Footwear disruptors set to sprint ahead

With innovation and growth setting a feverish pace in the footwear industry, Fidelity's Paul McElroy believes two disruptors are at the head of the pack and still have considerable room to run.

• Two makers of high-performance footwear and athletic apparel have been making strides to increase their share of the market for premium running shoes, according to Fidelity Portfolio Manager Paul McElroy, who also is drawn to the firms' promotion of a healthy lifestyle and their attention to sustainable materials and manufacturing practices.
• "On Holding and Deckers Outdoor — owners of the On Cloud and Hoka brands, respectively — have achieved strong growth and business results while making an impressive rise in popularity in recent years, and I don't believe they have crossed the finish line just yet," says McElroy, who co-manages Fidelity Advisor^® Healthy Future Fund with Melissa Reilly.
• Launched in 2022, the fund is a thematic equity strategy dedicated to investing in global health and wellness companies with strong business fundamentals and attractive environmental, social and governance profiles. Focusing on the health care and consumer-oriented sectors, McElroy and Reilly invest in innovative and disruptive firms that strive to help enhance health and wellness in people's lives, improve life expectancy and mitigate their impact on the environment.
• This had led the co-managers to invest in On, based in Switzerland, and Deckers Outdoor, which, in addition to Hoka, makes footwear under the UGG^® and Teva brands. Both companies — fund holdings as of February 28 — have logged double-digit revenue growth for the past four years, notes McElroy.
• On is particularly appealing given its recent market-share growth, McElroy highlights: 54% in North America, 29% in Western Europe and 56% in Asia Pacific, all while competitors have lost share in each of these key markets.
• "Furthermore, the company is dedicated to incorporating sustainable materials into both the design and manufacturing processes, without compromising performance," he adds.
• For example, he highlights that On utilizes a specialized robotic arm to craft the upper piece of a shoe in one step, thereby limiting waste and raw material use, while also reducing emissions at this stage of production by roughly 75% compared to its competitors.
• McElroy applauds the firm for embarking on an expansive promotional campaign launched during the Paris 2024 Summer Olympics, in addition to forging partnerships with athletes and influencers, including Kenyan runner Hellen Obiri, actress Zendaya and American tennis pro Ben Shelton.
• "We believe these On brand ambassadors could lead to increased sales momentum and expansion into vital, largely untapped markets with significant growth potential," says McElroy, citing that On has spent about 20% of its revenue to market and promote its premium footwear, apparel and accessories for high-performance running, outdoor, training, all-day activities and tennis.
• Turning to Deckers, McElroy expects the California-based company to continue to help transform the specialty running market as it shifts its focus toward expansion into Europe and the Asia Pacific region.
• "Melissa and I are incredibly excited to follow this expanding segment of the footwear market, as On and Deckers are inspiring and reinvigorating people to pursue health through movement," McElroy concludes.