Here are 2 ambitious objectives for On Holding shares in the second half of 2024

Shoes made by the Swiss company On hold (ONON 3.19%) are among the most sought-after in the world. But not content with its impressive recent market share gains, On's management has set two goals for the rest of 2024 that seem quite ambitious.

When it comes to market share gains, On’s growth has been nothing short of spectacular since its IPO. The company has seen net sales growth of 69%, 47%, and 24% in 2022, 2023, and the first half of 2024, respectively. This growth far outpaces the industry and is better than many of On’s competitors.

It's said to be thanks to its differentiated cushioning that it wins. The company calls it CloudTec: it consists of individual cushioning pockets that adapt more easily to the runner's stride. The company claims it feels like “running on clouds.”

Regardless, this shoe brand is working. Not only is On growing its sales, but that growth is fueled by direct-to-consumer sales. That’s remarkable. With repeat sales, a consumer might buy On shoes after accidentally finding them in a store. But with direct sales, consumers intentionally seek out the shoes, suggesting strong brand awareness.

Things are going well for On. But despite everything, the company has some goals that I find perhaps too ambitious.

On's optimistic outlook

For 2024, On's management expects net sales to grow by 30% compared to 2023 (after adjusting for currency fluctuations). It also expects a gross margin of 60% for the full year. This forecast assumes an acceleration in growth in the second half of the year and an improvement in the gross margin.

As mentioned earlier, On's net sales increased 24% in the first half of 2024 (before adjusting for currency fluctuations). Management says it expects to generate revenue of CHF2.26 billion for the year, or about $2.6 billion. Given that it had just under CHF1.1 billion in the first half, it expects revenue of nearly CHF1.2 billion in the second half.

To put things in perspective, if On achieves this target, it would need its net sales to increase by 28% year-on-year in the second half of the year (before adjusting for currency fluctuations). This would represent an acceleration in sales growth.

Additionally, we had a gross margin of just under 60% in the first half of 2024. With its guidance of a 60% margin for the full year, this implies a slight improvement in margin in the second half of the year.

Why this seems ambitious

Not only does On's management expect its shoes to be in higher demand from now on, they also expect consumers to pay a premium price for them. If the company can do this, it will truly stand out from the competition.

E-commerce giant Amazon Perhaps no other company is better placed to take the pulse of consumers. In the second quarter, CEO Andy Jassy said his customers were “cautious” and moving to less expensive products. Positioned as a premium sports brand, it’s ambitious to expect sales growth to accelerate when consumers are behaving this way.

Also consider that On's main competitor in the running shoe category is probably Nike. Nike, for its part, is dissatisfied with its recent financial results and is struggling to regain leadership. The company is launching new running shoes in the second half of the year while increasing its marketing investments.

Consumers are running out of opportunities and On's competitors are desperate to capture markets wherever they can. In short, it won't be easy for On to accelerate its growth in this environment.

In terms of gross margin, On is already a leader. Not only is it much better than Nike, but it is even better than another key rival, Deckers Exteriorwhich is commendable.

ONON Gross Profit Margin (Quarterly) data by YCharts

Can On's margins expand in a difficult macroeconomic environment when the group is already among the best? I'm not saying it's impossible. But it's certainly ambitious.

What this means for investors

We have a thriving business and likely years of profitable growth ahead of us. That said, with a price-to-sales (P/S) ratio of 9, the stock is not cheap. A high valuation implies that investors have high expectations for the company. And management clearly has high expectations as well, given its optimistic guidance. But in my view, it will be difficult to achieve these numbers in the second half of 2024.

If On fails to meet its targets, investors will be disappointed and the stock price will likely decline, at least in the short term. I think On could rebound in the long term. But I would wait before buying On shares. And if I were a shareholder with a long-term view, I would prepare for the possibility of short-term volatility.