Swiss running brand On delivered its seventh consecutive record quarter in revenues and achieved its highest gross margin since its August 2022 IPO. However, shares closed down slightly on Tuesday due to concerns over elevated inventory levels and its ability to deliver growth to match On’s stock’s high multiple.

Shares closed Tuesday at $25.65, down 91 cents on the day, fairly close to its $22 IPO price. The stock is well off its all-time closing high of $37.08 reached on August 10 despite a third straight quarter that saw On raise guidance on a better-than-expected performance.

While the stock’s pullback in part reflects weakness in the soft goods sector that’s still facing elevated inventories in the marketplace, it also reflects concerns over On’s inventory levels and whether On’s recent soaring growth rate can continue to justify the stock’s high earnings multiple. At an investor day earlier this year, On set aggressive targets to double its net sales by 2026 while increasing its gross margin rate to above 60 percent and its adjusted EBITDA to more than 18 percent.

“It’s fair to say that Q3 has been our most successful quarter in history across all measures,” said company co-CEO and CFO Martin Hoffmann on a call with analysts. “The demand for the On brand remains very strong.”

Inventories, however, were up 62 percent year over year, which compares to 3Q23 revenue growth of 46.5 percent and Q4 guidance for 21 percent year-over-year revenue growth.

“Managing our inventory remains a key focus area,” said Hoffmann, noting that the quarter marked further improvement from the second quarter (inventories up 101 percent year over year) and the first quarter (up 186 percent year over year.) Hoffman added, “In line with our previous communication, we expect to maintain the current inventory level by year-end.”

Most of Hoffmann’s comments on the call explored the vibrant demand being seen by On across categories, regions and channels.

Caspar Coppetti, co-founder and executive co-chairman of On, also the call noted On’s brand awareness is being helped by the performance of its ambassadors. A highlight in recent weeks was Hellen Obiri’s win at the New York City Marathon, becoming the first woman in 34 years to win the marathon in New York and Boston in the same season. In addition, On’s top tennis athletes, Iga Świątek and Ben Shelton, each finished off their season with a tournament victory with Świątek reclaiming the women’s world number 1 position.

“As we enter the holiday season and prepare for more product launches to surprise our fans in 2024,” said Coppetti. “We are grateful to share that the On brand has never been stronger than today and that we never had more reasons to be optimistic about the future trajectory of our business. This is a pivotal moment in our story as we are successfully transforming from a challenger in the running category to a running leader, from a running brand to a multisport brand, from a wholesale-led to a true omnichannel brand, and from a footwear brand to a sportswear brand..”

Sales in the quarter reached CHF (Swiss Francs) 480.5 million ($540 mm) from CHF 328.0 a year ago, up 46.5 percent on a reported basis and 58 percent on a currency-neutral basis.  Analysts’ consensus target was CHF 455.5 million.

DTC Outpaces Wholesale Growth
By channel, DTC climbed 54.6 percent to CHF 164.7 million while wholesale sales jumped 42.6 percent to CHF 315.7 million.

DTC outpaced wholesale growth for the second consecutive quarter in line, leading DTC share to increase to 34.3 percent of sales from 32.5 percent in the year-ago quarter. The growth is aligned with On’s plans to expand DTC faster than wholesale. Martin said, “The continued success of our stores is further increasing our confidence in this strategic direction.”

With 26 retail stores operating by the end of Q3, net sales from own retail more than tripled in the quarter year over year.

On opened two retail stores in the quarter in Miami and London‘s Spitalfields Market, marking its second London store. Martin said, “We’re absolutely thrilled to see the vibrant communities that are gathering around our retail locations. In London, we had about 100 dedicated runners joining us for the first Saturday run out of the store, even in the face of typical rainy London weather.”

The elevated apparel share of 23 percent in Miami and 19 percent in London demonstrates the importance of owned stores as a path to On becoming a head-to-toe sportswear brand.

The wholesale gain of 42.6 percent was “slightly elevated” in part due to the disruption in On’s warehouse in the U.S. in the year-ago quarter that resulted in 2022 orders shifting into the fourth quarter. In addition, some early holiday shipments this year were sent to wholesale partners in the latter part of the third quarter, pulling some volumes from the fourth quarter. Martin said, “Independently from these one-off effects, we have seen very strong sell-out numbers at our wholesale partners. We are very pleased with the level and the composition of our in-channel inventory. Given these on-offs, looking at wholesale growth for the combined second half of the year would be a more meaningful measure to establish a baseline for growth going forward.”

Coppetti said wholesale will remain an important channel for our business. He said, “I’m happy to say that as a brand, we have found the wholesale partners that we want to work with. And going forward, we will focus on deepening these partnerships and trying to deliver an intimate consumer experience across categories through these channels.”

