On Holding AG

Hello and welcome to the On Holdings AGQ3 2023 results call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, again, press star 1. We'll now turn the conference over to Jared Peter, Head of Investor Relations. Please go ahead.

Good afternoon, good morning, and thank you for joining on 2023 third quarter earnings conference call and webcast. With me today on the call are executive co-chairman and co-founder Kasper Kopebi, CFO and co-CEO Martin Hoffman, and co-CEO Mark Maurer. Before we begin, I would like to remind everyone today's call will contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements reflect our current expectations and beliefs only, and are subject to certain risks and uncertainties that could cause actual results to differ materially. Please refer to our 20F filed with the SEC on March 21st for a detailed discussion of such risks and uncertainties. We will further reference certain non-IFRS financial measures such as adjusted EBITDA and adjusted EBITDA margin, these measures are not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS. Please refer to today's release for a reconciliation to the most comparable IFRS measures. We will begin with Kasper, followed by Martin, leading through today's prepared remarks, after which we're looking forward to opening the call for a Q&A session. With that, I'm very happy to turn over the call to Kasper.

It is our great pleasure to be here today with you to discuss the results of our thriving business. ON continues to have a very strong momentum. In Q3, the outstanding demand for our brand resulted in another record top line quarter with over 480 million Swiss francs net sales. This represents 47% growth year over year, or even 58% on a constant currency basis. Many of you joined us six weeks ago for our investor day in Zurich, and we tremendously enjoyed sharing more about ON's unique culture, innovation pipeline, and brand vision with you. We aim to be the most premium global sportswear brand, rooted in innovation, design, and sustainability. Allow me to share how we have made progress towards this goal in the third quarter. The on-brand is in very high demand and has further gained in popularity and desirability. We are seeing great success by connecting our celebrity athletes to product innovation. When Ben Shelton stormed to the semifinals at the US Open, for instance, we amplified his skyrocketing popularity through the on-brand campaign, Dream On. As announced, we are making strategic shifts in our marketing spending further build global awareness for all. The headline dream on Helen O'Berry could also be seen on billboards across New York city in the recent weeks and dream on she did with her dominating win at the marathon, making Helen the first woman to win Boston and New York in the same season in 34 years. I cannot emphasize enough how important successes like this one are for our brand. and for our ambition to become the number one running brand. Performance is at the very core of the ON brand and our superior products allow us to command premium prices. More importantly, performance is also a passion across the team. Last month, our co-founder Olivier spent a good week in Boulder to support our local teams during Helen's final preparations for New York and the testing of new racing technologies for the upcoming Olympics with the On Athletics Club. And let us share another anecdote with you that illustrates our culture. Ten OAC athletes traveled to New York from Boulder to support Helen in her race. Among them, world class athlete Jared Nguz, who in September won the 1500 meters in the Diamond League meeting in Zurich. You may not be used to hearing these kind of stories in an earnings call, but we feel that how we achieve our results is just as important as the results themselves. As shared during the investor day, ON has a very strong product innovation pipeline. In recent months, we were able to deliver a number of highly successful product launches. Let me name a few. The Cloud Eclipse is catering to runners who are looking for a maximum cushioning experience. It is built on our newest patented cushioning platform, CloudTech Phase, which consumers have already adopted so quickly on the cloud server. And CloudTech Phase isn't just for running shoes. Ant's computer-optimized outsell technology has been adapted for ultimate all-day comfort as well. I am, of course, talking about the all-new Cloud Tilt, which we pre-launched in a hugely successful collaboration with Louisville. Retailing at $490, the model sold out almost entirely within a few days and generated significant traction across our social platforms. We are excited to see how far the Cloud Tilt will go when it becomes more widely available to consumers in February next year. Our design collaboration with JW Anderson and Loewe is a testament to the premium positioning of the ON brand, and in particular to ON's apparel range, which will again be featured in the collaboration with Loewe in the coming months. Speaking of apparel, we've seen exciting launches in the past weeks and have been very present around the globe with our campaign Run Together. Another key innovation milestone in apparel is the PACE collection, which launches today. It is made from captured carbon emissions, and we are proud to bring ONZE Clean Cloud technology to apparel for the first time. The strong presence on the tennis court has also increased demand for ONZE apparel range, and we look forward to introducing specific tennis performance and lifestyle apparel in spring. Congratulations to Iga Sviatek for taking the WTA finals title, and returning to world number one. Q3 also marks a milestone in the continuing shift of how we reach our customers. With 55% growth, ON's D2C business has significantly outpaced the wholesale business, which grew 43%. We are very encouraged by the strong performance across both e-comm and own retail, which saw store openings in Miami and London's Biddlefields in recent weeks. In line with our three-year plan, we expect D2C to continue to grow faster than wholesale, which will remain an important channel for our business. I'm happy to say that as a brand, we have found the wholesale partners that we want to work with. And going forward, we will focus on deepening these partnerships and jointly delivering an intimate consumer experience across categories through these channels. As we enter the holiday season and prepare for more product launches to surprise our fans in 2024, We are grateful to share that the on-brand has never been stronger than today, and that we never had more reasons to be optimistic about the future trajectory of our business. This is a pivotal moment in our story, as we are successfully transforming from a challenger in the running category to a running leader, from a running brand to a multi-sport brand, from a wholesale let to a true omnichannel brand, and from a footwear brand to a sportswear brand. With this, I will now hand over to Martin for the detailed discussion of our business and the financials. But not without correcting my earlier mistake of not naming him among the athletic feats of our top athletes. Congratulations on your finish in the New York Marathon, Martin.

