Could On Holding Become the Next Lululemon?

Lululemon Athletica (NASDAQ: LULU) has generated massive gains for its investors since its initial public offering (IPO) in 2007. Shares of the Canadian athleisure apparel maker have soared from their split-adjusted IPO price of $9 to nearly $510 today -- which would have turned a $1,000 investment into nearly $57,000 over the past 16 years.

Those multi-bagger gains drove many investors to seek out the "next Lululemon" in the athletic apparel market. One of those winners might be On Holding (NYSE: ONON), the Swiss footwear and apparel maker that went public just two years ago.

Five people attend a yoga class together.

Image source: Getty Images.

The similarities between On and Lululemon

On and Lululemon both set themselves apart from the competition with proprietary materials. On's CloudTec technology, which was developed by studying the flexibility of garden hoses, created interlocking "cloud" cushions for its shoes that relax when a foot is in the air and tighten when it hits the ground to support the next step. Lululemon developed a proprietary fabric that was preshrunk, was stretchier than many other fabrics, and wicked away moisture during sweaty workouts.

On and Lululemon both leverage their proprietary technologies to sell pricier products than most of their competitors. Both companies also focus on selling full-price products and actively avoid margin-crushing markdowns.

Both companies are also expanding their direct-to-consumer (DTC) channels to reduce their dependence on wholesale retailers, protect their pricing power, and boost their gross margins. In their latest quarters, On and Lululemon generated 34% and 41% of their revenue, respectively, from their DTC channels, including their e-commerce marketplaces and first-party stores. Both companies relied heavily on their online sales to continue growing throughout the pandemic.

On and Lululemon are both sponsored by well-known athletes. On was founded by Olivier Bernhard, a former Swiss Ironman champion, and it's promoted by Nicola Spirig, one of Switzerland's most famous triathletes. Swiss tennis legend Roger Federer, who oversaw the launch of On's "The Roger" shoe, is also a major investor in the company. Lululemon's top athletes include professional golfer Lydia Ko, freestyle skier Cassie Sharpe, and Utah Jazz guard Jordan Clarkson.

On is growing faster than a younger Lululemon

On expects its revenue to rise 46% to 1.79 billion Swiss francs ($2.1 billion) this year. That would represent a compound annual growth rate (CAGR) of 61% from 2019.





2023 Outlook

On Sales Growth (YOY)





Data source: On Holding. YOY = Year over year.

By comparison, Lululemon generated $2.1 billion in revenue in fiscal 2015 (which ended in January 2016). However, it grew its revenue at a CAGR of only 14% from fiscal 2012 to fiscal 2015 as it struggled with a recall of its see-through yoga pants, the resignation of its CEO, and a series of controversial comments by founder Chip Wilson.

Meanwhile, On won't stop growing anytime soon. The company expects to more than double its annual sales from fiscal 2023 to 2026, which would represent a three-year CAGR of 26%, but UBS recently predicted that its top line could grow at a CAGR of 45% over the next five years as it launches more products and expands into more markets.

Just like Lululemon, On is boosting its margin with premium branding, a lack of big markdowns, and the expansion of its DTC channels. On expects its gross margin to rise from 56% in 2022 to "at least" 59% in 2023. Lululemon posted a comparable gross margin of 58% in the first three months of fiscal 2023.

On also finally turned profitable in 2022. Analysts expect its net profit to grow at a CAGR of 66% from 2022 to 2025. Those are solid growth rates for a stock that trades at three times next year's sales and 39 times forward earnings.

On could still have plenty of room to run

On is the largest footwear brand in Switzerland, but it holds only a mid-single-digit share of the U.S. footwear market and gradually entered China in 2018. Its enterprise value of 7 billion Swiss francs ($8.3 billion) still makes it a lot smaller than Lululemon ($64.3 billion) or Nike ($167.9 billion) -- so it could still have plenty of room to run.

On's stock got a bit overheated after its IPO, but it now trades nearly 50% below that all-time high and about 16% above its debut price. Investors who take a chance on this growing footwear and athletic apparel maker -- which has a lot of the same positive qualities as a younger Lululemon -- might just reap some solid gains over the long run.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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