Regional Performance
By region, sales in the Americas in the quarter climbed 60.5 percent to CHF 294.9 million. Hoffman said, “We are pleased to see that strong selling for the fall season coincides with continued sell-off strengths at our partners across the board. Of course, our U.S. business was the most impacted by the operational challenges in the prior year period, again, slightly helping the reported growth rate in Q3 this year.”

Sales in Europe, Middle East and Africa (EMEA) were up 19.9 percent to CHF 144.0 million. Martin said that similar to recent quarters, significantly stronger growth was seen in DTC versus wholesale channels. He said, “The UK remains one of the key growth engines in the region. The growth is very much performance first, which is very important for us. The validation comes from our recent shoe count along key running routes, where we have seen a strong increase of our market share on runners’ feet.”

In the Asia-Pacific region, sales advanced 71.5 percent to CHF 41.6 million, led by momentum across regions and channels. The APAC region was the most impacted by the currency-exchange shifts versus the prior year. On a currency-neutral basis, sales would have been up over 95 percent. Martin said On benefited from “very strong momentum in Japan as well as the continued strength of our owned retail stores in China, in particular during the Golden Week holiday period.”

Product Performance
By product category, net sales from shoes jumped 47.0 percent to CHF 456.9 million, apparel gained  31.8 percent to CHF 20.1 million, and accessories surged 84.2 percent to CHF 3.5 million.

On footwear, Hoffman said, “We continue to be encouraged by the strong performance of newer core running blockbusters like the Cloud Surfer and Cloud Monster, and the new generation of Cloud X, clearly showcasing the adoption of On shoes across the globe. The positive brand momentum around the U.S. Open has also demonstrated an outstanding performance of the Roger family, visible in an elevated growth rate of the franchise in our DTC channels versus the prior year.”

On apparel, Hoffman said On is “very excited about the upcoming collections and innovations that will allow us to further emphasize the differentiation and premium-ness of our products.” A new store concept, the first opening in Paris later this week, is expected to feature improved displays for selling apparel.

Hoffman added that while On slightly scaled back on marketing in the fourth quarter last year, a bigger print campaign is running in the current fourth quarter centered around its new apparel collection. Said Hoffman, “This includes many highly visible print moments in key cities around the globe. One of the highlights is our activation at Tottenham Court Road underground station in London with steady traffic of over 200,000 people.”

Gross Margins Reach Highest Level In Two Years
On’s gross margins in the quarter improved to 59.9 percent in the third quarter from 57.1 percent in the comparable period in 2022, the highest rate since On’s IPO two years ago. The increase was driven by the continued high full-price sales, the increased DTC share versus the prior year comparison period, favorable freight and FX rates, as well as the discontinuation of extraordinary airfreight usage.

SG&A expenses, excluding share-based compensation, were 46.4 percent of sales up from 44.1 percent in the same period last year. Distribution expenses remain elevated due to the investment into warehouse automation, which is expected to deliver meaningful scale gains in the future.

As a result of the strong sales, its margin improvement and expense controls, adjusted EBITDA jumped 44.3 percent to CHF 81.3 million, exceeding any other quarterly adjusted EBITDA by almost 30 percent, said Hoffman. Analysts’ consensus target was CHF 73.7 million. As a percent of sales, adjusted EBITDA margin decreased to 16.9 percent from 17.2 percent.

Net income in the quarter vaulted 184.4 percent to CHF 58.7 million, which Hoffman noted is more than in the whole year’s earnings in 2022. Adjusted net income increased nearly three-fold to CHF 65.5 million from CHF 22.3 million.

Based on the strong results in the first nine months of 2023 and the confidence in the ongoing strength and demand for the On brand, On raised its previous sales outlook for the full year 2023 to CHF 1.79 billion, implying a full-year growth rate of over 46 percent.  Prior guidance called for revenue of at least CHF 1.76 billion, implying a full-year growth rate of 44 percent.

In addition, On now expects to reach a higher gross profit margin of at least 59.0 percent for the full year 2023 (58.5 percent previously), while maintaining the outlook for a 15.0 percent adjusted EBITDA margin.

The updated outlook further implies a reported growth rate of 21 percent in the fourth quarter of 2023 (over 30 percent on a constant currency basis), which will again be driven by On’s DTC channel. Due to a number of transitory impacts, On’s fourth-quarter wholesale growth rate is expected to be in the high single digits. These transitory impacts include the early holiday shipment of some wholesale orders recorded in the third quarter of 2023, resulting in an element of pull forward of Q4 volumes. In addition, the fourth quarter will see the initial impacts from lower reorders due to the previously announced strategic wholesale door closures in the EMEA region. As reported, the approximately 200 stores are more focused on comfort footwear rather than performance and accounted for around 10 percent of On’s EMEA wholesale sales.

Finally, wholesale volumes in the prior year Q4 period had further been shifted to the fourth quarter given a disruption of operations in the third quarter of 2022, resulting in a more challenging comparison period for the fourth quarter.

Photo courtesy On