Thank you, Kasper. And hello to everyone on the call. I still have goosebumps when thinking back to the energy from the amazing crowd along the course in New York City. I was extremely proud and inspired to see so many athletes of ON's right to run partners on the course too. This is what igniting the human spirits from movement is all about. Which is also why we attempt to incorporate a movement session in all interactions with our teams or partners. And yes, also at our first investor day. It was so exciting to welcome many of you to Zurich a few weeks ago. After having completed our IPO process, mostly in a virtual setting, it was great to allow you to experience ON first hand. Similarly, it was very important to us to introduce you to our product team. We are so grateful for the passionate and talented individuals that are building our dreams with us. We hope you learned a lot about who we are about the incredible pipeline of products and innovations that are yet to come, and most importantly, that you felt the unique culture add on. For those of you who are not able to join us on the day, the materials as well as a replay of the presentation are available on our investor relations website. In addition, before diving into our Q3 results, Let me quickly summarize the key elements of our strategy that we outlined at the investor day. We aim to be the most premium global sportswear brand. Our first pillar includes three strong existing building blocks that we will elevate further. We'll continue to put a lot of emphasis on running and aim to significantly increase our market share on runners bodies. We intend to benefit from the huge potential around the globe by increasing brand awareness among our core communities. And innovation will continue to be at our core as we focus relentlessly on driving on performance, credibility and sustainability impact. Our second pillar is focused on investment areas that we will grow aggressively to expand our reach and depth over the coming years. This starts with our ongoing commitment to elevate the power of our premium multi-channel distribution to reach our fans globally. We will significantly increase our own retail presence and evolve the channel to contribute meaningfully for our overall business. Finally, we'll continue to expand our footprint in China at a rapid pace, accelerating market share gains in one of ON's highest gross markets. The circular consists of new areas to establish our brand with meaningful communities aligned with our vision to be the most premium global sportswear brand. We aim to tap into the training community and light up the tennis court to significantly increase our addressable market. And we will further focus on establishing ON as a true sportswear brand known for our full head-to-toe looks across all of our existing and new verticals. With these initiatives, we intend to continue our path of combining high growth with attractive and increasing profitability. This means that by 2026, we aim to double our net sales to at least 3.55 billion, drive our cross-profit margin above 60%, and increase our adjusted EBDA margin to more than 18%. None of this will be easy, but we are extremely excited for what is to come. As a first step on this journey, and as Kasper mentioned, we are very pleased to say that we started off strong with another outstanding quarter. With this, let me reflect on our Q3 results and our full year outlook and how we view both in the light of our long-term strategy. With net sales reaching 480.5 million Swiss francs, Q3 has been our seventh consecutive record quarter. With 59.9%, we achieved the highest gross profit margin since our IPO. 81.3 million adjusted EBITDA marks another record in the history of the company, exceeding any other quarterly adjusted EBITDA by almost 30%. 58.7 million net profit in the quarter is more than in the whole year of 2022. And we generated a significant positive cash flow. It's fair to say that Q3 has been our most successful quarter in history across all measures. The demand for the on-brand remains very strong. Our net sales grew by 46.5% versus the prior year period. Due to the ongoing strength of our reporting currency, Swiss francs, the equivalent growth rate at constant currency rates would have been close to 58%. Or in absolute terms, our reported Q3 top line number would have been over 518 million Swiss francs at last year's rates. For the second consecutive quarter, D2C outpaced wholesale with a growth of 54.6%, resulting in a D2C share of 34.3%, compared to 32.5% in Q3 last year. D2C net sales for the quarter reached 164.7 million Swiss francs. As shared in some detail during our investor day, we are very excited to see how Brent moments, such as Ben's success at the US Open, the wins of our OAC athletes, or on a smaller scale, Roger's recent visit to some of our stores in China, are visibly leading to higher brand awareness and ultimately to increase traffic both on and offline. As mentioned before, own retail will play a larger role in our D2C strategy going forward. The continued success of our stores is further increasing our confidence in this strategic direction. With 26 retail stores operating by the end of Q3, our net sales contribution from own retail more than tripled year over year. As Kasper mentioned, over the recent weeks, we successfully opened two additional retail stores, one in Miami and the other in London's battlefields. We're absolutely thrilled to see the vibrant communities that are gathering around our retail locations. In London, we had about 100 dedicated runners joining us for the first Saturday run out of the store, even in the face of the typical rainy London weather. The high apparel share of 23% in