On Holdings raised its revenue outlook for 2023 after delivering a better-than-expected first quarter. The Americas led the regional growth, surging 91.9 percent to CHF 270.2 million ($301 mm), boosted by a strong reception for the brand at Dick’s Sporting Goods, On officials said on an analyst call.

On a call with analysts, Caspar Coppetti, On’s co-founder and executive co-chairman, said the Swiss running brand is now in 58 Dick’s stores and has already seen the “highest average sell-through” across On’s wholesale network.

Dick’s also boasts the highest apparel share among all On’s key accounts, an accomplishment called out because it aligns with On’s goal to become a balanced head-to-toe brand. However, broad-based robust growth across geographies, channels, and categories, including apparel, helped sales and earnings exceed analyst targets in the first quarter.

Shares nonetheless fell $3.27, or 9.8 percent, to $30.17 on Tuesday on the earnings report, with the decline attributed to some profit-taking following On’s stock’s strong run this year. The stock began the year at $17.16.

Some potential investor concerns included inventories, which, as expected, remain elevated, up 186 percent year over year. On officials, citing a strong order book and continued healthy sell-throughs so far in the current quarter, still expect inventory levels at the end of 2023 to be broadly in line with December 2022 levels while maintaining a higher net sales base.

Given the uncertain climate, on declined to raise its earnings guidance despite the Q1 outperformance.

Q1 Sales Driven By Strength Across Regions
In the first quarter, On’s overall sales jumped 78.3 percent to CHF 420.2 million ($470 mm), topping Wall Street’s consensus target of CHF 382.3 million. Strong brand momentum across all regions, channels and product groups.

Adjusted EBITDA catapulted 288.2 percent to CHF 61.0 million ($68 mm) from CHF 15.7 million. Analysts’ consensus target had been CHF 45.1 million.

“Our record net sales in Q1 are further validation of the strong brand momentum across all regions, channels and product groups,” said Martin Hoffmann, co-CEO and CFO, on the call. “Our strong supply position and our ability to distribute the high volume allowed us to capture the full momentum.”

Hoffmann noted that the size of the sales gain was supported by a largely normalized supply chain environment versus the first quarter of 2022 when growth was tempered by inventory shortages caused by pandemic-related lockdowns at Vietnamese factories. The supply constraints in the year-ago period had a larger impact on wholesale than DTC.

Wholesale Paces Channel Growth
By channel, wholesale sales climbed 86.0 percent to CHF 283.2 million ($319 mm), while DTC sales jumped 64.3 percent to CHF 137.0 million ($153 mm).

Hoffmann said wholesale benefited from the improved inventory flow versus the prior year, coupled with ‘very high demand” from retail partners. He said, “The majority of this growth is coming from existing doors, both fueled by existing and new products.”

With the start of the new spring/summer season in January, On continued its selective door expansion globally, and the brand is now available in almost 9800 doors in markets served directly. Hoffmann likewise called out the successful entry to Dick’s, which he described as “a partnership that we are incredibly happy with, and that plays an important part in expanding our reach to new customers.”

DTC Channel Reaching Younger Consumers
The 64.3 direct-to-consumer (DTC) growth reflected more than 50 percent growth in all regions.

“In our DTC data, we can also observe that we are increasingly reaching a younger consumer with our newer running models,” said Hoffmann. “This strategically important trend is very visible, for example, with the Cloudmonster and Cloudrunner, which are among the top of our youngest-leaning models in our running range. Along with many of our younger-leaning Performance All Day products, such as the Cloudnova. This is further validating the successful expansion of our product offerings to a younger audience.”

Physical retail stores remain a “small part” of sales, stores continue to enable On to showcase the brand “in the most premium way, and we’re very happy with how they are elevating brand awareness.” He said store openings are driving increased online traffic and also helping drive wholesale business within proximity of the new stores.

In Q1, On more than quadrupled its retail net sales compared to the same period last year. On’s London flagship store saw a “strong start” to its February opening that has continued. Hoffman said, “This is providing us with the evidence that there is a demand for selected larger flagship locations. We’re therefore extremely excited for the upcoming months, which will see the opening of new retail stores in Williamsburg and Miami. Both of these stores will have more than double the selling space compared to our current New York store.”

Americas Delivers Record Quarterly Sales By Region
The CHF 270.2 million sales level achieved in the Americas was CHF 16.5 million more than the previous quarterly record sales in Q422. Hoffman said, “This exceptional growth was driven by the strong demand in both channels, of course, supported by the controlled door expansion.”

