2023-08-15 12:30:38 ET
Summary
- On Holding's shares declined after the company reported Q2 results, a similar reaction we saw after the strong Q1 results.
- Revenues grew 52% year-over-year in Swiss francs and more than 60% Y/Y in constant currency, beating consensus estimates, and the full-year revenue guidance was increased despite currency headwinds.
- Gross margin improved and inventories are down, addressing previous concerns.
- The company continues to focus on sustainable and profitable growth, and the long-term outlook remains positive.
Shares of On Holding ( ONON ) declined after the company reported second quarter results. I was not surprised to see that, and I had reduced the position ahead of the earnings report in anticipation of this possibility, and the stock trading near 52-week highs prior to the earnings report last week made that decision easier.
The second quarter looked good considering the headwinds, and so does the outlook for the second half of the year. Revenues grew 52% Y/Y to CHF444.3 million or 62% Y/Y in US dollars to $496 million, beating the $477 million consensus and coming near the lower end of my $495-$505 million estimate range that I provided in the Q2 earnings preview article for my subscribers.
The full-year revenue guidance was increased by CHF20 million and reflects the continued strengthening of the Swiss franc compared to other currencies in major geographies - primarily the U.S. dollar and the euro. If we look at the guidance progression in U.S. dollars, the full-year outlook has increased by nearly $170 million since the start of the year as opposed to only CHF60 million.
On Holding earnings reports, author's calculations
The guidance in constant currency implies 44% Y/Y growth in the second half of the year versus 30% in Swiss francs. The expected constant currency growth shows the strength of the business in the face of currency headwinds, but also the overall macro headwinds.
Gross margin improved by 120 basis points sequentially, and it strongly addresses the other concern raised on the previous earnings call - that there is significant discounting intended to improve revenue growth. The improved gross margin also reflects the higher participation of the direct sales channel in total revenues and the high share of full-price sales. The much higher year-over-year gross margin improvement of 440 basis points reflects the discontinuation of the use of expensive air freight to move goods around during the COVID-affected period in 2022.
Inventories are down sequentially and as a percentage of TTM revenues and should address another concern from the previous earnings report. Inventories have already fallen to levels at which the company previously expected to finish this year.
Looking at the regional revenue breakdown, the EMEA region seemed a weak spot in the second quarter while the Americas and Asia Pacific continue to look strong (although Asia Pacific is still very small). Management said on the earnings call that the EMEA region continues to look good, but also that we should see a 5% to 10% headwind in the second half of the year driven by the optimization of the wholesale network and that there will be fewer doors in Europe compared to previous quarters. They also expect a slower expansion of doors in the following quarters at a net rate of approximately 200 a quarter. I believe these moves demonstrate the company's focus on profitable and sustainable growth rather than growth at all costs.
The expansion in China is on track, but the number of stores is still very low with a lot of room for growth since Asia Pacific represents more than a quarter of the global shoe market versus less than 8% of On's total revenues.
Going back to the full-year outlook, I believe the company has continued its historically conservative guidance policy and that the approximately $170 million increase in the full-year guidance since early 2023 shows this policy in action, and the improved outlook is somewhat masked by substantial currency headwinds.
On the sporting side, Iga Swiatek finally started to wear On shoes at the tennis tournament in Montreal in early August. That was one of the weak points recently as she signed the deal in March, but the shoes apparently were not ready or not up to Swiatek's expectations. Swiatek recently said that her custom shoe is "really, really close" to being developed and that the final details are being hammered out to create the "perfect" shoe.
Overall, the results look good, and I continue to see On as well positioned to deliver shareholder value in the following years. The latest period was very volatile for the stock, and we are seeing various reactions to earnings reports in the industry this year. The volatility does little to accurately represent the progress of On or its competitors. For example, Deckers Outdoor ( DECK ) dropped after a solid earnings report but quickly recovered and is now just below 52-week highs, Skechers ( SKX ) jumped after the earnings report and then started to trend lower, while Crocs ( CROX ) declined, recovered briefly and then continued to trend lower.
For further details see:
On Holding: Currency Headwinds Mask Underlying Growth In 2023