Earnings reviews to read from this current season:

There’s no single channel or geography to point to that explains this outperformance in isolation. Encouragingly, everything was strong for On Running during Q2. Every continent… every channel… every category… everything.

In the Americas, Europe, Middle East & Africa (EMEA) and APAC, durable growth was promising. It was in direct response to continued relevant product innovation, rising brand awareness, great store performance, controlled wholesale partner growth and strong sellout rates with those partners. For some specific highlights, Americas DTC revenue rose by 40% Y/Y. In EMEA, growth matched its fastest rate in two years, developed markets such as the UK kept steadily expanding and newer markets like France built immediate traction. And while both of these geographies are performing quite well, APAC is doing even better. Demand levels are in excess of current supply, China same-store sales growth was 50% Y/Y and e-commerce growth was well ahead of that rate.

“The result of all this is what we call consumer resilience. What we're seeing is that we are no longer just for early adopters. We are now resonating with a much wider audience. Our brand is over-indexing with Gen Z consumers.”

Co-Executive Chairman David Allemann

Gross margin was helped by DTC rising to a new record as a % of total revenue. Continued freight favorability following a lengthy stretch of rampant inflation and some foreign exchange favorability also helped gross margin outperformance. Notably, the price hikes it initiated in the USA happened in July, so there was no benefit this quarter.

Sales, general and administrative (SG&A) fell from 48.6% of revenue to 47.7% of revenue. A lot of that was thanks to thriving demand growth, but operational discipline in areas like distribution also helped. On is getting better at forecasting demand, placing goods closer to the end customer, cutting miles per fulfillment and augmenting overall efficiency. As always, it’s balancing this operational rigor with key investments in future growth. More on this later.

Net income and EPS are pretty irrelevant byproducts of foreign exchange fluctuations for this company. While FX helped input costs during the quarter, it also devalued assets held on ONON’s balance sheet, which technically count as net loss. This quarter, that lowered net income by about CHF 140 million. Without this impact, which is not related to core operations, EPS would have been CHF 0.32 per share vs. 0.20 expected. Net income margin would have been 13.2%.

Annual guidance updates were quite strong. They raised 28%+ CC growth guidance to 31%+. This beat 27.7% CC growth expectations. The brightening forecast is based on great year-to-date performance, as well as strong order books for the rest of the year. Data… not hope. It also raised GPM guidance from 60.25% to 60.75%, which beat 60.5% expectations. And finally, it raised 17% EBITDA margin guidance to 17.25%, which slightly beat 17.2% estimates. With the large revenue raise, EBITDA dollar guidance was materially boosted and comfortably beat consensus.

To make the outperformance even more impressive, guidance assumes some level of macro deterioration stemming from tariffs. Furthermore, guidance fully bakes in a near doubling of overall Vietnam and Cambodia tariff rates, which impacts ON’s cost structure significantly.

A few more notes:

ONON trades for 24x forward EBITDA. EBITDA is expected to grow by 29% over the next two years. Estimates will likely rise following the strong report.

Core Performance Running Shoe Business:

On’s brand tracker continues to trend very positively for all important performance running shoe metrics. This momentum is coinciding with brand awareness rising faster for On than any other competitor. That is somewhat of a byproduct of their newness in the market. Nike and Adidas have ubiquitous brand awareness, which means they don’t have a chance to enjoy large gains here. Nevertheless, compared to anyone at a similar scale, this is highly impressive.

In terms of new launches, the Cloudultra Pro and Cloudultra 3 are both unsurprisingly off to excellent starts. In the coming days, it will launch the new Cloudboom Max, which it calls “its first super shoe for the everyday runner.” Between this, the Cloudsurfer, Cloudmonster and a few others, its performance running segment has 8 franchises contributing at least 5% to overall revenue. That’s increasingly respectable diversification.

“In the U.S., we have previously shared that awareness has more than doubled in a single year, making On one of the top On Atlantic shoe brands among teens.”

Co-Executive Chairman David Allemann

Collaborations, Higher Fashion & Lifestyle – Creating a More Diverse Brand:

While most people currently think of ON and exclusively a performance/athletic shoe and apparel company, it wants to change that narrative. Athletes will always be a main focus, but it thinks it can allocate that needed focus while still having bandwidth for category expansion. This was a historically powerful unlock for the Nike and Adidas growth runways as those two giants broadened their reach. And there are emerging signs that the same can be true for On.

