Live Research: On Holding (ONON) — Great Growth, Big Questions

0:00All right. So today we're doing something a little bit different today. We're going to actually research a company live on air in real time. There's no fancy script. There's no, we already know the answers to what we're looking for because Andrew and I really don't know a whole lot about this company. I love their product. That's all I know. I know we've talked in the past couple of weeks about the process of identifying a good company. You know, finding your circle of competence, things like that. But this is kind of checking off all those boxes as we look into this company to see if we want to invest it.

0:34So quick warning, it may feel a little boring in spots, but we will do our best to be entertaining. I promise. So buckle up. Let's go. You're tuned in. You're tuned in to the Investing for Beginners podcast. Investing for Beginners podcast. The show for the long term investor. We cut through the noise to focus on what works. compounding discipline and the conviction to buy wonderful businesses and stick with them your path to financial freedom start now welcome back to the investing for beginner guys my name is steven morris he is andrew sayler and like i said in the opening we got a little bit of a different feel for you all today we're going to research a company that i know nothing about other than his product.

1:24Andrew, what company are we talking about today? We're talking about On Holding. They are a shoe brand and they are from Switzerland. Right. So that instantly isn't a red flag, but that's good information to know because now we know we're looking for a 20F, not a 10K. In that regard. so like i said like we we have no uh at least i have no knowledge of this andrew like why would you say your knowledge of the company would be and i did about like an hour of research maybe before we got on just because it was something that i'm looking at and a company i've been following for a while because i i own a couple of pairs of their shoes and i like their shoes um it's it's if you if you're not familiar with the the brand it's kind of on the higher end i guess or premium segment of shoe you know you would go to like a shoe carnival or um whatever discount shoe place you're going to it's not going to be there likely it's it's more you got to go to like a dick sporting goods or somewhere and pay a premium for it but um i probably wore out like if we talk about how many miles you could put on a shoe i bought the on cloud running the walking shoe and i probably wore those for like two or three years almost every day like that kind of dad vibe going on that's my energy outside of this podcast so i mean it's a very from what i saw it's a durable shoe do you own a pair have you ever tried on a pair of ons yeah i do i actually my running shoes are on okay and so i don't i don't i don't remember what the rule of thumb is for for it but i think it's like every six months you're supposed to change out your at least that's what i do every six months no matter what i change out my running shoe so um yeah after so i've bought two pairs now my wife actually was the first person to buy a pair of on she's the one that turned me on to them and she bought the she bought their i think it was the female version of the cloud walking shoe i don't remember the brand she got.

3:59They're not the brand, but the model, I guess. But all she talked about was just how freaking comfortable these tennis shoes are. And it's like, fine, I'll check them out. So I went to Dick's Sporting Goods. And one of the number one rules for my running shoes, I hate having lead weights tied to my feet. So like, I remember back when I was going through boot camp, the army gave me these big grandpa look in new balances. And those things literally weighed like five pounds a foot. Like they were. So I guess that's where my hatred for heavy footwear comes, at least whenever I'm trying to run. But um, the very first thing I noticed, no matter what uh tie or model of their shoe i picked up they're insanely light um and i just so instantly love that um they have great arch support as well as great ankle support which is key because i've broken my right ankle a few times so uh but anyway uh like you said after I changed out my first pair um I still wear them because they are perfectly fine and I would say a heavy moderate on the tread wear of course because I you know I'm running outside but I mean still there's plenty in there that they aren't like super slick but they get wet so yeah I still wear those just as a daily shoe now which is the first I want as far as I can remember that's the first pair of running shoes I've ever converted from a running shoe to just a daily wear shoe.

5:53They usually go from a running shoe to a work shoe to the trash. But yeah, my, my arms, like they still look good. They feel good. Yeah. Very happy with the quality of their product. Yeah. That's one of the things I noticed about this brand in particular, and I don't know if it's a wider trend, but just this idea that a shoe doesn't just have to be a running shoe. It can be a walking shoe. It can be a going out shoe. And this is something that in our earnings call, I can't remember which one I pulled up, the co-chairman was talking about how not only is the kind of athletic thing, basically instead of looking at it as utility, you look at it as identity.

