Though On acknowledged ongoing “macroeconomic developments and potential consumer demand impacts,” a “very successful” first half of the year led it to raise its full-year sales forecast from 1.04 billion francs ($1.09 billion) to 1.1 billion francs ($1.16 billion). On also upped its earnings before interest, taxes, depreciation and amortization guidance from 137 million francs ($144 million) to 145 million francs (S153 million), but kept its expected adjusted EBITDA margin at 13.2 percent.
In a Nutshell: Though On remains optimistic about its full-year prospects, co-CEO and chief financial officer Martin Hoffmann said the company has moved to grow its cost base “more conservatively” “given the macroeconomic uncertainties.”
These steps include reducing On’s goals for new hires for the remainder of the year. In the first half, Hoffmann noted, On increased its employee count by about 350 to 1,500. Though the company anticipates adding a “similar” number in the second half, Hoffmann said it originally planned add even more.
“We just [have] become a bit more defensive, which is also always a good thing in such a high- growth environment, to slow down a little bit in order to also drive efficiency in the company and improve processes,” Hoffmann said. “We will not compromise on areas where we really talk to the customer, so especially in happiness delivery, that’s where we will continue building the team to the size of the business that we expect, especially around the holiday season in the U.S.”
Hoffmann also noted that On plans to reduce travel in the months to come. “While we felt the importance of our teams to come back together physically after the end of the pandemic, we plan to make more use again of the proven ability to [work] together virtually,” he said.
One factor that should weigh less on On’s margins moving forward is air freight. Though currency fluctuations also negatively impacted the company’s second-quarter sales, air freight was largely responsible for On’s gross margin dropping 560 basis points in the second quarter, Hoffmann said.
Looking ahead, however, On expects air freight to impact its third quarter by just 5 million to 6 million francs ($5.26 million to $6.31 million). By the fourth quarter, the company expects the ratio of air freight to ocean freight to return to normal levels.
As of June 30, On’s inventories had increased by 54.3 million francs ($57.2 million) compared to three months earlier, “reflecting the significantly improved supply situation,” Hoffmann said. As of early July, he added, On was “well equipped” to deliver its Fall/Winter pre-order.
Net Sales: On once again exceeded its expectations in the second quarter with net sales up 66.6 percent to 291.7 million francs ($307 million). Its wholesale business led the way with revenue up 70.1 percent year over year to 186 million francs ($195.8 million). Direct-to-consumer sales climbed 60.8 percent to 105.6 million francs ($111.1 million).
On also noted “continued exceptional momentum and demand” in North America, where sales grew 102.5 percent. In Europe, revenue grew 17.5 percent to 83.3 million francs ($87.7 million).
In Asia-Pacific, sales improved 52.2 percent to 17.9 million francs ($18.8 million) as Japan doubled revenue and Australia grew by more than 60 percent. Extensive lockdowns, however, closed “around half” of On’s China stores for two months, resulting in a loss of around 5 million francs ($5.26 million), Hoffmann said. The impact disproportionately impacted On’s DTC and apparel segments, he noted. The company saw a “very strong recovery” in China as soon as restrictions lifted, he added.
On’s primary business, footwear, outpaced its other categories with sales up 68.2 percent to 280.6 million francs ($295.3 million). Apparel and accessories grew 31.3 percent to 9.2 million francs ($9.7 million) and 51.9 percent to 1.8 million francs ($1.9 million), respectively.
Net Earnings: On’s gross profit increased 51.2 percent to 160.8 million francs ($169.2 million). It delivered a second-quarter gross profit margin of 55.1 percent, down from the prior-year period’s 60.7 percent, but a sequential improvement from the first quarter’s 51.8 percent.
The company’s adjusted EBITDA increased 14.7 percent to 31.4 million francs ($33.1 million), but its adjusted EBITDA margin fell from 15.7 percent to 10.8 percent.
On recorded a net income of 49.1 million francs ($51.7 million), or 0.15 francs ($0.16) per diluted share, up from 14.2 million francs ($14.9 million) a year earlier. Its net income margin more than doubled, rising from 8.1 percent to 16.9 percent.
Its adjusted net income increased from 14 million francs ($14.7 million) a year ago to 44.8 million francs ($47.2 million), or 0.14 francs ($0.15) per diluted share.
CEO’s Take: “Despite the macro uncertainty, we currently do not see any signs of a slowing demand for our products,” Hoffmann said. “Appropriately, in an environment like this, some key accounts have started to pay more attention to their in-store inventory, but sell-out numbers for On have stayed consistently strong. And we are clearly planning the business this year for continued strong growth, but we are also focused on controlled and durable growth.”