On’s (NYSE: ONON) Q1 results prove it is gaining traction with athletes and is on track to dethrone Nike (NYSE: NKE) as the god of running shoes. The company’s results exceeded expectations on strength in all channels, segments, and geographical regions and are expected to accelerate as the year progresses. 

Evidence the shoes are more than a fad includes the latest Boston Marathon win. Helen Obiri of Kenya became the 6th woman to repeat back-to-back wins, the first since 2005, wearing a pair of On running shoes both times. The takeaway is that winners who care about comfort and quality are turning to On and On is expanding into new verticals, growing its addressable market. 

On Has Robust, Record-Setting Quarter, Gives Cautious Guidance

On had a solid quarter with revenue of $640.36 million, exceeding the Marketbeat.com consensus by a significant margin. The top line exceeded consensus by 1650 basis points to set a new all-time record and provide leverage to the bottom line. Revenue is up 20.9% compared to last year, led by the DTC channel. DTC sales, the higher margin channel, grew by 39%as-reported, and 49% on an FXN basis and are now 37.5% of the mix. Wholesales grew by 12%. Segmentally, Accessories grew fastest at 36%, but the core shoe segment also grew robustly at 21%. 

Margin news is good. The company widened its gross and operating margins on strength in DTC, sales leverage, and cost controls. Adjusted EBITDA increased by 27% on a 15.2% margin, up 70 bps YOY, to leave earnings at $0.36. This is more than double last year, suggesting that guidance is very cautious. 

On raised its guidance, providing another catalyst for the market. The takeaway for investors is that guidance expects quarterly growth to accelerate above 30% by year-end and for the margin to expand. The $2.52 billion in revenue aligns with the consensus estimate but is likely cautious given the Q1 strength and brand momentum. 

On’s Balance Sheet is a Fortress; Can Invest in Growth

On’s balance sheet is a fortress with no long-term debt and a growing cash position. The cash is up nearly 19% compared to last year, nearly $650 million, setting the company up to invest in growth and return capital to shareholders. The company does not currently pay dividends or repurchase shares but could begin doing so soon. Until then, investors might expect to see On’s growth continue robustly for years due to its lean into new verticals. Shoe lines targeting tennis and training are gaining traction and improving the total addressable market; competitor Nike stands to lose share. 

Analysts favor On and will likely lead this market higher. The seventeen tracked by Marketbeat.com rate the stock at a consensus Moderate Buy, and they have been revising their price targets to be higher. The consensus going into the report is $37.50, up 25% compared to last year and 10% above the pre-release price action. 

On Surges 20%: New Highs are in Sight

On’s stock price surged 20% at the open, exceeding the analysts' consensus target. The market shows a solid trend-following signal that should take it to a fresh high, but there is risk. Signs of resistance at the top of a trading range may cap gains near $37. A move above that level would be bullish; failing to do so would leave the market range bound at current levels. In the event new highs are reached and held, the market could advance another $10 with or without the aid of the analysts. If the analysts raise their targets, the upside potential increases.