6:43This idea that having high quality shoes, being active is sort of the new status symbol. These are all words that he directly used. And so I think they see tailwinds or just a general shift in how people think about athletic shoes in general and on being leading in that kind of movement. I'm not going to get But let's be honest about why I'm super excited about this company. And I'm hoping to get all of my thoughts gathered as we do this episode. And who knows, maybe it will be a recommendation in the future. Maybe it won't be. But the growth for this company has been pretty insane. If you take five years ago and you compare it to today, they've grown revenues almost 50 % a year.

7:35And what's weird is that the stock has been flat over that same five-year period. So when we talk about buying a great company but paying too high of a price, that's a really great example. The price is still expensive. It's a 45 PE, but their forward PE is a 22. So that basically implies Wall Street's expecting their earnings to double from where they are today. And if you're looking at it from that basis, it's cheap. It's never been that cheap on a forward PE level. So all those things get me irrationally excited about the company. Yeah, I'm looking at growth for revenue, you know, 74, 65, 66 per year.

8:23I'm talking about growth rates in that range. And they've gone from under 300 million in sales to now 3.8 billion as of 2025. so they've grown their their sales 10x and i'm curious if you have thoughts on like that idea of like what what i'm struggling with right now is like how do i how do i figure out what the upside to this is and i struggle with this with crocs too because you can't just say oh you know the shoe industry is is the tam and that's going to be it Like obviously on shoes, what they call it, on running, serves a very specific type of customer for a very specific type of value proposition.

9:12So where I'm struggling now, okay, you're at 3.8 billion US dollars. How high can that really go before you start running against saturation? because if it's big, if there's a lot of room to grow into, like the way my mom would buy my shoes when I was growing up, she'd buy like two sizes too big because she just think I would grow into them and I never did.

9:40So like if there's a lot of room to grow into that, you can out loud say maybe, hey, I justify paying a higher price for this. But if that actual, if Wall Street thinks that the space is bigger and it's actually smaller, then you probably don't want to pay a really expensive price for it. So one of the things I'm struggling with now is figuring out how big can they really grow into.

10:09Right. Nike has$46 billion in revenue. Adidas has$29 billion in revenue. some of their other competitors which I mentioned in the 20F Brooks running which is owned by Berkshire Hoka which I know my sister loves I think they are a Japanese publicly traded company New Balance which is privately owned and there are a few on other on here Lululemon so I mean competitive space right it's hard to say oh this is a leader just because I like the shoe and you like the shoe that doesn't necessarily mean you know that they necessarily have a competitive advantage um but I don't know like do is looking at sorry go ahead I was just that also probably means they don't have pricing power as well but as I say that like you said they're definitely on the higher premium side of shoe when it comes to, you know, the type of running.

11:18They're definitely the most expensive shoe, I think, that you'll buy in Dick's Sporting's goods. Yeah. So I was about to say they probably don't have pricing power, but now that I say that, they actually kind of do.

11:37So I'm sorry. Go ahead. I interrupted you with that thought. No, yeah, you're good.

11:46would you mention lightness as being one of those differentiators who pick up the shoe it's super super light another thing that they highlighted um which i saw i was on facebook and i was doing research there was a interview with again the co-chairman who's now co-ceo um he said in an earnings call their crown jewel is light spray so if you picture a robotic arm well apparently what they've designed swiss engineering for the win is this robotic arm that sprays the top of the shoe and the way he described it is it took 200 assembly steps and reduced it into one and according to that um one of the latest shoes was just worn in a marathon and it weighs 170 grams which would be less than a quarter of a pound i think truly insane they're they're using a robot arm to spray this thing you know i saw a visual so was easier for me to kind of like put a mental image in my head.

13:01But it's like it's spinning in this circle that you would associate with the top of a shoe and then being so thin. It's just a weird concept. Like how are you spraying the top of a shoe? But that's what's happening. And so he's the guy who's talking about this, the co-CEO, he's excited because now they're going to be able to mass produce this new type of technology if you want to call it that and be able to implement it in hundreds of thousands of shoes rather than right now it's just in a few of their shoes so the lightness that you're talking about that's a differentiator they could be going even further into that and we might just be starting to see that that's crazy but i mean So is this their technology or did?

