In its first quarterly report since its successful IPO in September, On Holding reported a sales increase of 67.6 percent to 218.0 million Swiss francs (€206.9m-$234.5m) in the third quarter ended Sept. 30, leading to a growth of 77 percent for the first nine months of 2021. The gross margin expanded by 5.6 percentage points to 60.2 percent in the quarter, thanks in part to the free trade agreement between the European Union and Vietnam, lower sourcing costs and less use of airfreight than a year ago.
The adjusted Ebitda margin remained at 17.4 percent in the quarter, the same as in the year-ago period due to higher demand creation spending, but net earnings increased to CHF 13.0 million (€12.3m-$14.0m) from CHF 8.1 million. For the first nine months of 2021, the adjusted Ebitda margin improved to 16.0 percent and the company turned around to a net profit of CHF 16.8 million (€15.9m-$18.1m) from a loss of CHF 25.0 million in the year-ago period. The strong results led to an increase of more than 20 percent in On’s share price, in spite of a cautious outlook going forward.
To cope with the recent factory lockdowns in South Vietnam, which represented 70 percent of the footwear capacities it booked, the company said it has diversified its sourcing, recruiting two new factory partners in Indonesia, and stocked a lot of raw materials and components to allow factories to resume production as quickly as possible.
Its Vietnamese suppliers are currently working at over 80 percent of planned capacities, but the management admitted that recent supply chain challenges will lead to temporary supply shortages an delays in new product launches in the fourth quarter and the first half of 2022. They will also lead to higher air freight and warehousing costs, which will affect gross margins by nine to ten percentage points, starting from the fourth quarter of this year, as the company will continue to prioritize growth over profitability through 2023 in order to expand its customer base and shelf space in the stores.
The company is currently guiding for a reduced adjusted Ebitda margin of 13.0 percent in 2022, the same as in 2021. The growth in revenues is expected to decline from a projected 67 percent in 2021 to around 35 percent in 2022, making them reach levels of CHF 710 million (€674m-$764m) and CHF 960 million (€911m-$1,032m), respectively. Specifically, the management told investors in its inaugural conference call that On is aiming for an annual growth rate of 40 to 50 percent in the second half of next year, which it would be able to reach also in the first half without the existing supply chain constraints.
Striving for “agility” in sourcing, On is looking for more automated production processes and for manufacturing locations closer to its consumers in Europe and North America. Pilot projects are running in some of them, the management said. Meanwhile, as On is being positioned as a premium brand in the growing running market, it doesn’t see a problem in posting price increases next spring on about 40 percent of the volumes, especially in North America, to help offset the higher logistics costs.
During the first nine months, On’s sales grew by 53.9 percent to CHF 216.3 million (€205.2m-$232.6m) in Europe, by 95.2 percent to CHF 276.1 million (€262.0m-$296.9m) in North America and by 112.2 percent to CHF 32.1 million (€30.5m-$34.5m) in Asia-Pacific. In the third quarter, sales were up by 50.3 percent in Europe, by 82.6 percent in North America and by 71.4 percent in APAC. Similar regional dynamics are envisaged for 2022.
In Europe, the brand continues to grow strongly in Germany, Austria and Switzerland, but it is growing faster in the U.K; where it has a smaller presence, and it sees opportunities for development in France. On is planning to open a flagship store in London, reportedly on Regent Street. Its eight stores in China, including one opened in Shenzhen in September, are performing “very, very well,” the management said. On’s sales jumped by more than 500 percent on Tmall on Singles’ Day.
Sales through the DTC channel, including the company’s own stores and e-commerce, rose by 69.8 percent to CHF 191.1 million (€181.3m-$206.5m) in the first nine months of this year, running at twice the rate of the wholesale channel in North America, while wholesale revenues increased overall at a faster and higher-than-expected rate of 81.7 percent to CHF 342.4 million (€324.9m-$368.3m), representing 64 percent of total revenues. By contrast, in the third quarter, the DTC channel grew by 93.0 percent and the wholesale channel by 56.7 percent.
On is trying to respond to the growing demand from both channels. In the wholesale segment, it is going beyond specialty retail, starting with department store operators like Harrods in London and Nordstrom in the U.S.. It is also conducting tests at some Foot Locker stores in the U.S. and some JD Sports stores in Europe, targeting mainly young female customers with some of lifestyle produts. At the same time, it is investing a lot on data capture and other features for the launch of a new web store in the second half of 2022.
As an “innovation company,” On will come out with three new functional models of running shoes next year including the Cloudrunner, whose market introduction during the first half will be slightly delayed because of the current supply chain problems. It will expand its range of hiking shoes and launch two new lifestyle silhouettes including a six-part Cloud Easy.
There will also be new models of apparel, which is not affected by some of the same constraints as its footwear. In the first nine months of this year, footwear continued represent the bulk of On’s turnover, growing by 76.2 percent to CHF 503.6 million (€477.9m-$541.6m), but sales of apparel rose at a faster pace of 109.4 percent to CHF 26.4 million (€€25.0m-$28.4m).
As part of its commitment to preserve the environment, On is testing three or four different technologies to reduce carbon emissions in the use of raw materials. A project called CleanCloud, which should be ready to be scaled toward the middle of 2022, consists of capturing carbon monoxide emissions from a factory to make EVA foam out of them.
