On Holdings once again raised its sales guidance for the year after reporting second-quarter results that topped analyst targets. In the Americas, sales vaulted 59.8 percent in the period, driven by strong full-price selling and share gains within the run specialty channel.

Sales in the Americas region reached CHF (Swiss Francs) 296.6 million ($338 mm).

“We’re happy to see that this growth continues to be supported by a very healthy full-price sell-through at our key wholesale partners,” said Martin Hoffmann, co-CEO and CFO of On, about the Americas region on a call with analysts. “In particular, we also continue to take market share in the specialty run channel despite a more promotion-driven environment by our competitors. At Fleet Feet, we’re currently the fastest-growing brand while at the same time having the highest average selling price by a good margin – a great showcase of the incredibly strong underlying demand for innovative, differentiated and premium products.”

Companywide, sales increased 52.3 percent to CHF 444.3 million ($477 mm), marking its sixth consecutive record top-line quarter. Sales exceeded On’s expectations and Wall Street’s consensus estimate of CHF 418.1 million.

Hoffmann said the momentum was driven by strength “across all channels, retailers and product categories” while noting that the “persistent strength of the Swiss franc versus nearly every other currency around the globe” masked the overall performance. On a currency-neutral basis, sales grew over 60 percent.

On’s EBITDA also exceeded analyst targets. Still, shares closed down $4.84, or 14 percent, to $29.77 on the New York Stock Exchange Tuesday reportedly due to the impact of strengthening the Swiss Franc against other currencies. The stock has seen a strong run, starting 2023 at $17.27.

DTC Gains Driven By E-Commerce
By channel, DTC saw the strongest growth, up 54.7 percent to CHF 163.5 million. DTC accounted for 36.8 percent of sales in the quarter compared to 32.6 percent in the first quarter and 36.2 percent in the second quarter a year ago. Hoffmann said DTC results marked a “quarterly record and even significantly exceeded the very strong results during the holiday season in Q4 2022.”

The gains continue to be driven by e-commerce, which notched an all-time traffic record, climbing over 75 percent year over year. Hoffman said, “We see the strength of the DTC channel as a validation of our ability to bring consistent innovations to the market to balance our wholesale and direct distribution and to build a strong direct bond with our fans around the globe.”

Other highlights of On’s DTC performance include the success of Onward, its resale program that has repurposed more than 30,000 items since being launched in early September 2022. Hoffmann also said retail continues to make a “small but increasing contribution” to the business, again quadrupling in revenues with new stores recently opened in London and Brooklyn’s Williamsburg section.

Wholesale Sales Expand 51 Percent
Sales through the wholesale sales channel nearly matched DTC’s gains, climbing 51.0 percent to CHF 280.8 million. Said Hoffmann, “Importantly, the demand for our products is also reflected in strong sell-out numbers at our wholesale partners, which ultimately drove strong reorders in Q2.”

He said On’s top five key account partners in the U.S. combined grew sales by 92 percent in the first half. He noted that those partners exclude its newly established business with Dick’s Sporting Goods. Hoffman called out the brand’s partnership with REI, which recently rewarded On as Vendor Partner of the Year.

Hoffman noted that the quarter included a “very limited number of incremental doors” versus the first quarter. He said On plans to remain selective in opening new wholesale accounts and indicated for the first time that the brand will be exiting some accounts as it optimizes distribution.

“Looking ahead, and as communicated previously, we plan to selectively expand on our key wholesale partnerships by only adding doors with meaningful additive customer bases,” said Hoffman. “While we expand selectively, we expect the net additional door number in the coming quarters to be lower than it has been in the past as we expect to see offsetting strategic doors closures in some of our more established markets.”

In other regions outside the Americas, sales in EMEA increased 28.9 percent to CHF 113.6 million, or 35 percent on a constant currency basis.

“We continue to expand our market share in a very meaningful way, even as we see a more promotion-driven environment offline and online from other brands,” said Hoffman of the EMEA performance. DTC sales grew stronger than wholesale. Highlights include growth of more than doubling in the United Kingdom and “significant growth and momentum” in the Middle East, where the brand still has a minimal presence.

Sales in the Asia-Pacific region surged 90.2 percent to CHF 34.1 million, supported by significant momentum in China and Japan.

In China, On currently has 17 owned retail locations and another 17 operated through franchise partners. Hoffman noted that several members of On’s senior management team recently went to China for the first time since the pandemic began and have become “even more excited about the opportunity in China and the Asia Pacific region more broadly.”

By product category, footwear sales jumped 52.6 percent to CHF 428.2 million, boosted by a number of successful product launches.

Apparel sales jumped 45.9 percent to CHF 13.4 million and accessory sales surged 45.4 percent to CHF 2.7 million. Hoffman noted that apparel marked its second straight quarter of gains over 45 percent, equaling CHF 57 million in sales over the last 12 months. He said apparel’s momentum can be particularly seen at On’s DTC channels, particularly its retail stores that support head-to-toe merchandising. He added, “Our exciting product pipeline provides strong confidence about the opportunity we have ahead of us.”