13:52Yeah. Yeah, it's something that they talk about that they've made. Interesting. So, I mean, I guess something we need to look into also is whether or not like this technology that they've come up with has other purposes, which I'm sure it does. Yeah. So their, their main market might not even be shoes in the long run. Hmm. Yeah. That's interesting. Or, or could they contract it out to other, yeah. To other uses. My, my, the pessimist in me says, okay, like it's cool to have a super, super light shoe, but do elite runners really care? and like the reason I say that is like I love my on my ons I have two of them but for my marathon I ran with Brooks and I liked the feel of those better and I never did like a which shoe is lighter kind of a comparison but just going off what people were saying uh online and and some just people in person so I know runners are pretty particular about their shoes and so it makes it hard if if i'm basing my entire thesis on the fact that they have the best running shoes to me maybe it's a limiting belief but to me it's hard to to put that whole basis in there if i'm not fully in tuned with which running shoe is the best so you trained with on and then switched to brooks for the actual run no no no i trained with brooks i had two pairs of brooks for the marathon yeah but the on shoes are more like walking shoes which i agree with what you're saying they feel like walking on clouds which is cool yeah i was gonna say that that's that's gutsy dude like to train with one shoe and switch for the actual marathon like that's that's gutsy a few other things i saw that kind of so now talking about some things that might be growth avenues despite already just taking taking the running shoe thing aside their shoe revenues 2.8 billion their total revenues 3 billion their apparel is only 160 million.

16:26So a fraction, their apparel is a fraction of total revenue. If I compare that with like Nike, the apparel is almost half of their footwear. And then if you look at Adidas, their footwear is only 16 billion, their apparel is 10 billion. So apparel is a huge part of Adidas and Nike's total revenue mix. For on-holding right now, it's a minuscule amount. So can we use that to say apparel could 10X from here to hit levels like Nike and Adidas? Maybe that's the next growth avenue. And I don't know for certain if that's the answer or not. You know how managements will go in their investor day. They'll list out as many of these growth drivers as they can and try to get you excited on at least one of them.

17:19but that could be an interesting play of like all right maybe they're not and maybe they are but like maybe they are not the de facto most obvious number one option for a running shoe but there's enough people that like them that just by growing apparel revenues they they find significant growth from here. Definitely. Now that's interesting. I'm trying to find

17:53under 20F about this technology you were talking about. Light spray. It's one word. I don't know if it's like L-I-G-H-T. Yeah. Oh, there it is. Huh. That is crazy. So their forward-looking statement includes, so this is straight from their 20th verbatim, from their cautionary statement regarding forward-looking statements. so where did i go oh here it is our ability to successfully develop implement and scale our light spray technology and products developed using this technology that's a risk factor yes yeah so they're aware that this is something basically what i take from that is they're aware this is something really unique that they've developed and they need to make sure they're scaling it properly or they realize they need to make sure they scale it properly yeah i guess when i read something like this that's very company specific and sounds super innovative it's like okay give me some numbers around it like it makes for a really awesome story, but until there's data around, okay, this percent of our shoes or this amount of our revenues, that's one of the things I try to do with any company I look at is, sure, any company probably has something exciting that they're working on, but which ones are really those that are going to push the ball forward and move the ball down the field in in a way that's meaningful versus which is just something that's cool, but you know, isn't going to change anything for when it comes to profits and revenues and things like that.

20:03Right. So again, this is straight from their 20 F speaking. It's actually funny because I just scrolled down when you started talking and the next thing that popped up is where to go. Oh, here it is. And we have, and this is from that same statement just on the next page, we have limited experience with our light spray technology and products developed using this technology. As such, that could be a significant risk factor that we don't fully understand it. And there can be no assurance that we will be able to successfully implement, develop, and scale our light spray technology and products. So to your point, like, yes, numbers would be great, but this is something brand new and there are no case studies for them to use.

20:54So, I mean, we kind of just have to take them at their word that this is innovative. This is going to be huge and they are going to figure out how to scale it. Which leads me to the other thing that worries me. So let's talk about their ownership structure, management structure.