Net sales in the EMEA region advanced 51.6 percent to CHF 118.9 million ($133 mm).

Sales in the UK more than doubled, becoming the second largest country in the region and boosted by the London flagship. Germany remains the largest market in the region, a sizeable lead as it grew 56 percent. Said Hoffman, “With the launch of the new Cloudsurfer, On made big waves with strong presence in most key European cities such as Barcelona, Paris, London, Berlin, and our home in Zurich.”

Net sales in the Asia-Pacific vaulted 89.4 percent to CHF 31.1 million ($35 mm), accelerating from 87.7 percent growth seen in the fourth quarter. All three key markets Australia, China and Japan saw growth rates between 75 percent and 100 percent. Said Hoffman, “We have seen a strong increase of local customers as well as international travelers in our Tokyo flagship store as well as our China stores. The APAC region continues to be a very strong showcase of the success of our apparel business with over 10 percent apparel share across the whole region.”

Footwear Growth Driven By New Styles
Sales from footwear grew 80 percent to CHF 400.5 million ($447 mm), with the second half of the quarter boosted by launches, including the Cloudsurfer 6. In the first three months post-launch, more of the updated Cloudsurfer models were sold than during the last two years of the old Cloudsurfer model combined.

The Roger Pro Clay was also launched, with overall demand for the Roger Pro exceeding expectations. Hoffman attributed the gains in tennis in part to new sponsorships. In March of this year, On added the number-one ranked women’s player, Iga Świątek of Poland, and American up-and-comer, Ben Shelton to its ambassador roster.

On’s first kid’s collection was also launched with two styles, the Cloud Play and Cloud Sky, at select retail accounts and On’s DTC channels, with the range continuing to see “very strong sell-out numbers.”

Apparel sales totaled CHF 16.9 million ($19 mm) in the quarter, up 48.9 percent year-on-year growth, an accelerating from 30.2 percent in the fourth quarter. Hoffman said, “Our new collections, introduced for the spring/summer season under the Feel Nothing campaign, have resonated very well with our fans in both channels.”

He said growth in apparel continues to be skewed toward the DTC channel and newer markets, including several APAC countries. Hoffman added that this shows “the proven ability of our D2C and our own store retail to fully showcase our head-to-toe looks and increase cross-selling between categories.”

Gross Margins Improved 650 Basis Points
Gross margins rose 650 basis points to 58.3 percent, largely due to the normalized supply chain environment and the discontinuation of extraordinary airfreight usage, which had been most elevated in the first quarter of last year.

SG&A expenses, excluding share-based compensation, were 47 percent of sales, down from 49.1 percent in the same period last year. The improvement comes despite slightly elevated distribution expenses for additional storage space to support elevated inventory levels and costs to ramp up warehouse automation projects around the globe. On also increased marketing expenses to drive awareness of its positioning as a head-to-toe brand more than any previous quarter. On had a major presence at key airports like Los Angeles, the Lantern Festival in China, and the Tokyo and Boston Marathons.

The company’s inventories were up 186 percent to CHF 465.2 million from CHF 162.5 million a year ago. Inventories were up 17.6 percent from CHF 395.6 million at the close of the year.

Hoffman noted that On had already warned that its inventory position at the end of Q1 was expected to increase slightly as a result of the normalization of lead times. The increase is driven by the early inflow of first fall/winter season products. Hoffman said, “Overall, our inventory remains very fresh and sets us up to drive a continued high share of full-price sales in 2023.”

Outlook
Given the outperformance in the first quarter combined with a strong order book for the second half of the year, On raised its 2023 sales outlook to at least CHF 1.74 billion, representing year-over-year growth of 42 percent.

When On reported fourth-quarter results, the company expected to reach net sales of at least CHF 1.7 billion, representing 39 percent growth

On is retaining its gross profit margin guidance of 58.5 percent for the full year 2023, which would, for the first time, bring On’s gross profit in absolute terms to over CHF 1billion for the year. The target for adjusted EBITDA margin is maintained at 15 percent for the full year, even at the higher net sales expectation, implying a year-over-year absolute adjusted EBITDA increase of close to 60 percent.

Hoffman said, “We continue to embed an element of caution in our outlook for the second half of the year in the light of the many risks in the current macroeconomic environment.”

Photo courtesy On