Is On Heading For Disaster?
Overall Thesis
On Holding faces a strategic tension between maintaining premium pricing and high margins versus sacrificing margins to sustain growth, with cautionary examples from Nike and Lululemon showing the risks of margin compression when growth slows.
Narratives
Travis argues On Holding's stock slump is a strategic tradeoff between growth and premium positioning, not a fundamental breakdown. He believes management's refusal to discount products protects long-term margin potential, and the recent selloff has made the stock more attractive on valuation.
Key Arguments
- On is maintaining premium pricing and high gross margins (~65%) rather than discounting like Nike and Lululemon did
- Operating margin is only 13.8% now but could expand significantly toward Lululemon's ~30% level if management focuses on cost containment
- Stock trades at 21x trailing and 17x forward earnings despite a 5-year revenue CAGR of 35%, which looks attractive if margins expand
- Growth remains strong in Asia-Pacific (54.7% constant currency) even as US growth slows to 13%
Nike is presented as a cautionary tale of what happens when a growth company slows and turns to discounting: gross margins fell from 46% to 42.9% and operating margins dropped from the 12-14% range to about 8%. This is used to illustrate risk for On Holding, not a forward-looking call on Nike itself.
Key Arguments
- Gross margin declined from 46% (2016) to 42.9% as growth slowed
- Operating margin fell from 12-14% to 8% over the past couple of years
- Slowing growth led to competing more on price, eroding profitability
Lululemon is cited as a second cautionary example where slowing revenue growth led the company to compete more on price, causing operating margins to decline from 28.7% in 2012 to 18.3% today. This is used as a historical comparison for On Holding's situation rather than a forward prediction on Lululemon.
Key Arguments
- Operating margin fell from 28.7% in 2012 to 18.3% now, a decade-long downward trend
- Gross margin peaked in 2025 and has since declined a couple of points
- Revenue growth slowdown coincided with increased price competition
Hedges & Caveats
- Currency headwinds affecting reported results (Swiss Franc reporting)
- Historical comparison to Nike and Lululemon may not be directly applicable
- On Holding's margin maintenance strategy is intentional and clearly communicated by management
- Analysis based on trailing 12-month data with limited public company history