Miami and 19% in London is another validation of the importance of our own retail channel in establishing ON as a head-to-toe sportswear brand. We continue to win many new fans and to tap into new communities through our wholesale channel. Wholesale grew by 42.6% in Q3, reaching 315.7 million Swiss francs. Due to the disruption in our warehouse in the U.S. in Q3 last year and the resulting shift of volume to Q4, this growth rate is slightly elevated. In addition, we did see some early holiday shipments sent out to our partners in the later part of Q3 this year, pulling forward some volumes from Q4. Independently from these one-off effects, we have seen very strong sellout numbers at our wholesale partners. We are very pleased with the level and the composition of our in-channel inventory. Given these one-offs, looking at wholesale growth for the combined second half of the year will be a more meaningful measure to establish a baseline for wholesale growth going forward. With that, let me move on to the developments by region. We have achieved strong growth rates globally. Net sales in the Americas grew by 60.5% in Q3, reaching 294.9 million Swiss francs. We are pleased to see that a strong selling for the fall winter 23 season coincides with continued sellout strengths at our partners across the board. Of course, our U.S. business was the most impacted by the operational challenges in the prior year period. Again, slightly helping the reported growth rate in Q3 this year. Net sales in the EMEA region reached 144 million Swiss francs in Q3, growing by 19.9% year over year. Similar to the previous quarters, we have seen a significantly stronger growth in our D2C channel compared to wholesale. The UK remains one of the key growth engines in the region. The growth is very much performance first, which is very important for us. The validation comes from our recent shoe count along key running routes, where we have seen a strong increase of our market share on runners' feet. APEC reached net sales of 41.6 million in the third quarter, corresponding to a growth rate of 71.5%. On a relative basis, APEC was the most impacted by the FX shifts versus the prior year. On a constant currency basis, growth in the region would have been over 95%. Overall, growth was broadly distributed across all sub-regions and channels, with callouts for the very strong momentum in Japan, as well as the continued strength of our own retail stores in China, in particular during the Golden Week holiday period. Turning to the performance by product, net sales from shoes grew by 47% to 456.9 million Swiss francs. We continue to be encouraged by the strong performance of newer core running blockbusters like the CloudSurfer and CloudMonster and the new generation of CloudX, clearly showcasing the adoption of ON in gyms across the globe. The positive brand momentum around the US Open was also demonstrated in an outstanding performance of the Roger family, visible in an elevated growth rate of the franchise in our D2C channels versus the prior year. A parallel grew by 31.8% in the quarter, reaching 20.1 million Swiss francs. As many of you saw a few weeks ago in Zurich, we are very excited about the upcoming collections and innovations that will allow us to further emphasize the differentiation and premiumness of our products. We are also looking forward to the next generation of our retail store concepts and the role they will play in showcasing our full head-to-toe offerings. The first store to follow this new concept will be our Paris store due to open later this week. Finally, while we slightly scaled back on marketing in Q4 last year, We are running a bigger brand campaign in Q4 this year, centered around our new apparel collection. This includes many highly visible brand moments in key cities around the globe. One of the highlights is our activation at Tottenham Court Road underground station in London, with daily traffic of over 200,000 people. For the first time since our IPO, we reached a cross-profit margin close to our mid-term target of 60% plus. Cross-profit reached 287.7 million Swiss francs in the quarter, reflecting a cross-profit margin of 59.9% and an increase of 280 basis points year over year. This margin increase was driven by a continued high share of full price sales as a result of the premium position of the brand. The increased D2C share and lower freight rates. In addition, we had recorded the last piece of extraordinary air freight usage in Q3 last year. SG&A expenses, excluding share based compensation in Q3, were 46.4% of net sales, up from 44.1% in the same period last year. In particular, distribution expenses remain elevated due to the investment into warehouse automation which are expected to deliver meaningful scale gains in the future. As a result of the strong net sales, our premium cross-profit margin and consciously managed expenses, adjusted EBITDA reached 81.3 million Swiss francs in the quarter, by far the highest in the history of the company, and up from 56.3 million Swiss francs in the previous year. Our adjusted EBITDA margin reached 16.9%, slightly down from the 17.2% in the same period last year. Moving to the balance sheet, capital expenditures were 8.2 million Swiss francs in Q3 23, or 1.7% of net sales, significantly reduced from the 6.7% of net sales in the same quarter in 2022. In the prior year, the elevated expenses had largely resulted from non-recurring investments into office build-outs in Zurich and in Portland. Managing our inventory remains a key focus area. In Q3, inventory approved to 424.5 million, a further reduction in comparison to the end of Q1 and Q2, while growing our net sales at the same time. In line with our previous