21:18So they have the co-founders, the executives, the directors, they own basically majority voting power of the company, but their actual share ownership, what they call the economic ownership, is not as high. so there's three three men who own over 50 % of the voting power combined it's Oliver Bernard Caspar Copetti and David Alleman and they just had a CEO Martin Hoffman who was there for five years and now he's gone so now it's a co-CEO situation between Bernhard and or no I'm sorry Copetti and Alleman and so where I get nervous is because we were talking a couple episodes ago about like, would Andrew ever dive into a company where they're not returning capital to shareholders, whether that's through a dividend or a buyback?

22:19Because everything up to now that I've bought has been either a dividend or a buyback with a track record of one or the other, and oftentimes both. In this case, the company is slightly diluting from year to year to year. And having this three guys, I'm pretty sure they're co-founders, with majority voting power means they might never return capital shareholders because they can completely dictate that. And so when you talk about taking them at their word on stuff, I really would need to look at each of these characters, for lack of a better word, and make sure that I'm aligned with their vision and that I actually would trust them.

23:15I don't know. It becomes like an interesting ballgame when you have guys who build a company and become millionaires or billionaires. And how does that change some of these motivations and things like that? Martin Hoffman, who was CEO for five years and now is leaving the company, One of the reasons that they said is he's kind of going on hiatus and pursuing philanthropic pursuits. And so when you talk about companies where there's not majority ownership, you don't necessarily worry about how motivated the CEO is or if they're going to... Yeah, basically how motivated they are because a board director could easily just boo them if he does a bad job.

24:04And if maximizing growth and capital compounding is not something he prioritizes. But when there is a majority ownership, you have to wonder. It's I don't know. It's just I feel weird saying it out loud, but it's like some people just have other priorities and they don't necessarily think that maximizing profit should be a number one priority. And so as a shareholder, that could be an issue if they see other priorities than maximizing shareholder value. As much as that's become a meme of this totally evil and destructive thing, if you have three people who are now independently wealthy and maybe they don't care to maximize shareholder value, does that become a bad thing for shareholders?

24:59You can look at Alphabet as an example where that did not happen. The two co-founders have majority voting power, and the company has been one of the greatest stocks of all time. But I think it's worth considering and putting on the table that maybe you're putting a lot of trust in the future here. Well, to your point, this is directly from their 20th. um this is a strategy shift that i found uh and they are explicitly move trying to move to dtc um which stands for direct to consumer uh sales so dick's sporting goods where was it i wrote it down so they wholesale to dick's sporting goods that is 58.2 percent of their their wholesales they're looking to get away from wholesale and go direct to consumer which i mean that's about that's a huge strategy shift good point and nike tried it three four years ago i mean i don't know if you've checked up on Nike stock lately, but it has not been pretty.

26:19They're down something like 65 % from the peak. Other problems happening there, not just the D2C strategy, but it's definitely risky. I don't know how that plays out. You're testing your brand and it's like, all right, we're going to see how strong our brand really is. And if you can succeed D2C, then it's got to have benefits. You have more control as a company. You probably earn higher margins. I guess it's a test, right? A test of the brand. I mean, more than half of their sales comes from Dick's Sporting Goods alone. Yeah. I mean, and they're based... The way I read this, they're basically trying to squeeze Dick's sporting goods out obvious for obvious reasons.

27:18And I don't, I'm not saying it's bad or good or whatever. It's just, they're literally, you know, I mean, if it goes bad, it's literally biting the hand that feeds you. Right. So if they, and I mean, obviously Dick's sporting goods, and I don't know this for a fact, I'm just as a business owner, this is something I would definitely notice and take personal. If I was on the Dick's Sporting Goods side. And so when they if it doesn't work and they have to come back to the table with me. Like that deal becomes much, much sweeter for me. Right. So, I mean. It's bold and, you know, I see it as bold.

