Switzerland-based On Holding Co-CEOs Martin Hoffman and Marc Maurer hosted the company’s quarterly conference call with analysts from the New York Stock Exchange on March 12, while company Co-founder and Co-chair David Allemann made it a truly international affair as he joined from Zurich to talk about the fourth quarter and full year 2023 results and a look ahead for 2024.
“Being here brings back great memories from our listing event in September 2021,” commented Hoffmann. “It fills us with immense pride to see what our team has achieved in the first two years since going public. We observe very strong growth, incredible increase in brand awareness, and significant gains in market share nearly everywhere around the globe.”
It wasn’t all a warm reception as ONON shares fell in the mid-teens after the earnings release and conference call before taking back some energy in the afternoon to close down less than 9 percent to $30.63 to end the day.
At issue was the apparent “miss” against the profit number the analysts were expecting. The company produced the numbers it said it would at the company’s November Investor Day, but it did not satisfy Wall Street. There are also concerns about the forecast for the first quarter of 2024, which came short of expectations. Much of the issue comes from the FX rate fluctuations over the last year, especially between the brand’s largest market in the U.S. and the Swiss franc reporting currency. In the future, the company said it will only provide guidance in constant-currency terms to mitigate some translation issues.
Hoffman noted that On generated over CHF 1 billion in sales in the Americas region for the full year and more than CHF 1 billion in consolidated gross profit. Consolidated net sales from the Wholesale channel exceeded CHF 1 billion.
On said that, including retail, the company had grown from 1,700 employees to over 2,400 and now represents 94 nationalities in over 20 offices worldwide.
“Our culture is at the center of our success, and our focus remains on building a high-performing team centered around our mission. We are deeply grateful for all your great work and your passion,” said Hoffman.
In 2023, On Holding opened 15 new retail stores, 10 of which were in China.
“In Q4 alone, we opened six new stores in London, Miami, Paris, Beijing, Chengdu, and Guangzhou, and expanded our New York Lafayette store,” Hoffman shared. “We’re eagerly looking forward to the openings in the upcoming weeks and months.” Hoffman added that he was excited about opening the first store in his home country, Germany.
“A new 300 square meter store in the center of Berlin is planned to open later this month, but equally for our recently opened store in Portland, the home of our brand in North America,” he said.
Turning to the Wholesale side of the business, Hoffman noted that the segment grew more modestly than the DTC side, which he said reflected some of the comparison period dynamics.
“Our wholesale partners observed strong sellout numbers at full price both in their brick-and-mortar locations, as well as their online presence,” Hoffman suggested. “Most of this volume had been shipped towards the end of Q3 in anticipation of the strong Q4. This is reflected in our combined Wholesale growth for the second half of the year.”
Wholesale revenue grew 26.8 percent (+36 percent CC) for the second half of 2023.
Fourth Quarter Regional Review
“In EMEA, as previously discussed, we are executing our strategy to fully emphasize the most premium and highest quality growth, reflecting in the closure of around 200 doors in Central Europe that we deem non-strategic,” shared Hoffman. “These stores have officially stopped receiving products as of Q1 2024 but had already reduced their orders in Q4 2023 to some extent.” He said the company will continue to manage its different channels very consciously.
“While we will be adding a lower number of incremental Wholesale doors in the future than we have over the past years, we see significant potential for deeper penetration as strategic accounts, same-store growth and ongoing market share gains,” he added. “We are very pleased to see how this opportunity materializes with the launch of some of our Spring/summer 2024 starts.”
Staying in Europe, Hoffman said the company sees increasing high-quality demand in the DTC channel more than making up for the door closures on the Wholesale side.
In aggregate, net sales in EMEA grew by 22.9 percent (+26 percent CC) to CHF 112.5 million for the fourth quarter.
The Americas grew by 18.5 percent (+29 percent CC) in Q4 to CHF 300.6 million. Hoffman said this marks the strongest quarter for the region in the company’s history and reflected the strong demand for On’s products.
“As in EMEA, we have seen a disproportionate growth of the DTC channel,” he noted. “While the reported growth includes nearly 11 percentage points of FX translation impacts and the constraints by the comparison period dynamics, our constant-currency growth is at 29 percent for the quarter. We continue to be very encouraged by the underlying dynamics and the brand’s strengths in the region.”
APAC reached net sales of CHF 34 million in Q4, corresponding to a growth rate of 57.7 percent (+76 percent CC). Again, APAC was the most impacted by FX translations.
“We are extremely excited about a very strong momentum in China and Japan, and in particular, our ability to gain share and awareness with the dedicated running community,” Hoffman offered. “In the Shanghai Marathon, held at the end of November, On ranked as the fifth overall brand in terms of presence on runners’ feet, demonstrating the brand’s performance credibility in China.”
Fourth Quarter Category Review
From a product category standpoint, Hoffman said that apparel had been the focus of the brand’s marketing campaigns in the fourth quarter.
“We are very pleased to see this has led to a fourth-quarter growth rate of 60.1 percent to reach CHF 18.4 million. In our DTC channels, apparel grew 110 percent. In APAC, the apparel share exceeded 10 percent in the fourth quarter.”
He said the strong demand provides a tailwind to 2024, where exciting new products, updated sizings, and more focus across all channels are expected to drive further success.
“We are thrilled to be launching our tennis apparel later this week. We know that our most loyal fans have been waiting for this ever since Iga and Ben first set foot on the court in our gear last year,” he celebrated.
Net sales from Footwear grew by 20.4 percent in Q4 to CHF 425.7 million.
