On Holding

On Holding held an investor day at which it laid out its roadmap for the next three years in terms of marketing, product development (including new categories), and channel growth. Its 2029 financial targets include CHF 5.6 billion in sales, a 65% gross margin, and a 22% EBITDA margin.

Why it matters: On's shares have been under pressure on slowing wholesale growth in the Americas and high costs. We think the presentation allayed some of these concerns as the firm outlined how it can continue to generate market-leading sales growth and margins. Areas of potential growth include the planned expansion into football (soccer), a greater selection of apparel (target is 10% of sales in 2029 from about 6% this year), higher penetration with key wholesale accounts, and a doubling its current company store base of about 100 stores. We view these goals as achievable given On's premium positioning, its success in running, its rising consumer awareness and distribution, and the high-profile signing of football star Kylian Mbappé. Even so, leaders in football (Nike, Adidas) and other sectors will not cede share willingly.

The bottom line: We lift our fair value estimate on narrow-moat On's shares to $51 from $48. Shares are undervalued as investors are skeptical that the firm can reach its medium-term targets in the competitive and challenging sportswear space, but we find its plans to be credible. Given On's plans and to align with its targets, we reduce our 2029 revenue estimate to CHF 5.6 billion from CHF 5.8 billion but raise our 2029 EBITDA margin forecast to 22% from 20%. Our valuation increase is attributable to greater free cash flow from margin expansion.

Between the lines: On intends to repurchase up to $1 billion worth of its Class A shares by the end of 2029. This is earlier than we had previously anticipated and, in our view, is a proper use of capital given the discount to our fair value. We maintain our Exemplary Morningstar Capital Allocation Rating.

On plans to switch to US dollar from Swiss franc reporting as soon as 2027. As the firm generates less than 2% of revenue in Swiss francs, this change should bring reported numbers more in line with business results and reduce uncertainty. Moreover, the change could raise US investor interest.

Having revised our forecast after On’s investor day, our fair value estimate on its shares rises to $51 per share from $48. Our fair value estimate is based on USD/CHF of 0.83, the exchange rate as of Sept. 24, 2026.

Given On's plans and to align with its targets, we reduce our 2029 revenue estimate to CHF 5.6 billion from CHF 5.8 billion but raise our 2029 EBITDA margin forecast to 22% from 20%. Our valuation increase is attributable to greater free cash flow from margin expansion.

In the near term, for 2026, we project 16% sales growth, CHF 712 million in adjusted EBITDA (20% margin), and CHF 1.37 in adjusted EPS. For 2027, we forecast 18.5% sales growth, a 20% EBITDA margin, and EPS of CHF 1.63. Our fair value estimate implies a P/E of 31 and an EV/adjusted EBITDA of 15 on our 2027 forecasts.

Over the next decade, we forecast a total compound average annual sales growth rate of 10%. By region, we project sales growth rates of 7% in the Americas, 11% in Europe, the Middle East, and Africa, and 16% in Asia-Pacific. On generates more than half its sales in the US, but revenue in Europe and Asia is rapidly increasing as the firm adds distribution. The company is in an early stage of development and has many expansion opportunities in terms of distribution and merchandise. Over the next decade, we anticipate awareness of the brand will increase globally, and it will expand beyond its association with running shoes. We forecast its share of sales of footwear will decline to about 82% in 2035 from 93% in 2025 as it offers more products in other categories.

With premium-priced products that are rarely discounted, On’s gross margins are among the highest of any large sportswear firm. Comparable firms typically have gross margins that are 10 or more points lower than those of On. We think the company’s current gross margins (above 64%) are near peak levels, but they should remain high because it plans to limit product releases and distribution to avoid oversaturation and markdowns. Unlike some competitors with broader product lines, On has no plans to offer merchandise at low price points. In the long run, we forecast gross margins will trend down to the high-50s, which are still impressive for a sports footwear company.

We project high-teens adjusted EBITDA margins in the long term. We anticipate On will invest in advertising and research and development to support growth. In 2025, the company’s yearly marketing spending as a percentage of sales was 12.5%, up from 11.9% in 2024. On’s marketing spending is relatively high for a sportswear firm, but we think it is justified by its high sales growth and margins. Over time, the company should achieve leverage on its operating costs. Specifically, from 33% of sales in 2025, we forecast selling, general, and administrative expenses will fall to 30% of sales in the long run.

We assign a narrow Morningstar Economic Moat Rating to sportswear firm On Holding, based on a brand intangible asset. Created by a competitive triathlete and business associates in Switzerland in 2010, On first gained a following among hardcore runners with its lightweight shoes that incorporate its proprietary CloudTec sole cushioning. It has since expanded its footwear and its cloud-sole technology into other categories, and it offers a growing selection of technical sports apparel and accessories. On has been the fastest-growing sportswear company in the world. Its total sales skyrocketed to CHF 3 billion in 2025 from just CHF 267 million in 2019, a compound average annual growth rate of 50%.

