On Holdings circumvented supply chain challenges to deliver fourth-quarter results that easily surpassed Wall Street targets. The Swiss running brand also lifted its outlook for 2022, projecting sales to expand at least 37 percent on top of 2021’s 70.4 percent gain.
On a conference call with analysts, David Allemann, co-founder and executive co-chairman, said 2021 marked the company’s strongest year in its 12-year history and beat expectations at the beginning of last year “on all accounts.” Demand for its products was seen across all regions, channels and categories to drive top-line growth, while gross margins saw a “significant jump” in the year to rank at the top-end of industry rates.
“We are grateful to have successfully navigated the uncertainties of the global pandemic and supply chain restrictions in the last two years,” said Allemann. “It shows the strength of the On brand, our operating model and, most importantly, our global team. On the supply side, On’s strong consumer demand met with better than expected product availability.”
Martin Hoffmann, co-CEO and CFO, said production capacity in Vietnam was back at 100 percent of pre-lockdown commitments since December 2021. With encouraging order backlog, the improved supply chain situation drove the higher outlook for 2022. He said, “Overall, we are fast-tracking the capacity ramp-up plan this year and leveraging our close relationship with all factory partners; this includes expanding into Indonesia, where we started production in a new facility to diversify our production network.”
Sales Jump 54 Percent In Fourth Quarter
In the fourth quarter ended December 31, sales jumped 53.7 percent to CHF (Swiss francs) 191.1 million ($204 mm), well ahead of Wall Street’s consensus estimate of CHF 179.5 million.
Gross margin in the quarter improved 650 basis points to 58.5 percent while adjusted EBITDA reached CHF 11.2 million, equal with the year-ago quarter. Adjusted EBITDA ran well ahead of Wall Street’s consensus target of CHF 7.2 million.
Hoffmann said the growth marked a slow-down from the 67.6 percent year-over-year growth due, in part, to the factory closures in Vietnam between September and November that led to supply shortages, especially in Europe.
In releasing third-quarter results on November 16, On warned that factory closures in South Vietnam, representing about 70 percent of On’s production capacity, would restrain sales growth through the first half of 2022. The accumulated loss of capacity in the affected region was estimated at approximately twelve weeks. As of early November, the affected factories were operating at more than 80 percent of its scheduled production capacity.
The growth in the quarter was also negatively impacted by a shift of its Spring/Summer product season launches from the fourth quarter of 2021 to the first quarter of 2022, tied to the supply chain disruption.
A third factor in the slower growth rate was that while North America had lifted most COVID-19-related shopping restrictions, repeated lockdowns occurred in Europe, especially in Germany, Austria, Switzerland and other markets, including Australia and China.
By channel, direct-to-consumer (DTC) sales in the fourth quarter climbed 76.7 percent to CHF 84.7 million, while wholesale advanced 39.3 percent to CHF 106.4 million. Hoffmann said the supply chain constraints had impacted wholesale more.
By region, net sales in North America jumped 100.1 percent to CHF 133.4 million in the quarter, while sales in the Asia Pacific increased 35.0 percent to CHF 10.6 million. Europe was down slightly year-over-year, having been impacted by supply shortages and lockdowns in November and December, but expected to return to growth in the first quarter of 2022.
By product category, sales climbed 49.0 percent to CHF 179.7 million in footwear, vaulted 216.0 percent to CHF 10.0 million in apparel and gained 164.9 percent to CHF 1.4 million in accessories.
Despite improving 650 basis points year-over-year, the 58.5 percent gross margin was down from a rate of 60 percent in the second and third quarters and reflects the use of additional air freight to compensate for supply shortages related to factory closures partially offset by a higher DTC share of sales.
The net loss in the quarter came to CHF 187.0 million from a loss of CHF 2.6 million a year ago. The loss reflects share-based compensation and, to a lesser degree, professional expenses related to its September IPO, depreciation and amortization and foreign exchange losses.
2021 Sales Expand 70 Percent
In the year, sales increased 70.4 percent to CHF 724.6 million. In releasing third-quarter results on November 16, On forecasted sales of CHF 710 million.
In the year, DTC sales expanded 71.9 percent to CHF 275.8 million, and wholesale sales grew 69.5 percent to CHF 448.8 million. Sales increased 38.8 percent to CHF 260.4 million in Europe, 96.8 percent to CHF 409.5 million in North America, and 85.8 percent to CHF 42.7 million in Asia-Pacific. Sales increased 68.1 percent to CHF 683.3 million in footwear, 130.8 percent to CHF 36.3 million in apparel, and 57.2 percent to CHF 5.0 million in accessories.
Gross margins improved to 59.4 percent from 54.3 percent in the year, while adjusted EBITDA increased 93.8 percent to CHF 96.4 million, exceeding On’s guidance of CHF 92 million. The net loss after non-recurring items grew to CHF 170.2 million from a loss of CHF 27.5 million a year ago.
2021 Highlights
Highlighting On’s successful progress with key initiatives, Allemann said the brand is “truly on fire.” In the U.S., it saw over 92 percent growth in run specialty in 2021 and over 85 percent in its e-commerce channel.
