Fresh off the brand’s strong Olympic showing in Paris, the senior executives at On Holding were hunkered down in a makeshift studio in the Alps for their second-quarter conference call with analysts, who were probably left wondering why the company had not arranged an in-person review of the company’s 2024 second-quarter results. It would have generated a big crowd.

Company CFO and Co-CEO Martin Hoffmann led the call, nodding to the On Olympic athletes, who did the company proud over the last two weeks. He also acknowledged the On team’s presence in Paris, which brought the brand to life for consumers, the media, and the world.

“Witnessing the team presenting their innovation to global media, star athletes and leaders in business and politics from around the world was a big highlight for us. Their pride and passion nearly matched what we saw from athletes winning medals, and we are thrilled and proud to work with such an exceptional team,” said Hoffman.

“Not too long ago, we talked about our big dreams for the summer,” he continued. “Looking back at the past weeks, it is clear that we have laid the groundwork for what we believe will shape On for many years to come. Zendaya, LightSpray, our athletes, our largest flagship store to-date, leading community events like On Track Nights. These big moments were not created to boost short-term sales, but to build the foundation for the long-term, durable, and profitable growth that we outlined at our Investor Day one year ago. To elevate our brand awareness with a wider fan base and to push our credibility as an innovation-led global premium performance sportswear brand.”

Hoffman said On’s multi-channel strategy allows it to capture global brand momentum and convert it into continued strong sales growth across all channels.

“With that, we’ve for the first time surpassed CHF 1 billion in net sales in a six-month period and CHF 2 billion when looking at the last 12 months period, both marking incredible milestones and achievements that we are extremely proud of,” offered Hoffman.

“As mentioned, the strong brand momentum converts into strong demand for On across all our channels and partners,” the co-CEO and CFO noted. “The ability to convert this momentum to sales, especially in the Americas region, would have been even higher, but the ongoing transition of our Atlanta warehouse led to some product availability constraints, including key franchises like the Cloud and to delayed or missing deliveries both towards our DTC and wholesale customers.”

On’s total net sales amounted to CHF 567.7 million in the second quarter, an increase of 27.8 percent year-over-year (y/y) and 29.4 percent growth on a constant-currency (cc) basis for the period. From a retail customer perspective, it should have been a good sign that while the direct-to-consumer (DTC) business outpaced its wholesale business once again, the growth trends were much closer in the second quarter.

“As anticipated, we saw a strong growth re-acceleration in our wholesale channel in Q2 in comparison to the last two quarters,” Hoffman highlighted. Wholesale channel net sales increased 27.6 percent (+28.8 percent) to CHF 358.2 million. “At the same time, we’re adding a lower number of incremental wholesale doors than we have over the past years. We’re pleased to see that the growing brand awareness drives strong full price demand to our existing wholesale partners across key accounts and specialty retailers, both in their physical, as well as digital channels,” he added.

“We continue to execute on the communicated strategy to focus on our existing distribution partners, driving our ongoing growth paths with deeper penetration at strategic accounts, same-store growth and ongoing market share gains,” he said.

DTC channel net sales increased 28.1 percent (+30.4 percent cc) to CHF 209.4 million in the quarter. As a result, the second quarter DTC share increased versus the prior-year Q2 period, reaching 36.9 percent of total net sales in the second quarter.

In the e-commerce business, Hoffman said the company saw some softer demand in the first days of the quarter, followed by a re-acceleration of growth in the second half paired with record-high traffic on the brand’s website.

“This includes a very strong start for some of our recent digital channel expansion,” he noted. “The global launch of our first commercial app is now complete with both downloads and transactions, which is well ahead of our expectations. In addition, we are encouraged to see a very high apparel share on the app comparable to what is reached in our retail environment.”

Hoffman said the increasing brand awareness is also visible in a wave of new visitors to the expanding network of retail stores in the new On location in Paris and beyond.

“Our New York City Lafayette store remains a vibrant hotspot, attracting some of the highest traffic levels among all our retail locations this quarter,” he shared. “We are excited to open our second store in Manhattan in a few months, where visitors will have even more space to immerse themselves in the full-on experience.”

Hoffman added that the new Hong Kong store that opened a few weeks ago has exceeded internal expectations, doubling the initial projections and “showcasing the remarkable brand feat that’s noticeable in the region.”

He reminded the call participants that he had outlined the company’s focus on owned retail as a key pillar for global growth at Investor day last October.