“It’s no surprise that Cloudmonster was also one of the significant growth contributors during the holiday season. More broadly, we are thrilled to see our strategic priorities playing out as intended, with a large part of growth driven by our performance running ranges,” he detailed. “In performance all day, the Cloudnova has established itself as a holiday season favorite, continuing to resonate very strongly with a younger DTC customer.”
Hoffman said the brand maintained a high share of full-price sales throughout the holiday season.
Accessories net sales grew 60.1 percent to CHF 2.9 million.
Income Statement
On’s gross margin in Q4 reached 60.4 percent over its midterm ambition of 60 percent-plus and an increase of 190 basis points year-over-year. The improvement versus the prior-year quarter was reportedly driven by the higher DTC share, overall favorable freight rates and limited use of air freight.
SG&A expenses, excluding share-based compensation in Q4, were 48.9 percent of net sales, up from 45.1 percent in the prior-year Q4 period. The increase was driven by planned, continued investment into brand building, which On had slightly scaled back in the 2022 first half to absorb some of the higher freight costs. In addition, G&A reportedly saw an increase, as a percentage of net sales, due to the somewhat different sales faced in 2023 versus 2022.
“The resulting adjusted EBITDA margin of 16.1 percent for the fourth quarter is well ahead of our latest expectations,” Hoffman said. “For the full year 2023, this brings our adjusted EBITDA margin to 15.5 percent, an increase of 200 basis points year-over-year and significantly above our 15 percent target. This achievement further exemplifies our commitment to not only drive significant growth but also consistently increase our profitability and take steps towards our stated 18 percent plus mid-term target. Ultimately, it shows the power of our premium brand positioning.”
As a result of the temporary downward movement in the U.S. dollar, the Swiss Franc FX rate in late December resulted in a 0.84 year-end Swiss Franc per U.S. dollar closing rate.
“The revaluation of our U.S. dollar balance sheet items led to the recording of unrealized FX losses in Q4, weighing on our reported net income and turning it to a loss for the three-month period,” Hoffman detailed. “However, based on current spot rates, we expect a partial reversal of these Q4 losses and a corresponding gain in the course of 2024.”
For the full year, Hoffman said On Holding reached a record net income of CHF 79.6 million, up from CHF 57.7 million in the prior year, even with the significant unrealized FX charges to the reported profits. He said a strong focus in 2023 was on improving and strengthening the balance sheet, most importantly, inventory and liquidity.
“To recall, due to the expedited recovery of the global supply chain, we started into the year with an elevated inventory position,” Hoffman noted.
“Our focus throughout the year has been maintaining the inventory level while growing ourselves. Our teams have done a tremendous job to finish 2023 with roughly the same number of items in our inventory as we had at the end of 2022,” Hoffman expressed. “In the same time frame, our business has grown by 55 percent. This puts us in a great position heading into 2024 while providing further opportunities to optimize and drive additional operating cash flow over the coming quarters and years.”
He also said that the company had significantly reduced capital expenditures from 2022 to 2023, both on an absolute basis and in percentage of net sales.
“While we had major investments into our office infrastructure in 2022, we invested 2.6 percent of sales in 2023, mainly in our retail expansion technology and some smaller offices,” he noted. “On an ongoing basis, we continue to expect CapEx in the range of 3.5 percent to 4.5 percent of sales; this includes high expenses in connection with our planned acceleration of retail store rollouts.”
Hoffman continued, “As a result of our strong profitability and the improved net working capital position, we achieved an operating cash flow of CHF232 million and a net cash flow of CHF163 million in 2023. This is by far the strongest cash flow in the company’s history.”
At the end of the year, On Holding’s cash balance stood at CHF 495 million, which is said to be “significantly up” from CHF 371 million at the end of 2022.
“Together with our CHF 700 million credit line, we are very well financed to invest in our future growth and to dream big,” Hoffman boasted.
Outlook
When looking ahead, Hoffman said that when considering the large impacts from FX translations the company has seen in 2023 and expects to remain over 2024, it would begin to refer to a constant-currency growth rate in its stated net sales expectations.
Hoffman said the previous long-term guidance for growth at a 26 percent CAGR throughout the fiscal year 2026 had already grown old, and the company now sees a constant-currency growth rate of at least 30 percent for the year. Considering the Swiss Franc strength, he said this translated to reported Swiss Franc net sales of at least CHF 2.25 billion at current spot rates. He also said the FX translation would be more pronounced in the year’s first half.
“For Q1, we are seeing strong demand, but we are also compounding against a strong wholesale performance in Q1 2023, driven by the initial expansion into some of the larger key accounts,” Hoffman explained. “As a result, for Q1 specifically, we expect a significantly increased DTC share and to achieve constant-currency net sales growth of 26 percent, translating into reported Swiss Francs net sales of CHF 495 million.”
Hoffman said On Holding anticipates a gross profit margin of around 60 percent, which aligns with the company’s mid-term target.
“This serves as a basis to continue on our path towards the adjusted EBITDA margin target of 18 percent plus by 2026. For 2024, we will continue to invest to drive long-term durable growth while we expect to further increase our adjusted EBITDA margin to 16 percent to 16.5 percent. Beyond this, we will maintain our focus in 2024 on further optimizing our inventory and networking capital position. And with that, expect a continued strong positive cash flow,” he shared.
“To conclude, we ended the year with a lot of tailwinds and opportunities in all parts of the business. The demand for the On brand remains very strong. Exciting product launches and big brand moments are in the making. We have more capabilities to execute our strategic plan than ever before, from retail to apparel, from E-com to operations, and we have a great team in place ready to dream On,” he concluded in his prepared statement.
Images courtesy On Holding AG