28:10and significantly risky saying, you know, if Nike can't pull it off, you know, what's to make them think they can? And I don't know. I don't have that answer. I just, that's what's going through the old brain bucket. Yeah. Yeah. So fiscal.ai has segment data for a bunch of companies and they break out the wholesale versus D2C revenue. So I'm going to pull them up and they've grown D2C at about 63 % a year and wholesale at about 43%. So D2C is making up a bigger percentage than it did in the past. that said though at what point do you at what point do you run into issues there and do you risk the revenue that you're getting from wholesale I did see in the 20F they have 67 stores right now and I was curious because I know Nike has their own stores Nike has somewhere around 2000 stores and I don't know if you knew this Adidas has

29:32886 concept and concession stores, whatever that means. And they also have 1136 factory outlets. So Adidas also has around 2 ,000 stores. So what does a retail environment look like if on-holding gets to 200 stores, 500 stores, 1 ,000 stores? Does that help? Does it not matter? I mean, the 2000 stores didn't really help Nike. So, you know, take that for what it's worth. But yeah, I just found that too. And that's also in their strategy is they want to aggressively, and that is their word, attack the retail expansion. Like Andrew said, they currently have 67 retail locations. this is what I think is very interesting though Andrew 38 of the 67 are in China right and China doesn't make up much of the revenue right now so their Asian revenue is 17 % okay 17 % really low

30:48Nike has a pretty decent size in China

30:55and I know that hasn't been working super well for them so yeah that's I don't know so does that concern you in what way and the way that the the the place they have the most retail locations is the place they have the worst revenue generation coming from it just makes me think that like the retail footprint doesn't really matter so i guess yeah if they are spending a lot in capex to build up these stores which from what i saw they didn't disclose exactly they said they're spending capex on new stores but also on like the manufacturing around that light spray idea um but yeah that would be concerning if they're spending a bunch of capex on stores that don't really help your revenues well i mean like i said they're word aggressive so and i like i hear i hear and agree with what you say like how in the days of amazon how important is like i can't tell you the last time i i actually bought shoes in a store i don't know you bought direct you bought direct from i do yeah on website that's interesting so yeah and i don't know it's just that that's kind of tripping me out the fact that they have their most retail locations and in the place they're getting the least amount of revenue and the word the their wording of aggressive towards the retail locations or expansion in the retail locations i don't know that that does concern me a little bit anything else on the retail or should i move on to other parts of the financials um no no i don't have any anything i'm currently frantically trying to read through 20f to figure out where their pricing power is right uh one thing i will say is there i i didn't want to bring that up where did it go hang on i gotta to scroll back up okay so 93 percent of their revenue comes from shoes their footwear um only 5.6 percent comes from apparel so um they do mention that they want to get that apparel number up significantly and again is that is that a strategic misstep so they have this potentially like game-changing spray machine thing light spray like that doesn't help with clothing so i don't know like shouldn't you be focusing on what because i mean and like you said earlier in the beginning that they're they're competitors lululemon especially with apparel yeah lululemon and Under Armour, Nike, Adidas, like, Asics, New Balance, like, there's so much competition, especially in the apparel area, or sports apparel.

34:29Like, how do you revolutionize that? And it seems like they found a way to revolutionize the shoe. So, I don't know. I don't know I don't know if that concerns me yet or not that they're focusing heavy on their apparel growth what you said about like trying to figure out if they have pricing power and basically is their competitive advantage more sustainable than Nike's because it's pretty obvious Nike and to a certain extent Adidas to have struggled with all the competitive forces and that's hard i mean i kind of skimmed through the 20f i didn't see anything structurally that would indicate a unique moat other than this light spray we've talked about and then obviously knowing or understanding why people are buying that brand um you kind of almost want to be a super user right because then you could really say whether For example, if it's just like having extra padding on the bottom of your shoe, well, that's not really much of a competitive advantage because any other shoe company could copy that as well.

35:55So is there something inherent in the shoe that another brand could not copy? That's something I think would show pricing power and would show a unique competitive advantage. And I guess at this point, I don't know enough to say so. From a Wall Street stock market business analyst perspective, there's nothing that I can point to that says, oh, economies of scale or distribution or anything like that. To me, it really seems like it would come down to are they really making the best shoe and are other competitors not able to copy it? Yeah, I think that's definitely concerning as well. I think, and where was I did see a warning they had.

