With its production capacity back to pre-lockdown levels in Vietnam, On anticipates a return to “hyper-growth” by the second half of the year.
The Swiss running brand saw sales climb 53.7 percent in the final quarter of 2021, it reported Friday. This growth, though substantial, was “slightly slower” than prior quarters, co-CEO and chief financial officer Martin Hoffmann acknowledged on a call with investors. The executive attributed the subdued sales numbers to three “transitory” factors.
Until a Covid-19 outbreak in Vietnam last summer prompted the country’s government to impose months of restrictions, 100 percent of On’s footwear was sourced from the Southeast Asian country. This resulted in supply shortages, “especially in Europe,” where it had a smaller inventory buffer entering the fourth quarter, Hoffmann said.
Second, On shifted the launch of its Spring/Summer footwear collection from November to January this winter. The change will result in a permanent volume shift in the brand’s wholesale channel from the fourth quarter to the first quarter. Hoffmann also noted the impact of Covid-related shopping restrictions outside of North America, especially in Germany, Austria, Switzerland, Australia and various cities in China.
In a Nutshell: On’s Vietnamese production capacity returned its pre-lockdown levels in December, Hoffmann said. The executive expressed gratitude for the brand’s factory partners, “most” of which continued work during the Tet holiday early last month “to recover from some of the capacity loss.”
Moving forward though, On is diversifying its production base, with plans to fast track its capacity ramp-up plan this year. This expansion includes its move into Indonesia, where it just started production in a new facility. The company intends to produce 10 percent of its footwear outside of Vietnam by the end of the year, Hoffmann said.
“Managing the supply chain remains a core priority as we are experiencing volatile shipping costs, port congestion at the U.S. West Coast and labor shortages due to Omicron infection in some of our warehouses,” he added.
Though “transitory” supply shortages will define On’s pace of growth in the first two quarters of the year, Hoffman said the company is in a “stronger” position to fuel demand in the first half than it forecasted in November. Supply is not expected to be a “significant limiting factor” in the second half, he added. “By then, our pace of growth will be defined much more by our strategy to build a global premium performance brand.”
The company expects certain supply chain challenges—an increased use of expensive air freight, higher sea– and air-freight rates and higher warehouse labor expenses—will continue to have a short-term and transitory impact on its financial performance for the first half of the year. As a result, it anticipates a headwind to its gross margin of approximately 700-800 basis points in the first half of 2022.
To offset some of this impact, Hoffmann said, On has increased retail prices in North America by $10 on roughly 40 percent of its sales volumes.
This year, On plans to “significantly” expand its offering in running, outdoor and lifestyle with “highly innovative and even more sustainable” shoes, apparel and accessories, Hoffmann said. Feedback from wholesalers appears to support this strategy, with the co-CEO reporting “very strong” pre-orders from existing and new partners for the Spring/Summer and Fall/Winter selling seasons.
This includes what Hoffmann described as a “very controlled expansion” with Foot Locker and JD Sports following pilots in the third quarter of last year. This summer will also include On’s first pilot with Dick’s Sporting Goods.
“In 2021, we have observed consumers flooding back to the city centers and stores after lockdowns, eager for interaction and experience,” David Allemann, On co-founder and executive co-chairman, said. “As a result, we have seen wholesale revenues bouncing back strongly…. This has strengthened our belief that attractive physical shopping experiences continue to be an important part of consumer culture and part of the very fabric of our cities.”
The return to physical experiences is now serving as the backdrop for On’s own retail expansion. “Flagships act as the most complete experience, community center and media channel for our brand,” Allemann said. Conversion in these stores is higher than any other sales channel, with apparel selling particularly well, he added. All On stores have reached profitability within nine months of opening, according to Allemann.
On intends to expand its network of flagship stores this year by opening its first locations in Europe, while at the same time increasing its presence in North America and China. In the next few weeks, it intends to open its first flagship in Asia outside of China in Tokyo. Flagships in London and Zurich are scheduled to open in the summer.
“We are not seeing a cannibalization of our wholesale and DTC channels,” Allemann noted. “Both channels show the same strong growth at the same time and are highly complementary.”
Hoffmann briefly addressed Russia’s ongoing war in Ukraine, noting that On’s business exposure in both markets is “very limited.” The company has one distributor in Russia that accounted for less than half a million francs ($536,000) in net sales last year. It has stopped all new product supply into Russia.
Net Sales: On saw net sales climbed 53.7 percent year over year in the fourth quarter to 191.1 million francs ($204 million). Direct-to-consumer sales increased 76.7 percent to 84.7 million francs ($90.4 million), while the wholesale channel grew 39.3 percent to 106.4 million francs ($113.6 million).
Net sales in North America, On’s leading region, doubled to 133.4 million francs ($142.4 million). In Asia-Pacific, meanwhile, revenues increased 35 percent to 10.6 million francs ($11.3 million).
On’s dominant business, footwear, grew 49 percent in the fourth quarter to 179.7 million francs ($191.9 million). Its apparel segment, though smaller, saw sales jump 216 percent to 10 million francs ($10.7 million). Accessories sales grew 164.9 percent to 1.4 million francs ($1.5 million).
Full-year net sales increased 70.4 percent to 724.6 million francs ($773.6 million). Wholesale revenues grew 69.5 percent to 448.8 million francs ($479.1 million). DTC sales rose 71.9 percent to 275.8 million francs ($294.4 million). Regionally, North America saw the strongest sales growth, rising 96.8 percent to 409.5 million francs ($437.2 million). Its next largest region, Europe, improved 38.8 percent to 260.4 million francs ($278 million), while in Asia-Pacific, sales increased 85.8 percent to 42.7 million francs ($45.6 million).
Net Income: On’s gross profit grew 74 percent in the fourth quarter to 111.8 million francs ($119.4 million). Its gross margin rose to 58.5 percent from 51.7 percent a year earlier.
On recorded a net loss of 187 million francs ($199.6 million), a significant increase from the prior-year period’s 2.6 million-franc ($2.8 million) net loss. Adjusted earnings before interest, taxes, depreciation and amortization remained stagnant year over year at 11.2 million francs ($12 million). Its adjusted EBITDA margin, however, decreased to 5.9 percent from 9 percent.
In full-year 2021, gross profit grew 86.2 percent to 430.3 million francs ($459.4 million). On’s gross margin also improved, rising from 54.3 percent in 2020 to 59.4 percent.
The company’s net losses expanded from 27.5 million francs ($29.4 million) in 2020 to 170.2 million francs ($181.7 million) last year. Its net loss margin expanded to 23.5 percent from 6.5 percent a year prior. On’s adjusted EBITDA grew 93.8 percent to 96.4 million ($102.9 million), while its adjusted EBITDA margin rose to 13.3 percent from 11.7 percent.
This year, On expects revenue to grow at least 37 percent compared to 2021, surpassing 990 million francs ($1.06 billion). Improved net sales would allow additional investments into the brand and team, while also increasing its adjusted EBITDA target to 130 million francs ($139.4 million) and adjusted EBITDA margin to 13.1 percent, it said.
CEO’s Take: “Looking back, 2021 was an extremely exciting year for the brand, with huge milestones, like the IPO, the launch of our new [enterprise resource planning] system, our official expression of our brand mission to ignite the human spirit through movement, exciting new products like the Cloudultra, the Cloudstratus, or apparel items that combines performance and design, with our big steps in sustainability, with many new athletes, our presence at the Olympics in Tokyo, our first podium at the Berlin Marathon, our growing presence in China and with so many new members in our team,” Hoffmann said. “All of us together are fully committed to shape our future and to make 2022 even more exciting.”