It’s seeing a lot of momentum across several lifestyle shoe products. Its Cloudtilt collaboration with Loewe has gone extremely well. The products are priced at $590 per pair and “sold out almost entirely within days.” Clearly, people will pay up for the On brand. Just like last quarter, the Cloud 6 continues to kill it for On Running – at a price point higher than its predecessor. The Zendaya marketing campaign for its Cloudtilt and Cloudzone shoes “is deeply resonating with consumers.” And specifically, Cloudtilt is now its first lifestyle shoe to cross 5% of total revenue, giving 9 of those products in total. Generally speaking, based on all of this momentum, its internal brand data points to On being the only brand growing consumer intent across both performance and lifestyle categories at the same time.

“This points to a future where On is playing at the intersection of performance, innovation and fashion… while ON is fundamentally a sports brands, the cultural shift towards sport as the new uniform means we’re also a lifestyle brand, unlocking a much larger addressable market.”

Co-Executive Chairman David Allemann

LightSpray:

There’s nothing that embodies On’s team, culture and long-term-oriented mindset quite like LightSpray. In the team’s mind, it’s the operational rigor and constant cost optimization that unlock the budget to invest in these exciting opportunities. As a reminder, LightSpray is On Running’s new automated manufacturing technique. It uses robotic arms to spray a light material (as the name indicates) right onto the sole of the shoe to form a single-piece, laceless model. Impressively, it takes a robot 3 minutes to make a shoe and is comparatively quite cheap. That combination should be fantastic for On’s long-term margin ceiling. 2025 has been heralded as the year of “testing and optimizing” this entirely new and proprietary manufacturing technology. This past month, it unveiled its first LightSpray manufacturing facility, with 4 robot arms to begin the learning process for eventual scaling.

DTC Business:

It now has 54 stores vs. 37 a year ago and store productivity continues to be excellent. It’s not just in China (aforementioned 50% comparable store sales growth)... it’s broad-based and informs more confidence in continued growth. Their Singapore launch (with a licensed business model) led its global footprint in weekend sales when it opened, while Palo Alto, Stockholm and Salem launches this quarter were all successful. On the digital side of things, the company enjoyed accelerations compared to last quarter in EMEA and the Americas.

Wholesale:

On continues to prioritize slower wholesale door growth, with an eye towards high-quality partners. With the 100-year vision this founder-led team has, they are not looking to juice growth for a quarter or even a year by partnering with whichever store wants to carry their products. That would dilute the brand quality this firm is trying so hard to fortify and would harm their mission of being viewed as the “most premium” brand in their niche. Again… the long game. This specific long game entails roughly mid-single-digit new door growth for 2025 and likely in the years to come.

“Over the last few months, I've had the opportunity to spend time with many of our global key account partners. In every conversation, I felt the incredible motivation and commitment to grow the brand together, including an offering that elevated even more premium customer experiences.”

CEO/CFO Martin Hoffmann

Apparel:

The apparel business has now shown clear signs of rapidly gaining traction for two consecutive quarters. Momentum with new customers is palpable, basket inclusion rates are moving higher and repeat buying is becoming much more frequent. Just like with its footwear, this is product and innovation-driven, and should support more marketing leverage, considering repeat buyers are cheaper to sell to than those who are unfamiliar with the brand.

This was another fantastic quarter from this stellar growth story and clear market share taker. Raising demand and margin guidance despite tariffs being doubled in the two countries where they make everything is quite impressive… but impressive is simply what this team has delivered quarter after quarter. This is the best name in a tough investing sector. It’s the hottest brand in its category and has a massive runway for more international growth. The hard part about fashion is that tastes change on a whim and adjusting to that change needs to be frequent and perfect. It’s hard to model for analysts… myself included. Lululemon and Nike are currently learning that lesson. I think On has the best team out of those three firms (maybe the best team in the space), so they have the best chance to keep effectively shifting with perpetually fluid fashion cycles. That is necessary to foster decades of growth like the team envisions.

Cava is a quick-service restaurant chain that sells Mediterranean food, with a focus on strong value, quality ingredients and a warm, in-store ambiance. My Cava Deep Dive can be found here.

In terms of OpEx buckets, food, beverage and packaging (FBP) rose from 29.4% of revenue to 29.5% Y/Y due to a full quarter impact from last year’s mid-Q2 steak launch. Labor was 25% of revenue vs. 25.2% Y/Y due to sales-based leverage (offset a bit by 2% wage inflation). Occupancy was 6.8% of revenue vs. 6.9% Y/Y. Other OpEx was 12.4% of revenue vs. 12.0% Y/Y. Overall G&A was 11.4% of revenue vs. 12.1% Y/Y due to modest leverage within these buckets, as well as lower legal fees, stock comp and performance-based compensation.