communication, we expect to maintain the current inventory level by year end. The reduction in inventories also largely drove the overall reduction in networking capital in Q3, contributing to a significant positive cash flow of over 90 million in the quarter. As a result, net cash increased from 337.1 million at the end of Q2 to 432 million at the end of Q3. As I've mentioned, this positive cash flow marks another historical record fall. With that, I would like to move on to our last outlook for the full year of 2023. We are experiencing another incredible year with three record quarters and the year to date growth rate of over 57%, which was driven by winning millions of new fans by connecting even closer with our existing customers. This is most directly reflected in the strong growth of our D2C channel by 57.4%. The growth was further amplified by the very successful expansion of our wholesale network and the important product door rollout with some of the largest global key accounts over the past 12 to 18 months. As Kasper mentioned, in many markets, we have found the wholesale partners that we want to work with. While we will continue to expand our presence in existing stores and carefully expand into new locations, new doors will drive less incremental growth compared to previous quarters. In our strategic plan, we outlined our belief in the power of our multi-channel distribution and the huge potential of combining all channels in harmony. And ultimately, in our belief to at least double our net sales in the next three years, while at the same time driving a stronger growth in our D2C channels compared to our wholesale channels. We look forward to the final one and a half months of the year and are heading into the holiday season with confidence in the strength of the on-brand and in the strength of our products. This kicked off strongly during the Double 11 holiday period in China. Despite again following our no discount policy, we saw an overall year-over-year volume growth of over 70% during the holiday period, clearly indicating the continued brand momentum in China. Based on the start of the fourth quarter, our strong Q3 results and our visibility until the end of the year, we are again increasing our net sales ambition for the full year from 1.76 billion to 1.79 billion Swiss francs. implying a full year growth rate of over 46%. Zooming in on the fourth quarter, our net sales outlook implies a Q4 growth rate versus the prior year of 21% on a reported currency basis. In line with our strategy outlined above, we expect to see a more controlled growth of our wholesale sales while converting the high demand for the brand in continued strong D2C sales growth. As we've outlined in our previous quarterly calls, our Q4 growth rate will be first influenced by three transitional factors. First, in 2022, we had seen a delay of some order deliveries from Q3 into Q4 due to the disruption of our largest US warehouse as a result of a system update at our 3PL partner. Second, in EMEA, focused on the DACH region, we will be strategically closing around 200 doors at the beginning of the year, which will have an initial impact on our reorders in the fourth quarter. As mentioned on our last call, these stores are mainly comfort stores with a low share of performance business and accounted for around 10% of our EMEA wholesale net sales. Last, primarily due to the strength of the US dollar, but also other impactful currencies compared to the Swiss franc in 2022, we expect another quarter with a strong negative currency impact on our global growth rate. The 21% anticipated growth rate on a reported basis in Q4 is equivalent to around 30% on a constant currency basis. As a result of our long-term strategy combined with these temporary effects and timing, We expect our reported wholesale growth in Q4 23 in the area of high single digits. On the other hand, we expect continued strong Q4 growth rates in D2C, closer to what we have seen over the past couple quarters in that channel. Moving to margins. Our year-to-date gross profit margin of 59.3% reflects the premium position of ONN. Based on the strong performance in Q3 and the planned strength of our D2C business in Q4, we expect to significantly overachieve our previous full year outlook of 58.5% and increase our full year expectation to at least 59%. If the environment continues to be favorable, we may even see the full year number drive beyond this threshold. The higher net sales and the stronger cross-profit margin will allow us to drive additional investments into building brand awareness in Q4, while maintaining our full year guidance of 15% adjusted EBITDA margin. We continue to think long term, and we expect these investments to have a positive effect on future sales, and ultimately on our ability to reach our long term goals. Doubling our net sales by 2026 while increasing our cross-profit margin above 60% and our adjusted EBITDA margin to more than 18%. Since we publicly announced our strategic plan at the investor day, we have spent a lot of time internally to share and discuss our vision reform. Just last week, we hosted our global summit where we introduced our fall winter 24 product collection as well as the 2026 strategic roadmap to our full internal team. And we are already experiencing the energy and the enthusiasm across all parts of the organization to build the future. And while we remain intensely focused on bringing this exceptional year across the finish line, we are already looking forward to the many highlights that we expect to achieve on the next steps of our journey. With that, Kasper, Mark, and I would like to open up the session to your questions. Operator, we are ready to begin the Q&A session.

