On Running’s first public quarter was also its strongest ever in the face of sourcing headwinds, with the Swiss footwear brand’s net sales jumping 68 percent to 218 million francs ($235.2 million) on net income of 13 million francs ($14 million). The banner quarter led the company’s stock to pop as much as 25 percent on Tuesday.
In a Nutshell: Like its running contemporaries, including brands like Brooks, Asics, Hoka One One and Saucony, On is showing that consumers are willing to spend big on the category. The performance sportswear brand, which recently announced its petroleum-free CleanCloud foam product that uses carbon emissions as a raw material, expects net sales for the full year to reach 710 million francs ($764.4 million), which would be approximately 67 percent ahead of 2020 totals.
The company also expects adjusted EBITDA to be 92 million francs ($99 million), representing an adjusted EBITDA margin of 13 percent and year-over-year growth of 85 percent.
On, like many of its footwear and apparel counterparts, has been impacted by the Vietnam factory closures resulting from Covid-19 outbreaks, with the company assuming that the challenges will affect both the fourth quarter of 2021 and the first half of 2022. But unlike companies such as Nike, Adidas or Under Armour, On’s entire footwear collection was sourced from Vietnam in the first half of 2021. Co-CEO and chief operating officer Marc Maurer said in an earnings call that the company is looking to diversify its sourcing capabilities into new countries and add additional factory capacity in the next few years, particularly closer to its consumers in Europe and North America.
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While the Vietnam issues are expected to cause further supply constraints and higher air freight expenses, the company says additional delays throughout the chain may push a portion of net sales out of the fourth quarter into 2022. Additionally, On expects the higher freight and shipping charges and warehouse labor expenses to impact overall operating expenses.
The company has more product on hand as the holiday approaches, with inventory soaring to 145.3 million francs ($156.5 million), up 42 percent from 102.3 million francs ($110.2 million).
And gross profit has actually gotten stronger throughout the delays, increasing 85.4 percent to 131.3 million francs ($141.3 million). Gross margin jumped to 60.2 percent from 54.5 percent in the year-ago period, even when accounting for the added fees for shipping and air freight.
Co-CEO and chief financial officer Martin Hoffmann said that for the time being, some product will be limited, and supply shortages in the upcoming first half are “higher than what we would like.”
As costs increase, On is planning price hikes for 40 percent of its North American product in Spring 2022, according to Hoffmann.
Helping On’s case in investors’ eyes, the company also is projecting 2022 sales before the holiday season starts. For the year ending Dec. 31, 2022, On Running expects net sales of at least 960 million francs ($1.03 billion), with the “hyper-growth” trajectory expected to return in the second half. Further, the Roger Federer-backed brand expects adjusted EBITDA to come in at 125 million francs ($134.6 million), representing an adjusted EBITDA margin of 13 percent, consistent with the outlook for 2021.
In the earnings call, Caspar Coppetti, co-founder and executive co-chairman of On, said the company increased its sales on Tmall by more than 500 percent during the 11.11 Shopping Festival.
Wholesale has accounted for 64 percent of On’s sales for the first three quarters of the year, said Coppetti, counting Foot Locker and JD Sports as its newest pilot partnerships in the quarter.
As of Sept. 30, 2021, the footwear seller has cash and cash equivalents of 672.2 million francs ($723.5 million), and has 200.3 million francs ($215.6 million) in net working capital.
Net Sales: On’s net sales increased 67.6 percent to 218 million francs ($235.2 million) from $130.1 million francs ($140 million) in the 2020 third quarter.
Net sales through the direct-to-consumer sales channel increased 93 percent to 75.7 million francs ($81.5 million), while wholesale sales rose 56.7 percent to 142.3 million francs ($153.2 million).
The company saw its highest sales growth in North America, at 82.6 percent to 112.2 million francs ($120.9 million). In Europe, sales increased 50.3 percent to 88.3 million francs ($95 million), while net sales grew 71.4 percent to 13.1 million francs ($14.1 million).
Shoes sales increased 65.2 percent to 205 million francs ($220.7 million), while apparel sales soared 133 percent to 11.5 million francs ($12.4 million). Accessories had a 41.5 percent sales boost to 1.5 million francs ($1.6 million).
Net Earnings: Net income increased to 13 million francs ($14 million) on a, up from 8.1 million francs ($8.7 million) taken in during the year-ago period. Adjusted EBITDA increased 67.9 percent to 37.9 million francs ($40.8 million), while adjusted EBITDA margin remained at 17.4 percent.
CEO’s Take: “We expect the demand for the On brand to increase,” Hoffmann said in a statement. “Recent supply chain challenges will lead to a transitory supply shortage in the fourth quarter and the first half of 2022. But since early November, all our production factories are open, and our outlook on net sales and adjusted EBITDA exceeds our original assumptions. We believe we are well-positioned to leverage this market momentum and to capitalize on the powerful consumer trends that are enlarging the global sportswear industry, increasing our brand awareness and expanding the size and breadth of our community.”