36:55Yeah, they warned that because it's such a highly competitive market, they are subject to competitor price discounts. So that automatically is a chink in their pricing power armor. um if nike and adidas and new balance just decide to offer you know 10 discount on everything you know on is going to have to do the same thing and another thing that concerns me with their moat is they're really heavy on the premium side of their brand so i don't know if i should say this is what take people like it's like they're they're they're focusing on the bougie aspect of their brand and that is such a fickle fleeting thing like it may be bougie today but tomorrow it might not be and like as far as I can tell so far that is the only pricing power they have is that they have a good light comfortable shoe that is durable and sells at a premium

38:26I've been really struggling to find a good pricing power for them yeah Yeah, I mean, those are all really good points and it's important. I mean, lots of different growth stories and it's easy to get attached to them and it goes well until it doesn't. And so ideally we build a portfolio of businesses that have that, those factors that really shield them against adversity, because it would be at those times that you would feel confident that, that you can hold whatever stock you're holding and it can weather a down, a downtrend. And because there are a downtrend comes for every stock, every industry.

39:16and it's not so hard to necessarily hold a stock when it's going up it's really hard to hold it when it's going down and everybody else seems to be selling it but the biggest gains happen when that happens as well you just have to hang on so if that were to happen to on holding in the next couple of years. Yeah. Does, is that conviction level there? It's, it's a very, um, it's a very discouraging thing to hold stocks and see them go up 30%, 50%, 80%, whatever it is. And then you see it get wiped out in just a few months. And so you understand when people say they want to take profits as much as everybody who picks stocks and wants to talk about picking stocks talks about yeah let your winners run let your winners run until you've experienced what that feels like it's hard it's it's hard to let those winners run because competition does come for companies and it can come for stocks and yeah it's you hate to boil it down an investment to just one single thing but in this case it does seem like do they have that pricing power do they have that uniqueness that can't be copied i think it i think that's a fair assessment yeah i definitely and you know well we talked about a couple episodes back like my my processes i always try to figure out what their moat is what their pricing power is first before i do anything so automatic red flag uh for me and i haven't been able to find it do you know where their their factory is i said vietnam vietnam there's like seven in vietnam and then there's two it's i think indonesia okay so

41:16supply chain um everything and i like i get i get the like the war in iran isn't going to last forever hopefully it's not another 20 year thing but i mean just shipping costs right now are insane because of it so that's a huge concern the another concern i have is like we said 93 of their revenue comes from their shoes so there's that there's no diver or diversification in how they make money at all so one slip up with the shoe was some you know supply chain interference you know a bad lawsuit that that just concerns me as well because you know maybe people just find a new hot you know something that's hot and new that they like better or whatever the there's no i don't i'm not seeing how on can withstand losing that um and then as far as i can tell they don't really dive into what they can do with this light spray they just say they have to scale it so i mean that's awesome i think i think that's really cool i think they're on to something which is why i'm not completely like writing them off at this point but i think i i just i want to know like what what what can they do with it like what else what other practical like how are they going to scale it or i know they don't want to give away their whole strategy or whatever but i mean you got to give me more than just one sentence right um it's all good points I think from a numbers perspective, this thing is screaming.

43:16But from a qualitative perspective, I think it's worth considering everything we've talked about because the numbers only get you so far. I wouldn't bet against them. I also don't know if it's in my risk tolerance appetite, at least with the information I have in front of me right now. yeah i definitely agree um still love their shoe yeah immensely um i like their company and i think i'm excited about this light spray like i think this could be really really cool just from the little bit of information i've gotten about it i think this is this could be neat but like you said i don't have enough information about their light spray their their numbers sound great but so i mean i don't know but it's definitely not a write-off like it's definitely not something i i think needs to be forgotten forever um i think it's something we we put a we should put a pin in and circle back to it in six months yeah i completely agree uh any last thoughts on this company the process we went through looking at super high gross stocks like this um anything else kind of stick out as we wrap up here no um i think it's a cool company i think obviously i love the brand as a whole um i think from an investment standpoint obviously it depends on your risk um if you're listening to this and you're interested definitely do your own search a bit own research um because we barely scratched the surface of what we need to know uh but i think it's And for me, ultimately, a little too risky.

45:27It's not the risk adverse or risk tolerant even. It's just that there are questions I want answered that I don't have answers to, at least right now. And until I have those answers to where I can look at it and say, okay, like even if their shoe sales take a hit, they're going to be fine because they have this and they're going to do that. And right now we don't have those answers. And, you know, we saw Nike back when the bad press about their factories in Africa hit. I don't even remember how far their stock dropped and how far their shoe sales dropped. But I know it was massive, massive and massive.