Thank you. If you have a question, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, simply press star 1 again. One moment, please, for your first question.

Your first question comes from the line of Jim Duffy of Stifel.

Your line is open.

Thank you. Hello, everyone. I have a few questions I wanted to start on the fourth quarter guide. The first relates to the state of channel inventories. Previously, you'd spoken to the North American market having three to four months of inventory in the channel. Does that figure still hold, or would the earlier sell-in, kind of the pull forward of some of the shipments, are you now above those levels?

Hi, Jim, this is Mark speaking. Thank you for your question. So that still holds. So we are very strategically managing that, especially with all our key accounts. We have very good visibility. And in the end, this is also what you see reflected in our gross margin. So we were able to drive a lot of full price sell through. And so we're very happy with the inventory position, a lot of fresh inventory that is available at our retailers.

Great. And then the fourth quarter, a very important e-commerce quarter. Can you speak to what you're seeing in e-commerce trends, including customer acquisition, mix new versus retained customers? I know you had some efforts in social commerce, what you're seeing in terms of the contributions from social commerce. That'd be helpful. Thanks.

Yeah. Hi, Jim. This is Martin. So let me maybe share a bit more insights into the holiday season. So we had a good start into October. We clearly see that we are winning market share in the current environment. Last year was an exceptionally strong holiday season, so significantly above what we had seen in previous years. We see less enthusiasm this year and this is also what we hear and see from our retail partners. But at the same time, we continue to grow strongly and we maintain a full price position. We share the success in China during the double 11 season with 70% growth in an environment where the market was flat. What we see at the moment is fully embedded in our guidance of 1.79 billion, and we believe that this number reflects the current situation quite accurately.

Great. Martin, can you maybe give some comments on customer acquisition? Historically, you've spoken some about mix of new versus retained customers in your D2C business.

Yeah, so the channel continues to win new customers and to increase market share. So we focus on both acquiring new customers by increasing also brand awareness, but then also working with the customers that we have. We have significantly increased the number of members, so where we have more data and more insights into our fans as well. The holiday season is usually a season where you see the benefits and the fruits from the work throughout the year coming to life. It's usually not the moment where you acquire a lot of new customers, but as I said, we are very happy with how our e-commension is performing and how it's supporting our strategy to outperform our wholesale growth with our DTC growth.

Your next question comes from the line of Jonathan Komp of Baird. Your line is open.