“During the last year, we expanded our network to 12 stores outside of China and 25 stores in China, and we gained a lot of additional confidence in the power of the channel to drive growth, high engagement levels with new and existing customers, increasing and strong apparel shares and very importantly additional profitability,” Hoffman detailed.

Region Summary

Europe, Middle East and Africa (EMEA) region net sales increased 21.8 percent (+22.2 percent cc) to CHF 138.4 million int he 2024 second quarter.

“We are very happy with the performance in the region both from an absolute net sales achievement as well as a product composition perspective,” said Hoffman. “We continue to see exceptional momentum in the United Kingdom across all channels. But from a smaller base, sales in France and also [the] Netherlands and Belgium clearly accelerated. But most important is the acceleration in the increased share of sales from our performance running range within some of our legacy markets in Central Europe, which we see as a result of our strategic prioritization over the past months.”

Americas region net sales grew 24.8 percent (+25.8 percent cc) to CHF 370.0 million in Q2 2024. Hoffman said it was by far the largest quarter in terms of absolute net sales and representing a reported growth rate

“We already mentioned the impact of the ongoing transition of our Atlanta warehouse, which was even more visible in our D2C than our wholesale channel,” he noted. “While we are fully focused on improving the situation, we expect a continued impact in the second half of the year. But this transition is essential to scale our distribution capabilities in the U.S. in the long-term and to ultimately fulfill the incredible brand momentum and demand that we continue to expect in the region.”

Company Co-CEO Marc Mauer added during the Q&A period that putting the Atlanta DC issues into perspective, the company is temporarily operating out of a space that is not optimized for its needs as it works to complete its new warehouse.

“And so as a result we experience capacity constraints in that warehouse,” Mauer offered. “And this then leads into basically unreliable late deliveries, but also inventory shortages. We are able to shift some of that capacity to our very well-performing warehouse on the West Coast, but only to the extent that we have inventory there.”

Mauer continued, indicating that the issue is affecting both DTC and Wholesale.

“But it is a bit hard to quantify, but we would expect without those impacts that we would have been able to deliver a sales growth on a global level above our full year guidance. And we would have seen a stronger DTC share or higher DTC share, as we clearly missed opportunities in the DTC channel, while in the Wholesale channel you always have the buffer of in-channel inventory, but then also we clearly saw that the wholesale channel was able to capture some of the traffic that initially came to our website, because of the constraints that we had.”

Mauer said the company has already installed a lot of measures, and as a result, it has clearly seen the strongest impact in its DTC in the first half of the second quarter.

“And ever since we have seen a clear re-acceleration of the growth rate in DTC, and this also continued into the first weeks of the new quarter. So we’re optimistic that we are able do the measures to lower the impact, but we still expect the impact,” he said.

“And as I said for us, it is much more about not living up to our high expectations from an operational perspective versus actually losing a few percentage points on the sales numbers,” Mauer offered. “And so we will clearly prioritize important franchises. We prioritize our important retail partners. We clearly prioritize our DTC channel, but there are simply limitations by the fact that the inventory is not always at the right place at the right time where the capacity sits. Important for everyone is that, we are well on track to have our automated warehouse live in the first half of next year. And I think in the end, this is where we want to be as this lays the foundation for the years to come.”

Asia-Pacific (APAC) net sales increased 73.7 percent (+84.7 percent cc) to CHF 59.2 million in the latest quarter.

“In the APAC region, we continue to win market share faster and across more countries than expected,” Hoffman shared. “From the continued strong momentum in China, daily queues in front of our store in Japan, record sales in very nascent markets such as Indonesia or the Philippines and of course, the already mentioned success of our new-store in Hong Kong. Current demand is clearly exceeding supply.”

Category Summary

Shoes revenues increased by 26.7 percent (+28.2 percent cc) to CHF 542.5 million in the Q2 period.

Demand for our products remains strong across all product verticals,” Hoffman noted. “In-line with our strategic priorities performance running continues to drive a significant part of growth. We maintained strong growth across all our running franchises, including the Cloudmonster, Cloudsurfer and Cloudrunner, and we keep fueling this growth with new products and innovation.”

He said the newly released Cloudrunner 2 has been a great success and elevates this franchise and is a stable for the everyday runner. The Cloudsurfer Next, which was just launched in early August extends the successful Cloudsurfer line towards a lower, but still premium price-point and significantly expands the reach and addressable market, Hoffman said.

“In our Performance All Day vertical, the Cloudtilt continues to fly off the shelf. The Lyst Index just called the Cloudtilt 2.0 of our Loewe collaboration, the quarter’s hottest product,” he shared.