Gross Margins Climb 440 Basis Points
Supported by the increasing DTC share, continued strength in full-price sales and a more normalized supply chain environment, gross margins improved 440 basis points to 59.5 percent year over year, marking On’s highest quarterly gross profit margin since its IPO in September 2021. The improvement in large part reflected the discontinuation of air freight usage due to the improved supply chains, partially offset by slight headwinds from foreign exchange currency fluctuations.

SG&A expenses, excluding share-based compensation, were 48.6 percent of net sales, up slightly from 48 percent in the same period last year,  The increase reflected the ramp-up of a warehouse automation project alongside some temporary expenses for additional warehouse space needed in the quarter.

Adjusted EBITDA soared 99.6 percent to CHF 62.7 million ($72 mm), exceeding analysts’ consensus estimate of CHF 56.8 million. Adjusted EBITDA margin of 14.1 percent compared with 10.8 percent the prior and was ahead of the consensus of 13.6 percent.

Net income fell 93.3 percent to CHF 3.3 million from CHF 49.1 million, reflecting the foreign currency headwinds. Excluding share-based compensation, adjusted net income decreased to CHF 11.7 million from CHF 44.8 million.

Inventories were up 101 percent to $435.9 million at the quarter’s end from $216.7 million a year ago when inventories faced supply-chain constraints. Inventories were down 6.3 percent from the first quarter. Hoffman said, “By actively managing our production plans and more focused efforts across our teams, we continue to be well on track for even more normalized inventory levels in relation to sales by year-end.”

Product Wins
Highlighting some of the pillars of On’s success, David Allemann, co-founder and executive co-chairman, on the analyst call said On’s “products vitality is at an all-time high.” Six performance footwear models were launched over the past 24 months and four— the Cloudmonster, Cloudrunner, Cloudgo and Cloudsurfer—have become major franchises for the brand. Allemann said, “They already contribute a substantial share to our product range after their recent launches and keep growing fast.”

He also cited the success of the Cloudboom Echo 3, the long-distance shoe worn by many of its athletes in competition.

Hoffman called the Cloudboom Echo 3 “a huge step in enabling the most ambitious runners all over the globe to lace up at races in our highest performing shoes yet and we are extremely pleased with the waves of positive feedback and coverage it has received. We are convinced that pinnacle products like this one will continue to increase the share of top runners in On and further fuel the adoption of our brand with the everyday running community.”

Allemann also noted that On’s introduction of kids’ footwear is seeing a “stellar reception.”

Localized Approach
Allemann also highlighted On’s success in driving “fast global expansion with a localized approach.”

In the U.K., for example, taking distribution in-house has enabled the brand to optimize its localized distribution approach, which has included partnering with JD Sports, Foot Locker and premium department stores in the region. The Regent Street store in London opened earlier this year and has been “huge success,” exceeding On’s expectations and driving brand awareness. A Cloudmonster pop-up in Liverpool this past May also drove strong engagement.

Allemann also said the successes of several On athletes in recent months have further “significantly elevated the performance credibility of our brand and product,” highlighted in running by the Boston Marathon win by Helen Obiri. Podium finishes were also seen in USA Track and Field (USATF) Outdoor Championships in June by On athletes, Alicia Monson, Yared Nuguse and Joe Klecker.

Hoffman also said the French Open win by Iga Świątek “marked a huge step and building our credibility in the tennis space and clearly created massive excitement inside and outside of On.” In Poland, where Świątek is from, Google brand searches increased over seven-fold since her win in Paris.

Looking ahead, On raised its revenue outlook for the full fiscal year ending December 31, now expecting sales of CHF 1.76 billion, representing year-over-year growth of 44.0 percent. Previously, On forecast sales of CHF 1.74, representing full-year growth of 42.6 percent.

Under the updated guidance, the second-half-year growth rate is projected to be close to 30 percent.

Based on the current foreign exchange rates and in comparison to the previous outlook in May, this incorporates an additional negative FX impact of approximately 3 percent on On’s US dollar net sales for the second half, equivalent to approximately 20 million Swiss Francs. The guidance for the second half further implies a constant currency growth rate of 44 percent.

On is maintaining its previous outlook on gross profit margin and adjusted EBITDA margin of 58.5 percent and 15.0 percent respectively. Hoffman said On sees the potential to exceed the 58.5 percent mark in the case of an ongoing U.S. dollar weakness versus the Swiss Franc and absent any significant offsets from other currencies. This is further supported by the strong gross profit margin of 58.9 percent in the first half of the year, and the expectation for a continued high share of full-price sales in the remainder of the year.

Hoffman said the 44 percent currency-neutral growth expectation for the second half comes despite tougher comparisons in the second half of last year as the year-ago first half was impacted by supply chain shortages. Hoffman said, “We are in a good position when it comes to our inventory. So if we see stronger demand, then we will be able to fulfill that strong demand and as we have said in the past, our aspiration is always to exceed our expectations. And the order book is strong and the DTC engine is strong so we’re going with a lot of confidence into the second half.”

Photo courtesy On/Paula Findlay