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On Running Fights Tight Supply From Vietnam Factory Closures

Strong first-quarter sales gave On the confidence to raise its full-year growth forecast by seven percentage points Tuesday.

The Swiss running brand now expects to end the year with revenue up at least 44 percent to 1.04 billion francs. The extra growth will allow additional “growth-focused investments” into the brand, co-CEO and chief financial officer Martin Hoffmann said. On also upped its full-year adjusted earnings before interest, taxes, depreciation and amortization target from 130 million francs ($132 million) to 137 million francs ($139 million) and its corresponding adjusted EBITDA margin from 13.1 percent to 13.2 percent.

In a Nutshell: Even as sales exceeded expectations, supply shortages originating from last year’s Covid-related factory closures in Vietnam continued to constrain On’s ability to meet demand, Hoffmann said. In some cases, the gap between demand and supply even widened due to “strong feedback” from customers, he added.

On increased its use of air freight to ensure products reached customers on time. Though the company spent “exactly” what it planned to on air freight, it ended up being “much more efficient” than it had previously anticipated, Hoffmann said.

“This is really thanks to the team that has done this great job in converting the product that we flew directly into sales and really bringing the right products into the right warehouse at the right time,” he added. “And this has led to a higher net sales number than what we had expected.”

So far, On hasn’t seen any impact to its production from recent lockdowns in China as all its factories are located outside the affected regions, Hoffmann said. One warehouse closed on March 31 and has been unable to ship products to the brand’s wholesale partners, retail stores and e-commerce customers. Earlier this week, however, local authorities whitelisted the facility and On now expects to resume operations “soon,” Hoffmann said.

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Four stores in Shanghai and one in Beijing have closed, while all other locations have been negatively impacted from missing inventory refills. On’s local business has been “strongly impacted,” Hoffmann said, but the company does not expect to see a “significant” impact to its top or bottom line given China’s relatively small share of net sales.

Elsewhere, On’s better-than-expected supply has allowed it to gain “significant” market share in key markets, executive co-chairman Caspar Coppetti said. The co-founder said the company is seeing “very grassroots-driven uptake.”

The running brand is also growing its presence among its retail partners. At Fleet Feet, for example, On’s market share grew from 8 percent at the end of last year to 13 percent currently, Coppetti said.

In March, Hoffmann teased a “very controlled expansion” with JD Sports and Foot Locker following pilots in the third quarter of last year. Coppetti said On is now at 94 JD doors and 68 Foot Locker stores. By the end of the year, it expects to reach roughly 150 and 130 doors, respectively.

Starting with Fall/Winter 2022, On also plans to expand its presence in Latin America to “most countries,” including Chile, Argentina, Colombia, Peru, Uruguay and Bolivia, Hoffmann said. Though it will continue to sell its products directly in Brazil, all other markets in the region will be served by new distributors.

During On’s call with investors Tuesday, Coppetti unveiled what the company is calling its “Lightning” program. The initiative’s single mission is “to make the fastest products possible and to work extremely closely with some of the most talented runners to unleash their full potential,” he said.

The program has produced “very encouraging results” in recent months, Coppetti said. At the end of March, On partner Hellen Obiri won a half marathon in Istanbul wearing a pair of prototype racing shoes she only received the day before. “Despite the conditions being far from optimal,” she posted the 10th fastest half marathon time on record, Coppetti said. Two weeks later, the 40-year-old Tadesse Abraham won a marathon in Zurich wearing those same prototype shoes, setting both a new course record and a Swiss record. Creating the world’s fastest marathon shoe has long been a major project for sneaker giants like Nike and Adidas.

Next spring, On plans to introduce a new cushioning technology it’s calling Cloudtec Phase. The company has shown the technology to its retail partners in recent weeks as part of its Spring 2023 sell-in and “the feedback is very encouraging,” Coppetti said.

The co-founder also noted that the brand is “using this opportunity to defend On’s premium positioning as other brands are also increasing prices.” Coppetti said this will not only allow it to absorb higher costs amid inflation, but also reflect inflation in its own 2023 salary rounds “as an important retention driver within our teams.” He also expressed optimism that price hikes elsewhere would not hurt demand for On’s own products.

“We’re not a luxury product,” Coppetti said. “So, we feel that, even if consumer spending or disposable income would go down, we would still be in a good position because people would probably defer a car purchase or a vacation over deferring buying something like a running product. So, we’re not overly concerned.”

Net Sales: On’s net sales grew 67.9 percent year over year in the first quarter to 235.7 million francs ($238.6 million). North America, the brand’s largest region, posted an 86.5 percent increase as sales rose to 138.4 million francs ($140.1 million). In Europe and Asia-Pacific, revenue grew 31.3 percent to 74.9 million francs ($75.8 million) and 125.9 percent to 16.4 million francs ($16.6 million), respectively.

The company recorded nearly equal growth across wholesale and DTC, with the former growing 67.8 percent to 152.3 million francs ($154.2 million) and the latter up 68 percent to 83.4 million francs ($84.4 million). As the company noted in March, On shifted the launch of its Spring/Summer footwear collection from the fourth quarter to the first this year, boosting wholesale growth in Q1. Combining both the fourth and first quarters, its wholesale channel grew 54.5 percent.

On’s largest category, footwear, grew 69 percent to 222.5 million francs ($225.3 million), while accessories soared 111.8 percent to 1.8 million francs ($1.8 million). Apparel, meanwhile, improved 44.9 percent to 11.4 million francs ($11.5 million). Compared to the first quarter of last year, Hoffmann noted, On had fewer apparel product launches and most of the brand’s messaging focused on footwear.

Net Income: Even as On’s gross profit grew 51 percent to 122.1 million francs ($123.6 million), its gross profit margin fell from 57.6 percent in the first quarter of last year to 51.8 percent. “Without the additional air freight exposure, and in spite of other inflationary pressures that we managed,” the brand would have reached a gross profit margin “close to” 60 percent, Hoffmann said.

Despite its investments in air freight, On’s adjusted EBITDA remained positive in the first quarter at 15.7 million francs ($15.9 million). The total was slightly down from the prior-year period, when On posted an adjusted EBITDA of 19.9 million francs ($20.2 million). Its adjusted EBITDA margin fell from 14.2 percent to 6.7 percent.

On recorded an adjusted net income of 17 million francs ($17.2 million), up from 13.7 million francs ($13.9 million) a year earlier. Adjusted diluted earnings per share grew 9.5 percent to 0.05 francs ($0.05).

CEO’s Take: Despite the fears around inflation and a possible recession, Hoffmann expressed confidence in On’s future, noting that the running category “is very resilient.”

“We really feel that we can continue to gain a lot of market share,” he said. “And we feel the brands that have strongest demand are in the best position over the next two to three years. And that’s what we’re observing.”