Hoffman also called out the Performance Tennis category, where he said On is growing at a rapid speed off of a smaller base of business.

“We are excited to be well-positioned to drive and capture the increasing cultural relevance of the sport,” Hoffman asserted. “The Roger is amongst our fastest growing franchises and Tennis inspires fans to own not only On footwear but also apparel pieces. The highly successful launch of our tennis apparel collection earlier this year clearly exemplifies this and was further fueled by the excitement surrounding the air tennis match between Zendaya and Roger [Federer].”

Apparel revenues grew 63.0 percent (+66.6 percent cc) to CHF 21.9 million in the quarter, underscoring Hoffman’s noted that the initiatives On has been taking on the apparel side are beginning to show in the numbers.

“Based on the momentum we are seeing in wholesale and even more in our own channels, we’re confident in the ability to drive significant growth and to increase our apparel share consistently over the coming quarters,” Hoffman said. “New products, but also exciting collaborations like the one with Loewe or South Korean Post-Archive Faction drove significant awareness for the category, and also allow us to reach a higher-level of engagement from our fans.”

Hoffman said the company provided members with early access to the Post Archive Faction collection and the launch was said to be “a huge success.” In China, the number of new members on launch day equaled what they would typically acquire over a period of two weeks.

Accessories revenues increased 23.6 percent (+26.3 percent cc) to CHF 3.3 million in the second quarter.

“We are very proud of our newest accessories offering, our first bag collection. It is another testimonial to the power of our team to innovate and redefine products,” Hoffman said. “Innovations like the Swiss style crab handles or our proprietary Fitlock design buckles meet a unique premium design centered around functionality for people on the move. I had the privilege to use the bags for my travels over the past year already and keep on receiving positive reactions at almost every security check.”

Income Statement Summary
Consolidated gross profit increased by 28.6 percent to CHF 340.2 million in Q2, compared to CHF 264.5 million in the year-ago corresponding period. Gross profit margin increased 40 basis points to 59.9 percent of sales from 59.5 percent in Q2 2023. Hoffman said the improvement was due primarily to continued high share of full-price sales as well as lower freight rates in Q2 this year, slightly offset by the higher freight share versus historically low levels last year.

SG&A expenses, excluding share-based compensation were CHF 275.8 million in Q2, equivalent to 48.6 percent of net sales, flat versus the Q2 period last year.

“As planned, we increased marketing expenses to support our big brand building initiatives this summer,” Hoffman explained. “At the same time, distribution expenses as a percent of sales were lower compared to Q2 2023 as a result of lower warehousing costs as well as operational efficiency gains.”

The resulting adjusted EBITDA margin for Q2 was 16 percent of net sales, notably up from 14.1 percent in Q2 2023.

On Holding net income increased by 834.3 percent to CHF 30.8 million, or CHF 0.09 per diluted Class A share in the second quarter, compared to CHF 3.3 million, or CHF 0.01 per diluted Class A share in the 2023 second quarter.

Net income margin increased to 5.4 percent of net sales in the quarter from 0.7 percent of net sales in the prior-year quarter.

“The more stable U.S. dollar [to] Swiss franc FX rate during the quarter supported a less volatile foreign exchange result than what we have seen in recent quarters,” Hoffman noted. “As a result, the strong bottom-line for the quarter truly reflects our operational success and profitability.”

Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) increased 44.7 percent to CHF 90.8 million from CHF 62.7 million in the year-ago period. Adjusted EBITDA margin increased to 16.0 percent of net sales from 14.1 percent of net sales in Q2 last year.

Adjusted net income increased to CHF 46.9 million, or CHF 0.14 per diluted Class A share from CHF 11.7 million, or CHF 0.04 per diluted Class A share, in the prior-year Q2 period.

Balance Sheet and Cash Management
Capital expenditures were CHF 16.9 million in Q2, equivalent to 3 percent of net sales, up slightly from 2.5 percent last year.

While achieving significantly more net sales, Hoffman said net working capital at the end of Q2 was at CHF 567.1 million, almost flat compared to the CHF 560.2 million at the end of March and even lower than the CHF 598.6 million a year ago.

First Half (H1) Summary
Net sales increased by 24.4 percent (+ 29.3 percent cc) to CHF 1.08 billion in the first half.

