On Holding AG (ONON) Earnings Call Transcript & Summary

All right. Well, we'll bring the energy up here for you guys, keep you awake. I'm Alex Straton, Morgan Stanley's offline retail and brands analyst. Super pleased to be here today with On, which is about a $15 billion market cap lifestyle and running footwear business, very distinctive silhouette. I'm sure many of you have seen them being walked around in at this conference here up on the stage. You see them everywhere these days. I'm joined by Marc Maurer and also Martin Hoffmann, co-CEOs of the business. Thanks so much for being here with us today.

Thank you for joining the stage with us.

Yes. So maybe let's start with some big picture questions. I think this marks your 15th year as a business. Talk to me about how you've been able to generate such tremendous growth, sort of the big milestones as you see them.

Yes. Obviously, very happy to have reached the 15th anniversary. I wrote a little love letter to the brand, if you want to check my LinkedIn profile, and you get some of the milestones that we had. Obviously, it's a big moment for the team, we're now like 3,500 people. And so we will find a moment to celebrate this. We wanted to take the whole team to [indiscernible] for the 10th anniversary, but then COVID hit. So there's some catch-up to be done here. But I think important is that basically what -- who we are today is who we always wanted to be. So we started On as a performance brand rooted in running. And we always knew coming out of Switzerland, we want to build a premium brand and -- that lives really at that intersection of performance and design and sustainability. And staying true to that core mission that we have, I think, is -- gives us a lot of power because there are not a lot of questions on where do we want to go. But this has basically been clear from day 1, and we've been executing on that. And I think, yes, I wouldn't have dreamed where we are now, but I think we have the same big dreams going forward.

And now maybe if we zoom in on 2024, specifically, another great year of growth, margin expansion for you. What kind of did you accomplish so far in 2024? And how does that fit into your longer-term vision for the brand?

Yes. '24 for us was, I think, even more defining year than just looking at the numbers and the growth of the numbers because of a couple of reasons. I think first, we took brand awareness to a very, very different level. So in the U.S., we doubled brand awareness in '24. So way more people know about On, which is great and which is a new baseline that we can now use for '25. Then I think we've brought innovation to the market that no one expected and that the industry hasn't seen before. So with the LightSpray product, we're not only bringing more sustainability, but we're also bringing a manufacturing technology, and we're bringing more performance. So I think it's really helped to position us as a run and a performance brand. And then thirdly, I think we were able to tap into new communities at scale with a partnership like with Zendaya. So we were able to tap into younger consumer segments. We were able to make inroads on the streetwear and performance all-day side and on the training side. So a very, very defining year for us and super happy that we can now build '25 on this new baseline that we created in '24.

Now so we are sitting here in January. We've had a lot of companies come out with holiday updates this morning or at some point today. Understanding that you all don't provide a holiday update. What can you tell us on the quarter so far or how holiday performed relative to your expectations? I'm not pressing you, whatever you can...

Yes. Based on what Marc just said, we have done a lot of right and great things in the course of '24. So really elevated brand awareness. We have launched a couple of really great, super successful products like the Cloudmonster 2. And we have really elevated our ability to deliver the products to the customers. And this has already been reflected in a very strong Q3, and we were talking about this. We had seen more than 50% D2C growth in Q3. So we really ended the holiday season with a lot of demand for the brand, but also our ability to fulfill this. And so this gave us a lot of confidence to also basically stay on our strategy to push full price sales and to not engage in the craziness of the holiday season. And we are extremely happy with how the holiday season worked out. So basically, what we have already seen in Q3 continued in Q4. We worked a lot with our different partners in wholesale and retail to also make sure that everyone has the right assortment and is set up for the holiday season, also something that worked out very well. And so I think we go into '25 with a lot of tailwind and a lot of confidence that all the things that we've built in '24 are actually driving a lot of demand into the brand, and we are able to capture that.

So you both mentioned 2025 a number of times so far in our conversation. What are your big picture strategic focus areas for '25 as you think about the year ahead?

