Shoes from Switzerland When holding (ONON 3.19%) are among the most sought-after in the world. But On’s management is not satisfied with the impressive market share gains of recent times and has set itself two goals for the rest of 2024 that seem quite ambitious.

In terms of market share gains, On’s growth since its IPO has been nothing short of spectacular. The company reported net revenue growth of 69%, 47% and 24% in 2022, 2023 and the first half of 2024, respectively. This growth far exceeds the industry growth and is better than many of On’s competitors.

On claims it wins because of its differentiated cushioning. The company calls it CloudTec – there are individual cushioning pockets that more easily conform to the runner’s stride. The company claims this makes it feel like “running on clouds.”

Whatever it is about this shoe brand, it’s working. Not only is On increasing its sales, but the growth is also being driven by direct-to-consumer sales. This is remarkable. With regular sales, a consumer might buy On shoes after spotting them by chance in a store. But with direct sales, consumers are specifically looking for the shoes, which suggests high brand awareness.

Things are going great for On. However, the company has some goals that I think are perhaps too ambitious.

Our optimistic outlook

For 2024, On’s management expects net sales growth of 30% compared to 2023 (currency adjusted). The company also expects a gross profit margin of 60% for the full year. This forecast assumes that growth accelerates in the second half of the year and that the gross margin also improves.

As mentioned, On’s net sales increased by 24% (currency adjusted) in the first half of 2024. Management expects sales of 2.26 billion Swiss francs for the year, which corresponds to about 2.6 billion dollars. Given sales of just under 1.1 billion Swiss francs in the first half of the year, sales of just under 1.2 billion are expected for the second half of the year.

To illustrate, to achieve this target, On’s net sales in the second half of the year would have to increase by 28% year-on-year (at constant currency). This would represent an acceleration in sales growth.

In addition, On had a gross margin of almost 60% in the first half of 2024. With the forecast of a 60% margin for the full year, this represents a slight margin improvement in the second half of the year.

Why this sounds ambitious

On’s management not only believes that there will be greater demand for its shoes from now on, but also expects customers to pay full price. If the company can do this, it will clearly differentiate itself from the competition.

E-commerce giant Amazon has its finger on the pulse of consumers, perhaps better than any other company. In the second quarter, CEO Andy Jassy mentioned that its customers were “cautious” and were switching to cheaper products. With On positioning itself as a premium sports brand, it’s ambitious to expect an acceleration in sales growth with this consumer behavior.

Also keep in mind that On’s biggest competitor in the running shoe category is probably NikeNike, for its part, is dissatisfied with its recent financial results and is working hard to restore its leadership position. In the second half of the year, the company is launching new running shoes while increasing its investment in marketing.

Consumers are overwhelmed and On’s competitors are trying to grab sales wherever they can. In short, it will not be easy for On to accelerate its growth in this environment.

In terms of gross margin, On is already a leader. The company is not only miles better than Nike, but even better than another major competitor, Deckers Outdoorwhich is commendable.

ONON Gross Profit Margin (Quarterly) data by YCharts

Can On increase its margins despite a difficult macroeconomic environment when the company is already one of the best? I’m not saying it’s impossible. But it’s certainly an ambitious goal.

What it means for investors

On has a great business and likely has years of profitable growth ahead of it. However, with a price-to-sales ratio of 9, the stock isn’t exactly cheap. A high valuation means investors have high expectations for the company. And given its optimistic forecast, management obviously has high expectations too. But in my opinion, it will be hard to hit those numbers in the second half of 2024.

If On fails to meet expectations, it would be disappointing for investors and likely lead to a lower share price, at least in the short term. While I believe On could recover over the long term, I would wait to buy On shares. And if I were a shareholder with a long-term perspective, I would prepare for the possibility of short-term volatility.