  • Net sales through the DTC sales channel increased by 33.1 percent to CHF 399.9 million, or by 38.7 percent on a constant currency basis;
  • Net sales through the wholesale sales channel increased by 19.8 percent to CHF 675.9 million, or by 24.3 percent on constant currency basis;
  • Net sales in EMEA, Americas and Asia-Pacific increased by 13.9 percent to CHF 264.6 million, 23.4 percent to CHF 699.7 million and 70.5 percent to CHF 111.6 million, respectively;
  • Net sales in EMEA, Americas, and Asia-Pacific increased by 16.3 percent, 28.0 percent and 86.8 percent on a constant currency basis, respectively;
  • Net sales from shoes, apparel and accessories increased by 23.9 percent to CHF 1,027.1 million, 37.2 percent to CHF 41.6 million and 30.3 percent to CHF 7.1 million, respectively;
  • Net sales from shoes, apparel and accessories increased by 28.8 percent, 43.1 percent, 36.3 percent on a constant currency basis, respectively;
  • Gross profit margin increased to 59.8 percent of net sales in H1 from 58.9 percent in the year-ago H1 period;
  • Net income increased CHF 122.2 million, or CHF 0.37 per diluted Class A share, in the first half, from CHF 47.7 million, or CHF 0.15 per diluted Class A share, in the 2023 first half period;
  • Net income margin increased to 11.4 percent of net sales in H1 2024 from 5.5 percent of net sales in H1 2023;
  • Adjusted EBITDA increased by 36.0 percent to CHF 168.2 million in the first half from CHF 123.7 million in H1 2023;. Adjusted EBITDA margin increased to 15.6 percent of net sales from 14.3 percent in the year-ago comparable period;
  • Adjusted net income increased to CHF 153.4 million, or CHF 0.47 per diluted Class A share, in the first half, from CHF 60.5 million, or CHF 0.19 per diluted Class A share, in the first half.

Balance Sheet and Cash Management
Cash and cash equivalents increased by 32 percent to CHF 652.4 million at June 30, from CHF 494.6 million at December 31, 2023.

Net working capital increased by 14.3 percent to CHF 567.1 million at quarter-end from CHF 496.2 million at December 31, 2023.

On Holding’s inventory position was CHF 401.3 million at quarter-end, a slight increase versus the CHF 365.3 million at the end of the 2024 first quarter, but described as “significantly lower” than at the end of Q2 last year.

“While we remain laser focused on actively managing our inventory at efficient levels, we are willing to lean-in on certain key styles in order to capture the high demand we are observing around the world,” Hoffman said.

As a result of strong operating cash flow of CHF 102.4 million in the quarter, On improved its cash position from CHF 584.6 million at the end of Q1 2024 to CHF 652.4 million at the end of Q2.

“Over the past 12 months, we achieved an operating cash flow of CHF 412.2 million and have improved our cash position by CHF 315.3 million,” Hoffman detailed.

Outlook
“On has experienced a very strong first half of 2024, with two consecutive record top-line quarters and continued strong demand across channels, regions and product categories. From highly successful product launches and groundbreaking innovations to athlete success stories and authentic brand partnerships, On has further ignited its brand momentum in the first six months of 2024 with various initiatives that are converting to higher brand awareness and inspiring fans to Dream On,” the company said in a pre-call media release.

On Holding is reiterating its full-year expectation of at least 30 percent net sales growth on a constant-currency basis. Considering the recent strength of the Swiss Franc compared to the company’s most meaningful currencies, including the U.S. dollar, and assuming spot rates persist at current levels for the remainder of the year, the company said this implies reported net sales of at least CHF 2.26 billion in 2024 and the continuation of the company’s strong momentum in the second half of the year.

On said additional focus over the months ahead will be placed on successfully advancing On’s warehouse automation project in the U.S., with a view towards scaling On’s distribution capabilities in North America over the medium term.

Considering the results in the first half of 2024, On said it also remains well on track to reach its profitability ambitions for the full year, and expects to achieve a gross profit margin of around 60 percent and an adjusted EBITDA margin of 16.0 to 16.5 percent for the full year.

“We are thrilled to see that all the attention we are generating is leading to increased brand awareness and converting into online and offline traffic,” Hoffman shared. “This provides us with a lot of confidence for the continued high-demand for the On-brand and our products, even above our expectations. At the same time, we acknowledge some of the ongoing distribution challenges to ensure we have the right product at the right place at the right time to fulfill the specific and full demand that is out there.

“While we build our brand by relying on a certain level of scarcity, we are not fully and consistently delivering to our own high expectations from an operational perspective. That being said, the strong consumer demand, as well as actions taken on our aim to mitigate impacts from the warehouse transition give us a lot of confidence to reiterate our 2024 constant-currency net sales growth rate expectation of at least 30 percent.”

Image courtesy On Holding AG