Shares of On Holding rose 26 percent Tuesday after the Swiss running brand reported revenues jumped 92 percent in the fourth quarter with the help of market share gains in running and tennis and On’s strengthening appeal with younger consumers. On officials also provided a bullish outlook for 2023.
Shares closed at $27.26, up 5.69, or 26.4 percent. Its 52-week range is between $15.44 and $29.18.
The sales growth of 91.9 percent in the fourth quarter significantly accelerated from 50.4 percent in the third quarter. The fourth-quarter quarter benefited from some sales pushed forward from the third quarter due to temporary constraints in its U.S. East Coast warehouse caused by a system upgrade by its 3PL partner. Sales in the year-ago fourth quarter were also constrained by pandemic-related factory closures in Vietnam in the third quarter of 2021. Nonetheless, sales exceeded On’s targets on the robust demand for the brand.
“The quarter came in significantly ahead of even our high expectations,” said David Allemann, co-founder and executive co-chairman of On, on a call with analysts. “The demand for the brand across all regions, categories and channels remains extremely strong, and we are so excited that we were able to go into 2023 in such a great position.”
The company also guided revenue growth of 61 percent in the first quarter and 39 percent for the year to reach CHF 1.7 billion in sales ($1.84 bn) in 2023, a figure 30 percent higher than its target set in its September 2021 initial public offering.
Allemann said, “We truly believe we are setting ourselves up for our best year yet. I say this both in terms of that strong momentum that we have seen in the first months of the year, as well as where we and the industry are if you look at the normalization of operations.”
Fourth-Quarter Sales Jumped 92 Percent
In the quarter ended December 31, sales surged 91.9 percent to CHF 366.8 million ($396.9 mm). The net loss shrunk to CHF 26.4 million from CHF 187.0 million a year ago.
Gross margins in the quarter were unchanged at 58.5 percent. The margin benefit of a return to using sea freight after 12 months of heavy use of air freight offset 280 basis points of headwinds from unfavorable currency movements. The rate improved sequentially from 57.1 percent in the third quarter.
SG&A expenses, excluding share-based compensation, were reduced from 59.2 percent of sales in Q421 to 45.1 percent in Q422, primarily reflecting leverage on top-line growth. Martin Hoffmann, co-CEO and CFO, told analysts,” During the holiday season, our brand strength and word of mouth drove a high level of organic traffic, which allowed us to achieve significantly higher net sales with a similar absolute marketing spend compared to the same quarter in the prior year.”
Adjusted EBITDA in the quarter increased 451.7 percent to CHF 61.8 million, with the adjusted EBITDA margin improving to 16.8 percent from 5.9 percent.
For the year, On’s sales climbed 68.7 percent to CHF 1.22 billion ($1.32 bn). Net income reached CHF 57.7 million against a net loss of CHF 170.2 million. Adjusted EBITDA advanced 71.4 percent to CHF 165.3 million, with the adjusted EBITDA margin increasing to 16.8 percent from 5.9 percent.
Wholesale Revenues Double In Fourth Quarter
By channel, wholesale sales grew 104.2 percent to CHF 217.3 million in the quarter and gained 73.1 percent to CHF 777.0 million in the year. Hoffmann said, “The strong numbers are backed up by the underlying demand and sales strength at our wholesale partners.”
He said On expanded its wholesale door accounts from around 8,000 to 9,200 doors over the year, including the exiting of 200 doors On considered “less additive to the positioning of the brand.”
Sales through DTC gained 76.4 percent to CHF 149.4 million in the quarter and moved up 61.4 percent to CHF 445.1 million in the year.
Hoffman said On’s owned DTC operations saw a “very high share of full-price sales” despite the promotional marketplace. On during the year completed the rollout of its new website and the purchase of the on.com domain. The number of visitors to On’s website increased from 102 million to 143 million year-over-year in 2022.
Among its owned stores, On’s largest store opened on Regent Street in London a few weeks ago and has outperformed expectations while helping drive visitors to the company’s website and retail partners in the area. Apparel sales at the location exceed sales in any other UK store. New stores will open in the coming months in Miami, FL and Williamsburg, Brooklyn.
North America Sales Jump 82 Percent In Fourth Quarter
By region, net sales in North America, its largest region, increased 81.5 percent to CHF 242.1 million in the quarter and 80.3 percent to CHF 738.5 million in the year. The North American business “re-accelerated” in the fourth quarter after being impacted by the warehouse disruption in the third quarter. DTC grew stronger than wholesale. Hoffman said, “This confirms both our ability to drive over proportionately to seek growth, as well as the selective expansion of our wholesale network.”
Regarding the year in North America, Hoffman added, “We further amplified our relationship and trust with many key retail partners, and we look forward to growing our combined businesses. Even with this incredible growth, we still see ample opportunities for higher penetration in many areas of the U.S., and we will continue to calibrate and selectively expand our footprint with wholesale partners to ensure we are getting into the most meaningful doors that support our growth and the brand positioning.”
Europe’s sales vaulted 80.6 percent to CHF 79.6 million in the quarter and 36.1 percent to CHF 354.3 million in 2022. Europe saw a slow start to the year as it was impacted by Vietnam’s factory closures but returned to strong growth in the fourth quarter. Net sales almost tripled in the UK in the quarter and grew 40 percent and 50 percent, respectively, in Germany and Austria. Hoffman said many European countries are at “a very early stage of growth and increasingly picking up momentum,” citing the UK and markets such as France, Spain and Italy that have only recently or are in the process of being shifted from licensed operations to in-house operations.
