Key Points Summary
Onyx's second-quarter financial report came as a surprise to the market: revenue growth fell short of expectations (21.6% at a fixed exchange rate), and the annual growth forecast was lowered from "at least 23%" to "in the low 20%" range, causing the company's stock price to drop by nearly 20% during trading. On the other hand, the company achieved a record-high gross margin of 65.4%, and its Direct-to-Consumer (DTC) business, which targets consumers directly, saw a 34.3% increase in sales. The Asia-Pacific region, particularly China, was a major contributor to this growth. Essentially, Onyx is not experiencing a slowdown; rather, it is transitioning from a rapid growth model based on hit-selling sneakers and wholesale distribution to a high-end brand strategy that focuses on brand strength, direct sales, and a broader range of products. While this transition inevitably leads to slower growth, it also presents both long-term opportunities and short-term risks.
Detailed Analysis
1. Growth Has Slowed, but It's Not a Disaster – Active Adjustment and a High Base
Onyx's growth rate of 21.6% at a fixed exchange rate is impressive compared to traditional sports brands. However, the market reacted strongly because the company was once considered a "growth stock," with its scale tripling since its initial public offering in 2021, and investors were accustomed to growth rates above 30%. The slowdown can be attributed to two main factors:
- High Base: The company grew too rapidly in the previous two years, and now that its base is larger, maintaining the same pace is more challenging.
- Active Control of Wholesale: The U.S. market accounts for over 50% of Onyx's business, but local sports retailers are offering significant discounts (with Nike and Adidas also discounting their products). To protect its brand premium, Onyx has reduced shipments to some distributors. However, this approach may indicate weaker demand in the U.S., as some of its regular sneakers did not sell as well as expected.
In summary, the slowdown is a result of intentional strategic adjustments rather than a collapse in demand.
2. The Power of Hit-Selling Sneakers Is Diminishing – Moving from Single Products to a Diverse Product Portfolio
Onyx's success was largely driven by its Cloud series of sneakers, which first attracted runners with advanced midsoles and then gained popularity among broader consumers through attractive designs, eventually reaching markets worldwide through wholesale channels. However, the impact of a single hit-selling product is diminishing:
- In the past, one new sneaker could drive double-digit quarterly growth; now, with a wider product portfolio, the contribution of each new release is diluted.
- Management plans to introduce updates to its core products (such as the Cloud X5) over the next 14 months. To sustain growth of CHF 3 billion, Onyx will need to rely on a diverse range of products, including different types of sneakers, clothing, and training equipment.
This is a concern for the market, as the traditional formula of "hot new products + widespread distribution" is no longer effective, and Onyx needs to find new drivers of growth.
3. High-End Transformation: Good Gross Margin, but With Concerns
Onyx aims to become a high-end sports brand, and it has several strengths:
- Strong DTC Business: Direct sales through its own stores and website account for nearly 46%, generating higher profits and allowing the company to control prices and collect customer data.
- High Gross Margin: At 65.4%, Onyx outperforms Nike, Adidas (40-50%), and Lululemon (58%) due to its high proportion of direct sales, premium new products, and improved supply chain efficiency.
However, there are also concerns:
- Quality of DTC Growth: The 34.3% growth may be partly due to the opening of new stores, rather than increased sales at existing locations. If this growth is solely driven by expansion, it might not reflect true brand strength.
- High Costs: Direct operations incur higher expenses for rent, salaries, and inventory management, resulting in a lower operating margin compared to Lululemon.
- Inventory Pressure: Inventory increased by 12.7% in the second quarter. With controlled wholesale, Onyx must manage its inventory on its own, and if products don't sell, it may need to discount them. This was a problem in Europe, and competition in the U.S. market is even more intense, posing additional risks.
4. The Chinese Market: Huge Potential, but Not Enough to Offset Short-Term Challenges
China is a key market for Onyx:
- Fast Growth: The Asia-Pacific region grew by 54.7%, with China being a major contributor (Tmall sales exceeded expectations).
- Precise Positioning: The Chinese sports market is segmented, with Nike and Adidas targeting the mass market, while Onyx and Hoka target the mid-to-high-end segment. Onyx's sneakers cater to both running and commuting needs, aligning with the trend of consumer upgrading.
- Clear Goals: Onyx aims to become China's second-largest market by the end of 2026, with a high proportion of direct sales.
However, challenges include:
- Small Base: The Chinese market is much smaller than the U.S., so the high growth rate (54.7%) cannot quickly make up for the slowdown in the U.S. market.
- Expansion Risks: Expanding directly into China is costly, especially in expensive urban areas. Whether each new store will be profitable and when it will break even remains to be seen.
5. Product Expansion: A Promising Approach, but Uncertainty Remains
Onyx is trying to expand beyond sneakers into clothing and training products, with growth of 56.2% in the second quarter. However:
- Low Base: These categories currently account for a small portion of its business, so they are not significant sources of additional revenue.
- Consumer Motivation: Is consumer interest in Onyx's clothing based on brand recognition or merely as a complement to its sneakers? If the latter is the case, sustained growth in these categories may be difficult.
This is similar to Lululemon's challenge: can a brand that thrived on a single product extend its influence to other areas?
Conclusion
Onyx's financial report is not a sign of failure but a reflection of its transformation from a fast-growing company focused on hit-selling products to a high-end brand. The temporary slowdown in growth and stock price drops are part of this transition. If Onyx can build a strong brand and reduce its reliance on single products, it could become the next Lululemon. Otherwise, it may remain a specialist in sneakers. The key is whether it can navigate this transition successfully.