Yes. So I think On strategy is clear. So we want to be the most premium sportswear brand, very much driven by performance, design and sustainability. Martin already mentioned it. And I think on that journey, we had very consistent priorities within '24, and they also go into '25. And they're also consistent with what we communicated when it comes to our midterm to long-term targets on the journey to '26, '27. And so I think the first part is really building and continuing to build run culture. On is a performance run brand at heart. That's our core. That's our authenticity. And I think we're going to continue to put a lot of emphasis and focus on this. We are currently the #3 brand in the U.S. in the run specialty field, and we're not going to stop before we're the #1 brand. So we're going to put a lot of effort in that. Then the second thing is we feel the way we want to gain the consumer is through bringing more innovation to the market faster. So we're not about bringing old things back, but about creating new things that the world hasn't seen. So we refer to LightSpray, and we're very much looking forward to the product launches we have next spring, next fall. So looking at the Cloudsurfer 2, which is a very important franchise for us that's going to renew. We're going to bring the Cloud 6. We're going to bring the Cloudboom next, which is the first performance or kind of carbon plated shoe for a little bit the slower marathon runner, and then we're going to bring a lot of newness in the apparel space as well. So continuing to push innovation is going to be a big, big topic. Then we're very much -- we will very much continue to focus on building training, tennis, but also tapping more and more into the outdoors with trail running. So that's a big topic and then continuing to build On as a sportswear brand head to toe. So we're very proud that we can not only sit here in footwear, but also showcase our apparel pieces and our own retail stores will help to bring apparel to life in an even better way. And then a very big piece of work that the world probably doesn't see so prominently is what's happening in the background of the company. So for us, really elevating our operational capabilities is super, super important. You saw part of the result of that already in Q3 and Q4, but that's going to be a big, big focus into '25 and '26 as well so that we're really building the backbone for a company that can be much, much bigger than what it is today.

So I think that's a great kind of high-level overview, what you guys are focused on. Maybe for Martin, just thinking about this in the context of your targets that you've put out there, 26% CAGR at the last Investor Day as it relates to revenue. Everyone is gnashing at their teeth. What are the key puts and takes into '25 as we think about top line growth? I know sitting in my seat, it feels like there's a lot of things that might be helpful to you, whether it's your wholesale being reworked, whether it's some of these supply chain challenges changing. Just walk me through maybe the high-level dynamics you're thinking about.

Yes. So we will come out with an official guidance in March. So you need to wait for that.

Not today, right now?

But if you take a step back, with the Investor Day in '23, we basically announced how we want to double the sales over the course of 3 years. And we laid out a couple of building blocks that we intended that will help us to reach that. And -- so those were things like building retail, building apparel, China continue to grow in running, and tennis and training and some more. And in '24, we were really focusing on building the foundation for all of those elements to work. And I think being able to have a current guidance at 32% constant currency growth for '24 clearly shows it works. And now if we look at that projection for '26, I think it becomes very, very clear how we get there. And the company has all the confidence that those are the right building blocks that bring us there. And at the same time, within the company, we are now looking at what's beyond. So what's after the 3.5 billion, 3.6 billion that are standing behind the '26 aspiration. And what do we need to build in order to really become the most premium global performance sportswear brand. And so I think this is the important message going into '25, all the things that should drive our business are working, and we have the confidence and we will be able to execute. So there will be a lot of focus, you heard it from Marc, on the execution of those building blocks, but the validation is there.

So speaking of execution, Marc, you alluded to this, there were some challenges this year as it relates to the warehouse automation, some DC constraints. Can you just give us an update where are we at in terms of where that stands and what it means for '25?

Yes. So for '25, we're very confident that the business can really deliver where the consumer demand is. And so we did a lot of work on it. And the main topic was really the Atlanta warehouse and some shortcomings we had there in Q1 and Q2, which led to a performance that we would have wished was better in Q2. It already got much, much better in Q3 and Q4. So we really feel the last 2 quarters, the company we're still kind of in Q4. So -- but we really feel the company was able to execute against the consumer demand. We had the right product at the right time, in the right channel. And so we are foreseeing no major disruptions for '25. We're very happy that the automation is planned to go live in Atlanta in the first half of the year of '25. And that's a super important project for us because it will allow us to execute on our D2C business on our e-com business. And we're constantly reviewing the footprint that we have across the globe and how do we not only deliver the best possible consumer experience, but also reap kind of efficiency benefits in the backbone of the company. And so how we're looking at warehouses, how we're looking at manufacturing partners and how we're optimizing that constantly is a very important part of who we are and then obviously also will show in our bottom line.

That's great. Good to hear. It will be mostly in the rearview this year. One thing we haven't actually touched on at all is China, which has really been a bright spot for you all, whereas for many others, it's been a source of challenge. So can you just walk us through kind of what you're seeing there and then what your hopes for this year are as it relates to that market in particular?