the ticker ONON, is a $13-14 billion market cap company with 60% gross margins by focusing primarily on running shoe technology. The company’s trademarked “cloud” technology is comfortable, flexible, and lightweight. The shoe is recognizable too with the little “cloud” pockets on the bottom. If you’re not familiar with the brand, now that I’ve mentioned it, you’ll see them everywhere. The company is profitable with big working capital movements based on inventory ordering dynamics. Growing 40%+ at $3 billion and selling into wholesale channels can create large mismatches so it’s probably best to look at net income + D&A, which is a little over $300 million on a TTM basis. So call it almost 40x earnings and more like 25-30x on a forward basis, for 40% growth. I’d personally like to see a little lower but it’s not a terrible deal for a market share gainer with a popular brand in a category where there is typically strong loyalty.