On’s second quarter results came well ahead of Wall Street targets as the Swiss running brand was able to overcome supply chain challenges and capitalize on strong demand in North America. North. We raised its outlook for the year.
In the quarter ended June 30, sales rose 66.6% to 291.7 million francs ($307 million), easily beating Wall Street’s consensus estimate of 239.8 million francs.
Adjusted EBITDA rose 14.7% to CHF31.4m despite margin pressures from additional airfreight, also well above Wall Street’s consensus estimate of CHF23.2m. frank.
“Consumer demand for the On brand remains very high,” Caspar Coppetti, co-founder and co-executive chairman, said on a conference call with analysts. “All geographies, channels and categories contributed strongly to this outstanding result, confirming On’s proven strategy of maintaining a well-balanced product and distribution portfolio.
By channel, DTC sales jumped 60.8% to CHF 105.6 million while wholesale sales soared 70.1% to CHF 186.0 million.
Hoffmann said wholesale growth was driven by continued market share gains with most existing retail partners. He added, “This is driven by the success of existing and new products as well as further selective expansion of our doors with our global and regional key accounts.”
DTC’s growth came despite strong growth a year ago, due to ongoing lockdowns in Europe.
Martin Hoffmann, CFO and Co-CEO, said DTC’s strong growth provides “further validation of our ability to build and retain a loyal fan base and deliver the best, most authentic experience to our clients”.
In October, On plans to roll out a new website, which will provide a more personalized and individualized brand experience and feature more product details, which On says is a key driver for continued share growth. clothes.
In its new bricks-and-mortar business, the Tokyo and Zurich flagships “got off to a very successful start,” while the New York flagship had its best quarter yet, thanks to an increase in footfall. stores. Stores are expected to open in Los Angeles in September and in Miami in December. Its London store opening will be postponed to early 2023. It is expected to end 2022 with 13 owned-and-operated stores in China and six in all other markets.
North America grows 103.5%
By region, gains were led by North America, up 102.5% to 181.7 million francs. The region accounted for 62.3% of activity during the three-month period.
Hoffmann said on the call, “In North America, we continue to see strong brand momentum that has been fueled by the IPO, strong market fit of our existing products and all of our recently launched, and by the successful expansion of our collaboration with the best key accounts and specialist stores in the region.
Net sales in Europe increased by 17.5% to CHF 83.3 million. Hoffmann said wholesale in Europe has grown excessively as we continue to see a greater shift from online to offline shopping in the region. Additionally, DTC’s sales in the second quarter of last year were strong due to extended shutdowns in many of its key markets. Sales growth in Europe was further negatively affected by a weaker euro and pound sterling against the Swiss franc. Hoffmann said, “We continue to be very encouraged by the development of individual markets in Europe, including but not limited to the UK and France.”
Net sales in the Asia-Pacific region increased by 52.2% in the quarter to CHF 17.9 million. The “very strong growth” in Japan and Australia has offset most of the impact of massive lockdowns in China. On’s warehouse in Shanghai and about half of its stores in China were closed for two months, resulting in a loss of sales of around 5 million francs. Hoffmann said, “Due to the structure of the business in China, the impact is disproportionately high on our D2C and apparel businesses. As soon as the restrictions were lifted, we saw a very strong recovery in China. And in June, our own outlets had their best month ever.
Rest of the World sales increased 224.2% to CHF 8.8 million, reflecting the post-COVID recovery in many distributor markets as well as some earlier shipments of Fall/Winter products compared to the second quarter of Last year.
Footwear sales jump 68%
By product category, shoe sales increased by 68.2% to 280.6 million francs. Hoffmann said an expanded line of performance running shoes is driving market share gains in the running market for both existing and new customers. Among the launches, the maximum-cushioned Cloudmonster model ranks among its bestsellers in On-owned distribution, while the Cloudrunner everyday running shoe has become one of the top performers among specialty sporting goods accounts and generals. The Cloudultra and Cloudvista have gained traction in the trail running category while the Cloudnova continues to attract new customers.