As evidence of its competitive edge and its improving leverage on operating costs, On’s adjusted returns on invested capital, including goodwill, have averaged 27% over the past four years (2022-25) and reached approximately 37% in 2025, much higher than our 9% weighted average cost of capital estimate. Moreover, we think the firm’s ROICs will average 46% over the next decade.

On’s impressive ROICs are driven by its rapid sales growth and high profitability. Driven by expanding gross margins and cost efficiencies, On’s yearly adjusted EBITDA margins have risen to 19% from 11% since 2019. Although its sales growth is slowing from the sky-high levels of the past, we forecast a 10-year compound annual growth rate of 10%, well above projected mid-single-digit growth in global sportswear sales (4.6% annual growth through 2030, per Euromonitor).

As evidence of a competitive edge, On’s gross margins above 60% are among the highest among any multinational sportswear firm. Its products are premium priced and rarely discounted; the firm will typically take back unsold merchandise rather than allow markdowns. On’s margins are especially impressive given that 58% of its 2025 sales came through wholesale channels. One way in which the company holds its margins is by limiting distribution to retailers that focus on premium activewear and serious athletes.

In addition, On’s margins are supported by a growing direct-to-consumer business. The firm’s direct sales rose to 42% of total sales in 2025 from just 25% in 2019 (before the pandemic). As with its wholesale operation, On limits discounts through its own channels to preserve margins and brand value. Indeed, unlike many competitors, it does not operate any outlet or clearance stores that might cheapen its brand value.

On has expanded its consumer direct business. In its first decade, the firm was almost entirely dependent on third-party stores and digital; indeed, at the time of its initial public offering in 2021, it operated just eight stores. This has changed as the firm now has about 100 stores. Even so, the company’s store base in all regions remains a fraction of that of many peers, so there is room for many more locations. On plans to add another 100 or so stores by the end of 2029.

Further, On supports its brand value with marketing spending that totaled 12.5% of sales in 2025. This spending level is relatively high as comparable firms Nike and Deckers spend closer to 8% of their yearly sales on marketing. To highlight the performance of its footwear and raise its profile, the brand sponsors a few dozen professional athletes, primarily in running and tennis. On also has a high-profile collaboration with actress-singer Zendaya.

Some of On’s marketing success has been its association with tennis great and fellow Swiss native Roger Federer. Nike sponsored Federer for many years until his contract expired in 2018. The next year, rather than signing a typical endorsement deal, Federer decided to invest about USD 50 million in On and become involved with product design and marketing. Although Federer retired from professional tennis in 2022, his close association with On gives it credibility with both professional and amateur athletes.

On is entering the football (soccer) space. Although crowded, On attracted attention by signing Kylian Mbappé as the face of the business.

Providing diversification and greatly expanding its addressable market, On’s apparel sales have more than doubled over the past two years. Its leggings and other items are priced at the high end of the market Although clothing only accounted for 6% of On’s total sales in 2025, the category represents 25%-30% of the firm’s sales in some company-owned stores, which gives us confidence that consumers are responding favorably. We forecast apparel will reach 10% of total sales in 2029.

Given its emphasis on premium products for high-level athletes, product development is important for On’s brand value. The company has released new formulations of cloud and foam technology, which have allowed it to expand beyond running shoes. Another innovation is LightSpray, an automated process that can create lightweight shoes in three minutes. In early 2026, the company opened a LightSpray factory in South Korea to mass produce shoes made with this process for the first time.

We do not think a wide moat rating is appropriate for On. Although this rating could be justified by the company’s high margins and returns, its success is relatively new. Moreover, On’s ability to expand in China and other markets is uncertain given that the US accounts for more than half of its sales. Thus, it may be aggressive to assume that its brand-based edge could last for more than 20 years (as required for a wide moat).

On’s sole moat source is a brand intangible asset. The firm outsources its production to third-party factories in Asia, so it has no cost advantage over competitors. Moreover, we do not think On has a moat based on efficient scale, as its distribution system is like that of competitors. Further, there is no network effect in its industry and no switching costs.

On has been the fastest-growing sportswear brand in the world since the pandemic. Its footwear has rapidly gained share on much more mature brands in several markets.

There are opportunities for growth through store openings, technical innovation, the introduction of football (soccer) products, and geographic expansion. The company is diversifying and reducing its historical dependence on wholesale selling.

As its products are premium priced and rarely discounted, On achieves some of the highest gross margins in the sportswear space.

The sports footwear market is very competitive. On has a shorter history and lower consumer awareness than numerous firms in its industry.

Although it has been diversifying, On remains dependent on running shoes. The running category is very crowded, and there is no guarantee that On’s planned expansion into football (soccer) and other footwear categories and apparel will be successful.

On has had some management instability as both of its co-CEOs from the time of its IPO have left the firm over the past year. The company has also brought in a new chief financial officer.