The U.K. saw a 75 percent growth in 2021. In China, business improved its rank from 120 to 135 on Tmall’s sports ranking, and On achieved a five-fold increase in its social followers.
Within Marketing, On continues to benefit from new partnerships with elite athletes through its On Athletics Club in Boulder, CO, its multi-year partnership with the track & field event Penn Relays and as the official sponsor and outfitter of the Swiss and Norwegian Olympics team.
Allemann noted that Switzerland recently marked its most successful Winter Olympics and said more On Athletics Clubs are scheduled to open this year in Europe and Australia, building on Boulder, Colorado’s success.
When it comes to product, On aims to reach a “broader community” aligned with its mission “to ignite the human spirit through movement” and includes the launch of the Cloud Runner this spring aimed at “everyday runners.” At the Winter OR Show 2022, the brand showcased the Cloud Vista, described as “the perfect companion for gravel roads and track—– versatile and mainstream.”
On’s apparel range is growing nearly twice as fast as its footwear. On is also seeing “On culture crossing over into popular culture” with the brand resonating with younger shoppers in Tokyo, Shanghai and New York City as well as on the shelves of Foot Locker and J.D. Sports. A recent collaboration between On and LVMH-owned luxury fashion label Loewe “almost sold out” days after launching.
Said Allemann, “On stays firmly rooted in run culture and, at the same time, is embraced by a much wider market and demographic.”
On’s omnichannel strategy “is firing on all cylinders,” added Allemann. On’s e-commerce sales reached a high share of 36 percent in 2021. Allemann said, “This means increasing direct connections to our community. We now serve customers in 48 countries through DTC and learn from them.”
In 2021, the number of recorded sessions on its e-commerce platform, including China, increased from 66 million to 102 million. China accounted for 3 percent of the total e-commerce sales during 2021 versus one percent in 2020.
At wholesale, On is investing in activations with its key partners. The Cloud Ultra trail shoe was pre-launched at REI; a coup Allemann described as “a huge win for building On’s credibility in the outdoor space.”
On’s “fast success” at Nordstrom is supported by 20 in-store shops this year within its department stores. And to introduce the On brand to an “even younger audience, the company is focused on selling at the “best Foot Locker” stores.
Overall, the brand has expanded globally to more than 8,700 stores at the close of 2021, up from over 7,800 at the start of the year—with shop-in-shops at more than 1,000 locations.
Its New York City flagship has waiting lines at its front door with community runs starting there regularly. On also has eight stores in China. The stores attract the highest share of first-time customers compared to other channels, convert at a higher rate than other channels, with a significant share of apparel in some stores up to 25 percent of sales. All its stores reached profitability within nine months of opening. New stores in 2022 include Tokyo, in the weeks to come, followed by London and Zurich this summer.
Said Allemann, “It is important for you to know that we are not seeing any cannibalization of our wholesale and DTC channels. Those channels show sustained strong growth at the same time and are highly complementary.”
2022 Outlook
Looking ahead, On now expects net sales to exceed CHF 990 million, representing year-over-year growth of at least 37 percent compared to 2021. In releasing third-quarter results, On projected sales of at least CHF 960 million in 2022.
The adjusted EBITDA target is CHF 130 million at an adjusted EBITDA margin of 13.1 percent. Previously, On projected adjusted EBITDA of at least CHF 125 million in 2022.
Hoffman said On anticipates significant expansion of its product offering in running, outdoor and lifestyle, which we call Performance All Day.
“We have completed our selling season for spring, summer, fall, and winter 2022, and we’re seeing very strong pre-orders from existing and new wholesale partners both for half-year one and two,” said Hoffman.
The growth will include “controlled expansion” of its partnership with Foot Locker and J.D. Sports following a successful pilot in Q321. This summer, it will also have a first pilot at Dick’s Sporting Goods with a “very targeted assortment of On running products.”
At the DTC level, On plans to open its first flagship stores in Europe and Asia outside China while increasing its owned store presence in North America and doubling its store count in China.
Hoffman noted that managing the supply chain remains a priority as On continues to experience volatile shipping costs, port congestion at U.S. West Coast ports and labor shortages due to Omicron infections in some warehouses.
The increased outlook also considers improved sourcing with production capacity back to pre-pandemic levels. Hoffman said many of its sourcing partners worked through Vietnam’s Tet holiday to recover some lost capacity. On also recently started production in a new facility in Indonesia to produce 10 percent of its footwear outside of Vietnam by the end of 2022.
With the help of its partnerships in its factories and supply chain, On entered 2022 with an “elevated supply position” to help mitigate some of the supply chain pressures and was able, three weeks ago, to orchestrate its largest product launch for the Cloud 5; however, growth in the first half of the year continues to be restrained by supply chain contraints than in the second half.
To mitigate the disruptions across the international supply chain, On said it would continue to use air freight, and it’s expected to be a headwind to gross margins of approximately 700-to-800 basis points in the first half of 2022.
To offset the impact from high expenses along the supply chain, On has increased its retail prices in North America by $10 U.S. dollars on roughly 40 percent of its sales volume.
Photo courtesy On