Clothing sales increased by 31.3% to CHF 9.2 million. The increase was slightly below management’s expectations, “but also shows the great opportunity we have in this category given the strength and penetration of our brand in footwear,” Hoffmann said. He also said “very strong” apparel sales were seen at On-owned stores, with an 18% apparel share at its new Tokyo store and 19% in Zurich.
Investments will continue in in-store boutiques to drive apparel growth, including those established inside Nordstrom in the US and Sport Chek in Canada. Hoffmann said of stores within stores: “As a result, we are seeing both a strong increase in overall sales and a significantly higher apparel split between 15% and 25%.”
Sales of accessories increased by 51.9% to CHF 1.8 million.
Gross margins impacted by transport costs
Gross profit increased by 51.2% to CHF 160.8 million. Gross margins, however, eroded to 55.1% from 60.7% due to planned investments in air freight to support demand. Gross margins were still up from 51.8% in the first quarter of 2022, reflecting continued, but reduced, transitional headwinds from rising air freight costs and related expenses.
Hoffman said, “In the second quarter, we continued to invest across all areas of the business while delivering profitability despite significant air freight costs.”
General and administrative expenses before share-based compensation and excluding IPO-related transaction costs of CHF 3.3 million in the second quarter of 2021 represented 48% of sales in the last quarter, compared to 48.7% for the same period last year.
Net profit more than tripled to CHF 49.1 million from CHF 14.2 million a year ago.
Inventories at the end of the quarter increased by CHF 54.3 million compared to the end of March, reflecting the significant improvement in the supply situation. Hoffman said, “With this position, we were well equipped to deliver our strong fall/winter season pre-orders starting in early July.”
Based on its successful first half and continued demand for its products, On has raised its previous guidance and now expects net sales of at least CHF 1.1 billion, representing year-on-year growth of 52% compared to 2021. Previously, sales were expected to exceed CHF 1.04 billion, representing growth of at least 44% year-on-year.
The higher anticipated sales will allow for additional growth-focused investment in the brand while increasing the adjusted EBITDA target for the full year to CHF 145 million. We had forecast an adjusted EBITDA for the full year of 137 million francs.
Full-year Adjusted EBITDA margin guidance remains unchanged at 13.2%, confirming its past guidance to target an Adjusted EBITDA margin of 13.2%, even with a revenue outlook of considerably high business.
Regarding the improving outlook, Hoffman said that despite the macroeconomic uncertainty, “we currently see no signs of a slowdown in demand for On products.” He noted that some large accounts are starting to pay more attention to their in-store inventory, but sales numbers for On have “remained consistently high.” And we clearly plan the business this year for continued strong growth.
The earnings improvement partly reflects a decision to increase its cost base more conservatively and lower its new hire target for the rest of the year in light of macroeconomic uncertainty. Hoffman added, “And while we felt the importance for our teams to come together physically after the pandemic subsided, we plan to make further use of the proven ability to work together virtually and reduce travel in the coming months. ”
Current currency volatility, in particular the strength of the US dollar and the weakness of the euro against the Swiss franc, is also reflected in the updated outlook. Hoffman said, “A strong US dollar against the Swiss franc can be seen as a tailwind to net sales and absolute gross profit by negatively impacting gross profit margin. A weak euro against the Swiss franc has a negative impact on net sales, gross profit and gross profit margin.
Finally, Hoffman said the updated outlook reflects success in recovering the majority of production capacity lost during plant shutdowns last fall. Hoffman said, “Our supply situation has improved significantly.”
He said that while more standard ocean freight is expected to be used for the vast majority of shipments in the future, investments in air freight will be used to support better than expected performance from the launch of Cloudmonster and Cloudrunner. . The additional airfreight is expected to impact gross profit margin by 150 to 200 basis points in the third quarter.
Photo courtesy On David Kilgore, Athlete Ambassador, On