If we exclude the one-time tax benefit from Q2 2024, EPS would have risen from $0.14 to $0.16 Y/Y.

As of right now ($65/share), Cava trades for about 44x forward EBITDA. EBITDA is expected to smoothly compound at a 27% clip for the next three years.

Unpacking Comparable Store Sales (CSS) Weakness:

A lot to discuss for this highly important part of the Q2 report. Investors have been a bit spoiled by Cava over the last several quarters. They’ve trained people to expect outperforming CSS growth based on consistently excellent performance. And when that pattern breaks… at this multiple… it makes sense to see the stock respond negatively after-hours. Fortunately, when listening through the explanation and contemplating things, I do not think this is structural. I think this weakness will be temporary. Here’s why:

First, the steak launch last year happened in June 2024 and was arguably its most successful food introduction in its history. There was a large, large red meat gap in its product offering for a year that led to traffic headwinds and some pent-up demand. That was unleashed last summer, which led to a fantastic 10% Y/Y traffic growth performance that it’s now lapping. That led to strong April and May CSS growth decelerating materially during June.

Next, its 2024 new store class ramped faster than expected… by a country mile and a half. Those stores reached AUV targets well ahead of schedule and met year two cash-on-cash return goals in year one. That is not normal and it amplified the abnormally difficult comp headwind during the quarter. Some of these stores even dipped into negative comp territory, but again, that’s because year 1 was so much better than it was supposed to be. So, to summarize, these stores are still outperforming vs. year 2 expectations, but the year one pull-forward made it so that more of that growth came last year.

Thirdly, it’s not immune to fragile macro. While some sectors have fared quite well amid this geopolitical volatility, quick-service restaurants have been more challenged. Wherever you look, CSS growth is challenged as consumers look to save a little money; this is among the easiest places to do that. Macro didn’t seem like the main culprit, as premium item attach-rates were stable and leadership seemed to hint at this challenge being somewhat modest, but it simply added to Q2 2025 obstacles.

Finally, the company spends very little on marketing. It sounds like there was a significant opportunity to buy more revenue during the quarter to help meet top-line expectations, but they refrained from doing so. Why? Because it also sounded like they have more work to do to ensure marketing is targeted and returns are optimal. This team is focused on the “next ten years” and will not inefficiently throw money at a campaign to meet a Wall Street target for a three-month period. They’ve focused a lot on perfecting the store experience (and rightfully so), and are now turning some of their attention to this area. As they get confident in marketing capabilities, they will likely lean in. Luckily, simply expanding nationally will help a ton there, as channels are inherently more efficient to use when you have more local stores to convert interest into sales. Encouragingly, more marketing spend is not part of current 2025 CSS guidance. I think some modest incremental investments here can go a long way without creating unacceptable margin contraction. The brand clearly resonates enough for this spending to coincide with the incremental revenue needed to offset any material profit headwinds.

Encouragingly, things are already improving. July CSS growth has accelerated from June on a 1-year and 2-year basis. The 2-year stacked growth acceleration is getting nearly 4 points of help from Q3 2024 being faster than Q2 2024, so that’s not all that notable. The 1-year acceleration is more notable. The team was asked if this acceleration banked on trends improving or was related to observed July strength. Fortunately, it’s based on CSS growth accelerating to 3%+ Y/Y. While that doesn’t sound incredible for a company like this, note that CSS growth next quarter will lap 18.1% Y/Y growth. These very difficult comps will last through the end of the year, when things start to get much easier and CSS should meaningfully accelerate further. If you’ll recall, there was a growth scare for this company during Q1 2024 (highlighted in yellow in the second demand chart above), when CSS rose by just 2.3%. That was related to abnormally difficult comps and quickly normalized. I expect the exact same thing to play out here. 

When putting all of this together, I think the updated guidance is understandable. It effectively de-risks comp headwinds, macro and all other potential challenges, while leaving room for upside surprise. I’m not thrilled with it, but I’m also not that annoyed. There is nothing fundamentally wrong with brand value scores. It has the second-highest net promoter score (NPS) in its sector, the competitive value proposition (more later) remains strong and new stores keep outperforming. This, to me, is solely a byproduct of lapping the steak launch and the amazingly strong 2024 store launches.

New Stores & Competition:

As briefly noted, 2025 stores are killing it. This is direct evidence that their brand and value prop continue to resonate and Americans remain hungry for more locations. Specifically, new stores are over $3M in AUV, which is more than 30% above expectations. While that could lead to tougher comps for these stores next year, that’s a luxurious problem to have, as it’s a byproduct of these locations racing to higher revenues and profitability faster than they’re supposed to. It also doesn’t sound like the outperformance has been quite as dramatic as it was in 2024.

