On Running ($ONON) – Earnings Review – August 17, 2024
Demand
- Beat revenue estimates by 1%.
- Wholesale was nearly 6% ahead of estimates, while direct-to-consumer (DTC) was about 6% below estimates. More on this later.
- Revenue in North America slightly missed, while revenue across Europe and especially Asia Pacific (APAC) was ahead of expectations. More on this later.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Profits & Margins
- Missed 60.3% gross profit margin (GPM) estimates by 40 basis points (bps; 1 basis point = 0.01%). A “high share of full-price sales and lower freight rates” drove Y/Y expansion.
- Beat EBITDA estimates by 5.5%.
- Met $0.14 EPS estimates. EPS is heavily influenced by gains or losses in FX conversion. This metric is noise and not meaningful for Onon. Focus on EBITDA and GAAP EBIT. This is why EPS rose from $0.01 to $0.14 Y/Y. It did realize operating leverage, but not that much.
- SG&A rose by 30% Y/Y as it executed a planned acceleration in marketing spend to capture potential growth from events like the Olympics and Euro Cup.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Balance Sheet
- About $750 million in cash & equivalents.
- Inventory fell materially Y/Y.
- Share count rose by 1.4% Y/Y.
Guidance & Valuation
On Holdings reiterated expectations for 30%+ FXN Y/Y revenue growth. Based on current FX headwinds, that led to its revenue guidance falling slightly from CHF 2.29 billion to CHF 2.26 billion. This slightly missed estimates. It reiterated 60% GPM and 16.25% EBITDA margin expectations, respectively. This led to very slight reductions in 2024 EBITDA estimates.
It also still sees DTC rising 2 points as a % of total revenue this year.
ONON trades for 44x forward EPS. EPS is expected to rise by 140% Y/Y this year and by 16% Y/Y next year.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Product Innovation:
On is founder-led and fixated on forgoing the temptations of short-term value maximization to optimize for the long term. The team seems to embody Shopify’s “building a 100 year company” mantra and other firms in that bucket.
The design is assembled using a robotic arm and adhesive to essentially glue the shoe together. The shoe shapes the foot and does not come with any laces. It’s one piece and “ultra-light.” The process is expected to considerably cut manufacturing costs and time to produce a shoe down to 3 minutes. The new process will soon be used in its new Cloudboom Strike racing shoe. Marathon star Hellen Obiri was introduced to the shoe and was “skeptical” considering it looks so different from a normal running shoe. After trying it out, she was hooked and won the Boston Marathon while wearing them.
Product innovation is the central focus, and Lightspray is perhaps the most exciting long term project to discuss. This technology will be used across several other On shoe models over time. Phase one of this slow launch will be “moving from OpEx-led production model to a CapEx model” and using this affordable robotics tech to “move shoes closer to the consumer with fewer parts.” Easier, cheaper assembly paired with shorter distance to fulfillment is a powerful recipe for cost edges. Maybe it could even license this technology to other shoe companies over time.
“LightSpray offers a clear message that we will always be there to take bold bets on our mission towards achieving long-term innovation-led success.”
Co-Founder/Co-CEO David Allemann
LightSpray is the main character in On’s long term growth story. Still, near term innovation to drive 2024 and 2025 sales growth is not slowing down. It has a new Cloudboom racing shoe set to debut next month. For casual runners, the Cloudsurfer Next shoe launch is performing well.
Brand Building – Influencers & the Olympics:
On struck a new partnership with Zendaya to drive more global brand awareness. She played against famous On athlete Roger Federer in a game of air tennis during the quarter. Many more activations to come.
In Paris, On had 6 athletes from 25 different countries who were well represented on the podium. To nurture this opportunity in perfectly-timed fashion, On rolled out a pop-up shop right in Paris for the event and also just opened its first store there (largest to date).
