Inventories Running Too Hot at Best Idea Short ONON. Came in +186%, virtually in line with last quarter’s 190%. Making no progress on drawing down inventory, despite the big revenue beat (which it NEEDED to put up). Total revenue up 78%, a deceleration from 92% last quarter. The exact opposite should have happened when sitting on an inventory bloat. Our sense is that retailers are skittish about taking on more inventory, at the same exact time ONON is placing a massive inventory bet with the (false) expectation that it will all sell through at full price. Plus wholesale is materially outgrowing DTC -- this Q up 86% and 64%, respectively, vs up 104% and up 76% last Q, respectively. The company guided to full year revenue growth of about 42%, with 1H growth of around 50% and 2H growth low to mid-30s. So you’re looking at a decelerating top line growth rate throughout the year, and we think, an uptick in markdowns (Gross Margin pressure – which will be permanent) to clear its balance sheet. As noted in the Q+A section of the call, wholesale retailers in Europe have started running promos on product – something we fully expect to spill into other regions in the coming quarters, and yes, ONON will need to share in those markdowns if it wants to keep filling the wholesale channel. This is eerily similar to when the Michael Kors brand stuffed the wholesale channel in 2015/16, and the stock went from $100 down to the $30s. ONON should be tiering its product and growing at a sustainably controlled rate – like Nike and HOKA (DECK). But it’s not, and this story won’t end well. For our full thesis on ONON, and why we think this name will blow up in 2023, see our latest Black Book. ONON Short Black Book Video Replay Link CLICK HERE
Takeaway: Discounting has started in Europe, and is likely to spill into other Regions to clear excess inventory. This company is growing recklessly.