The launch in Michigan was met with long lines, while the Pittsburgh store is doing quite well and more Florida expansion is going as hoped for. Again… new stores are thriving. In terms of competition and gauging how many stores this country can support, they’ve seen no change to the competitive landscape. They keep taking market share every quarter and see their “position strengthening.” In New York City specifically, where competitive concerns were sharpest, it sees zero signs of store weakness. Nada. They are more confident than ever in getting to 1,000+ stores by 2032. Exceptionally strong and better-than-expected store efficiency leads me to agree with that conviction. Simply put, the runway is wonderfully lengthy and they feel poised to devour it. I agree.

Support Labor with Technology:

Cava’s connected kitchen initiative is showing promise in 95 stores and will be in 270 by 2026. Order accuracy rates and store productivity are both rising wherever this is implemented. As a reminder, a big piece of this is its updated kitchen display system (KDS). This automates order intake and triaging while instructing workflows, upgrading staff communication and raising service quality. The program also includes updated ovens that cook ingredients faster and its AI camera vision tech that measures ingredient depletion rates and tells employees when to prep more food.

Food:

Chicken shawarma is testing very well in Dallas and Tampa. They’re planning on this being a limited time offer this fall, with premium pricing expected. It’s also proceeding with pita chip flavor innovation, which provides a seamless up-sell opportunity for Cava. Alongside chicken shawarma, it will launch cinnamon sugar pita chips with a honey dip. Menu innovation will remain highly data-driven and meticulous. This great team runs careful stage-gated testing so they know exactly what will work before it’s implemented. It’s the same playbook as all of the in-store innovation items discussed above.

Loyalty Program:

Cava keeps inserting its “Peter Chip” mascot into more loyalty program events. It repeated their free pita chip promotion this summer for members, which delivered its second-highest day of app downloads and digital revenue ever. They also created a Peter Chip Plush Toy for their hot harissa menu item, which sold out across many stores. The team was quick to correct an analyst who called this a value meal concept, instead framing it as a way to deepen brand engagement and loyalty. Six in one… half-dozen in the other.

Later in the year, they will launch a revamped program, with tiered access and personalized perks to better incentivize engagement. As a reminder, this is made possible by their malleable microservices foundation, which enabled it to build and manage its own loyalty program without partners. The foundation here is strong.

Team:

Cava is adding an Assistant General Manager to its stores. More support is needed when AUVs are way higher than they were supposed to be. And encouragingly, Cava is confident that these new team members will more than pay for themselves via incremental transactions. They’re doing this to raise the throughput ceiling and also give themselves a bench of seasoned talent ready to step into GM roles in new regions.

I thought demand would look a bit better, but candidly, I’m not fretting this miss. As I explained above, the reasoning is entirely fair and temporary.

It has been frustrating to own shares in this great company since earlier in the year. Why? As Max readers know, I have gone painfully slowly with building out this stake. It’s just 1% of holdings and my smallest position by a decent margin. You may be wondering “why don’t you own more if you speak so fondly of the firm?” Fair question.. and a one-word answer: valuation. This name was priced for perfection and then some. So when we get an imperfect showing, even if it’s for non-structural reasons that don’t threaten the multi-year investment case, there’s no room for forgiveness from Mr. Market. That’s what happened this evening.

That is why my earnings season previews over the last few quarters have featured me “selfishly rooting” for some needed multiple contraction. This was a pre-requisite for me to finally own a material stake in what I view as the next quick-service juggernaut. Here’s a direct quote from the most recent preview:

“Just like for Chipotle, I’d love to see solid numbers drum up some share price turbulence so I can add a lot more shares. I’m a huge fan of the company and its team. I’m still not a huge fan of the forward valuation at 60x forward EBITDA and have been forced to keep this position very small. I’d love for that to change.”

An Annoying Nerd

I apologize if this sounds insensitive, but this after-hours move (if it holds) was needed and this is healthy. It has me mumbling the word “finally.” This brings the company down to a roughly 44x forward EBITDA multiple and to a place where I’m ready to make it a much larger piece of holdings. Max readers will likely be getting a portfolio update tomorrow morning. This purchasing won’t happen in one chunk, but it will get more aggressive if weakness endures. We shall see.

This, I think, is an obvious long-term revenue compounder with plenty of operating leverage left in the tank. Great team. Strong value prop. Long runway. Consistent execution. And now? A multiple that isn’t quite so ridiculous.