In the Asia-Pacific region, sales climbed 103.8 percent to CHF 21.6 million in the quarter and expanded 87.7 percent to CHF 80.2 million in the year, reflecting “very strong” momentum in Japan, Australia and China. Rest of World sales increased 680.5 percent to CHF 23.4 million in the quarter and increased 310.5 percent to CHF 49.1 million in the year. The gains reflect the entrance into several distributor markets in Latin America during 2022.
Footwear Sales Climb 97 Percent In Fourth Quarter
By category, shoe sales increased 96.7 percent to CHF 353.4 million in the quarter and 70.9 percent to CHF 1,167.5 million in the year. Hoffman said, “We continue to gain market share in the running community, especially with the Cloudmonster, the Cloudrunner and the Cloudgo while at the same time, the Cloudnova is winning more and more younger fans”
In Q4, On launched the Cloud X, which strongly resonates with fitness enthusiasts and has become its best-selling product in China. Growth for the year in footwear was balanced “well-balanced across all three product categories: Performance Running Performance, Outdoor and Performance All Day
Sales from apparel increased 15.4 percent to CHF 11.5 million in the quarter and gained 30.2 percent to CHF 47.3 million in the year. Sales of accessories rose 30.9 percent to CHF 1.8 million in the quarter and gained 48.3 percent to CHF 7.4 million in the year. Hoffman said On intentionally launched fewer apparel products this year but remained focused on building On’s “head-to-toe” positioning. Hoffman said, “We’ll be very much focused on the apparel business throughout 2023 and beyond.”
Allemann highlighted traction On is seeing in the running and tennis categories as well as in reaching younger consumers.
Allemann said On had a “huge year” in running with the introduction of the Cloudrunner, Cloudgo and Cloudmonster becoming key franchises helping On increase market share in run.
He said, “We can see this very clearly in our proprietary runner count data where in particular the Cloud Monster and Cloudrunner are positively over-indexing with regards to their visibility on the running routes versus their contribution to sales. This of course further establishes our credibility as a brand rooted in performance, a key strategic priority for us.”
Activations supporting the run opportunity include the January launch of “On Track Nights,” the brand’s own global running event series; “Right To Run,” its social impact partnerships program; and On Athletics Club, its Boulder-based elite middle and long-distance runners squad. The On Athletics Club recently signed reigning Olympic Champion triathlete Kristian Blummenfelt who followed the fall 2022 signing of Ironman World Champion Gustav Iden. Other recent signees include triathletes Paula Findlay and Chelsea Sodaro.
Allemann cited a number of recent podium wins across the brand’s athlete roaster and said On is launching the Cloudboom Echo, worn by many of its athletes, commercially for the first time.
For the everyday runner, a new Cloudsurfer is launching on Thursday featuring the next phase of CloudTec technology, the CloudTec Phase, designed to minimize stresses for the runner. Said Allemann, “Early media reviews have been hugely positive with testers describing being blown away by the new CloudTec Phase cushioning, calling it their favorite road running shoe of the year and heralding the Cloudsurfer running shoe as an impressive step change for all.”
In tennis, On announced on Monday that it had signed the women’s number one ranked player, Iga Świątek, and American rising star Ben Shelton. Allemann said, “Going forward, both players will be wearing the company’s newly developed on-court collection for professional competition and custom editions of the Roger Pro. The competition tennis shoe has been Swiss engineered and designed individually for and in close collaboration with both players, Roger Federer and the Lightning innovation team at On Labs to meet the demands of their individual style of play.”
On also signed 16-year-old Brazilian junior player João Fonseca. Allemann said, “We truly believe that tennis can play a key role in fueling the next stage of all growth.”
On’s success reaching younger consumers is evident from its success at Foot Locker, where On’s sales saw its strongest sell-throughs in the fourth quarter. With the same 160 doors in each quarter, On’s unit sales were up 59 percent sequentially at Foot Locker versus the third quarter, supported by styles such as the Cloudnova.
Said Allemann, “On’s highly visible technology and innovation in shoes and apparel is increasingly embraced by younger consumers from taste-making teenagers in the UK to many young On fans in gyms and on the streets across the U.S.”
As part of that youth push, On is launching its first kids’ shoe, the Cloudplay, and first for teens and preteens, the Cloudsky. Allemann said On worked with two leading universities in the field of children’s biometrics to tune the Cloud “and make sure the shoes help kids feet grow in the very best conditions.”
He added, “It’s our mission to promote movements among kids and teenagers from a young age to build their love for sports and their relationship with On for a lifetime.”
Looking ahead, On expects growth of 61 percent in the first quarter, with the higher growth rate in part reflecting the year-ago supply constraints.
For the full year, On expects to reach sales of at least CHF 1.7 billion, representing a year-over-year growth rate of 39 percent on a reported basis and 42 percent on a currency-neutral basis. As a result of this strong first-quarter momentum and the comparatively heavy supply disruptions faced primarily in the first half of 2022, On anticipates a higher growth rate of high-40s in the first half of 2023 versus low-to-mid-30s growth in the back half.
With air freight usage expected to be limited in 2023 in a normalized supply chain environment, combined with a strong inflow of recent products supporting full-price selling, On foresees the continuation of the gross profit margin expansion towards the stated mid-term target of 60 percent. Considering current FX rates, On anticipates a full-year 2023 gross profit margin of approximately 58.5 percent. Driven by ongoing scale gains in SG&A expenses, somewhat offset by an intended re-acceleration of marketing expenses, On expects its adjusted EBITDA margin for the full year 2023 to increase to 15 percent.
Photo courtesy On