What's Driving On: The Hottest Footwear Company In The Market?

ON Holding AG ONON shares suffered a setback despite reporting record sales for a sixth consecutive quarter. 

The Zurich-based footwear company's stock was hit by currency headwinds plagued by a strong Swiss Franc, undermining an otherwise solid second-quarter performance.  

On has been the hottest footwear company in the market this year; even after seeing a 14% drop on Tuesday, the company's shares are up over 79% year-to-date. 

The company made waves after signing Roger Federer in 2019 and has greatly benefitted from the resurgence of performance footwear prompted by the pandemic. 

The Americas region, which accounts for two-thirds of the business, grew 60% in the second quarter. The Americas business is up 74% year-to-date. Amid this growth, On still sees a path to continue its impressive growth trajectory. 

"Culturally, there has been a moment where running has been very cool again, and we have seen a trend that the market size is growing," Britt Olsen, GM of Americas and Head of Global Commercial Strategy, said in an exclusive interview post-earnings.

"But regardless of what the trend is, On is always very true to the core of why we started, which is born from a very strong performance DNA."

Following the release, On raised its guidance from 1.74 billion Swiss francs to 1.76 billion. 

"We have been very intentional in our distribution in the US and globally. On is not a brand that opens up all doors so we have a lot of room to grow. We say no quite a lot in terms of where we want our products to be distributed, and so we think we have a ton of runway to build On into a true performance running brand," Olsen added. 

Performance Footwear's Comeback

A renewed interest in performance footwear is a noticeable shift from pre-pandemic days when the category was primarily considered out of favor. Performance footwear is now experiencing a resurgence, and this trend shift is playing to On's benefit. 

On has an understated logo, but paired with its oversized Cloudtec midsole, the product has become instantly recognizable.

"I think the future is very bright for this brand. The product is very unique, and I think it captured the imagination of the fashion consumer, even though On is built as a performance product," said Matt Powell, advisor at Spurwink River.

The footwear giants Nike and Adidas have been ceding market share to the niche running brands, primarily due to resting on the laurels of their heritage footwear and lacking focus on innovation, Powell says. 

"During the pandemic, Nike leaned heavily into classic footwear and best sellers and did not come out with anything new. They took very little risk with new innovative products and are paying the price for that. The classic footwear they leaned heavily on has slowed up in interest. With the lack of anything fresh, the walls of retail look stale right now," said Powell. 

"Meanwhile, On is seeing strong sell-through at full price. That's partly because they remain a hot brand and a brand that's not broadly distributed. All of those things combined support full-price selling," he added.

Powell believes that Nike continues to shed market share to On and Deckers Outdoor Corp DECK's Hoka. 

"If you look at their results compared to Hoka and On growth, clearly Nike is giving up share, and On and Hoka have been recipients of that share donation," Powell concluded. 

What's Behind On's Run?

"They make a really good product with a very distinctive design, and they have been good with the placement of this product. They haven't chased the mid-tier and low-tier price points—they have stayed premium and have been very tight with who can sell their product," said Matt Halfhill, CEO and Founder of Nicekicks.com. 

Halfhill argues that there are very few new brands that have built traction in innovation like On.

"This is not the first time that Wall Street got it wrong on footwear brands not knowing how to read earnings reports. On is positioned well in the marketplace, and they stand out from their competitors in being premium and also aimed at performance. That's what I think has really been a big part of their success." 

Disclosure: I have no business relationship with any of the companies mentioned in this article. I also do not own any shares in the companies mentioned.