Scaled Distribution:
ONON’s strong quarter was despite continued supply chain bottlenecks in the U.S. It’s shifting the large Atlanta warehouse to a new model that can fully automate the picking, packing fulfillment and re-fulfillment too. Issues here led to the DTC and North America revenue misses; this was not a matter of soft demand. The automation project will cut human labor needs and build on the manufacturing efficiency gains that LightSpray is set to provide over time. For now, the shift is leading to product availability and delivery timing issues within key franchises like its lineup of Cloud shoes.
“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.”
Co-CEO/CFO Martin Hoffmann
“We clearly missed opportunities in the DTC channel.”
Co-Founder/Co-CEO David Allemann
On has “implemented a lot of measures” like shifting some fulfillment to west coast facilities. That has resulted in the reacceleration for DTC, which “continued into the first weeks of the new quarter.”
Demand by Channel:
In wholesale, On continues to focus on existing distribution partners and raising shelf and market share with those partners. It’s pulling back on growth in wholesale doors, likely in a bid to preserve its highly premium brand reputation, as well as to support direct-to-consumer initiatives. It was very pleased with full price demand levels with these wholesale partners, which helped lead to continued GPM expansion.
For e-commerce DTC, the softer demand it saw at the very beginning of the period abruptly improved, with growth accelerating throughout the rest of the quarter. The launch of its first app is yielding download and transaction levels “well ahead of expectations” and is enjoying a heavier apparel skew than its other channels. Apparel is a key growth level for ONON, so this is positive.
Stores will remain an imperative piece of its revenue growth and DTC revenue growth engines. It opened 12 new stores ex-China (37 total) and is seeing strong engagement levels at these locations. It will launch a 2nd New York City store in Manhattan this summer; its new Hong Kong store is doubling initial volume projections.
Demand by Geography:
- Asia Pacific yielded On’s sharpest market share gains during the period, although it took market share across all geographies. “Current demand is exceeding supply,” which tells me there’s more growth to be enjoyed (like in the U.S.) beyond what it’s already securing.
- APAC revenue rose by 84.7% Y/Y on an FXN basis.
- U.S. market share gains were held back by the Atlanta transition.
- Americas revenue rose by 25.8% on an FXN basis.
- In Europe, the UK was a highlight, with France, Netherlands and Belgium all accelerating too.
- Revenue rose by 22.2% on an FXN basis.
Demand by Category:
On’s primary focus within shoes is maximizing performance running traction. The Cloudmonster, Cloudsurfer and Cloudrunner all maintained “strong growth” as part of this pursuit. The Cloudrunner 2 launch is outperforming expectations and the Cloudsurfer next is poised to extend its addressable market at a lower price point. It launched this month. In all day shoes, the Cloudtilt is “flying off of the shelves.”
In tennis shoes, its market share gains are accelerating. Tennis customers also purchase apparel at a much higher clip than runners, which means success here directly supports its other growth vector. Its collaborations and customer exclusives within apparel netted more China customers on a day one product launch than what it expects to add in 2 weeks. Changes to apparel sizing over the last few quarters have already yielded stronger traction for that segment.
- Shoe revenue rose by 28.2% Y/Y FXN. This represents 95% of its total revenue.
- Apparel revenue rose by 66.6% Y/Y FXN.
- Accessories rose by 26.3% Y/Y FXN.
U.S. Consumer Quote:
“When it comes to the U.S., we confirmed strong guidance. We wouldn’t do that if we didn’t have confidence in the consumer. We’ve seen very positive signs over the last couple of weeks… this gives us U.S. consumer confidence for the rest of the year.”
Co-Founder/Co-CEO David Allemann
Take
This was a great quarter amid a highly challenged macro backdrop. It’s faring better than any of its public counterparts and maintaining impressive 30%+ FXN Y/Y growth targets along with margin goals. New products are all working, new innovation could provide manufacturing cost advantages, and its opportunity is still entirely untapped in everything aside from performance shoes. The runway is very long… the team seems capable of executing.
All I’ll say is that hot consumer brands routinely come and go. The cliche is these brands fizzling out… while becoming the next Nike is the exception. I’d need to see this company thrive across fashion cycles to communicate to me there’s something here beyond creating currently in-style products. Regardless, another great quarter. Congrats shareholders.