Yeah. Hi. Good afternoon. Thank you. I want to just follow up. When you look at the fourth quarter revenue guidance, I know you called out some of the transitory factors. Could you maybe just discuss, as you look forward beyond the fourth quarter, you know, if any of those factors will continue outside of the wholesale pullback in Europe? And as you think about next year relative to your long-term plans, mid-20% growth target. Do you have any insight today that would support confidence, you know, above or below that? And could you, Kasper, maybe talk about, you know, the pace of some of the upcoming introductions that you're most excited about?

Yeah, so maybe let me start with the last one. So we are super excited for 24. I think we have a firework of new products coming. a lot of innovation. We have big brand moments planned like the Olympics. So we have outlined our growth aspiration for the next three years and doubling our net sales. And as we have done in the past, we will provide an updated guidance on 24 in our earnings calls then in March during the full year results. looking at wholesale and D2C and some of the temporary effects that we now see in Q4. The store closures from EMEA, this is something that will be visible and we spoke about this that we that those $200 account for around 10% of the EMEA wholesale sales. And so this volume will be going out of the market over the next 12 months. And then we outlined in our investor day our belief in the power of our multi-channel distribution and that we see all channels growing, that we want to accelerate our expansion in retail, all with the goal to be the most premium performance sportwear brand. And so we expect that all channels are growing, but by controlling the wholesale growth and simply having less incremental new doors, We expect that the increasing brand awareness that we clearly see is converting stronger into the D2C channel. And as a result, we expect a stronger growth in D2C than wholesale. And we expect this to be already quite visible in our Q4 numbers and ultimately being a source for delivering a premium financial profile in the mid and long term.

And John Casper here for your product related question. There's many things to be excited about. As you know, you've been here for the investor day. If you just look at the recent launches in this quarter, the cloud tech phase platform. So the new Eclipse that we just launched, our max cushioning product has done extremely well in early sell through and it's becoming one of the favorite running shoes for many. So kind of having a second option there next to the monster for those that are looking for a very cushioned ride is important. And on that same Caltech FACE platform, the TILT, which we've pre-launched now with the Louisville collaboration, that has exceeded all our expectations. And we're very, very excited about the pending launch in Q1 in 24 when the TILT becomes very widely available to consumers. hopefully adding another strong sealant next to CloudNova, Roger, and Cloud. But, you know, this wouldn't be complete if we wouldn't talk about apparel in there. So we've had a really strong launch around winter running. The bra category gets a lot of traction for us. And then as we move into spring next year, as you know, we've announced that we will enter the training category. And apparel will be the driver there. So a lot of exciting things coming in Q1. And of course, also training SHU with the Cloud Pulse.

That's very helpful. Thank you both. And Martin, just one follow-up if I could. Given your positive commentary about gross margin, could you maybe just highlight the factors that are weighing on adjusted EBITDA margin in the fourth quarter? And of those factors, should we be expecting any pressures continuing into 2024? Thanks again.

Yeah, so we established at the investor day our aspiration to have a cross-profit margin of 60% plus. We are very proud to have achieved that number, at least very close in Q3 with 59.9%. um we continue to see and expect a favorable environment on the on the freight side as as mark mentioned we have an unhealthy inventory level not only at our retailers but we have further improved our inventory levels at at our warehouses so we expect a continued high share of full price sales we we don't see a lot of currency impacts at the moment on on on cross-profit margins also not a lot of other one-off effects. So yeah, I said it in the comments, we are positive about our cross-profit margin and also going into next year and the increasing D2C share will further support it. And then on the EBITDA, so in Q4, we are As I mentioned in the past calls, our focus is on achieving the 15% adjusted EBDA for the full year. Now the strong Q3, but also the strong margin that we expect in Q4 allows us to double down on some of the brand awareness campaigns that we had planned for Q4 and they are running. We mentioned some of those on the call. Again, this is all for future sales growth. It's not immediately converting into Q4. But as a result, we expect to see some higher marketing expenses. Again, this is a clear perspective of achieving the 15% adjusted EBITDA.

Your next question comes from the line of Jay Saul of UBS. Your line is open.

Great. Thank you so much. Martin, two questions. When you touched on your prepared remarks, the sell-out in the wholesale channel has been quite strong. Would it be possible to share some numbers around that? And then secondly, I think on inventory, you said that you expect inventory levels to be the same in Q4 as Q3. Now, do you mean that in terms of a growth rate will be the same in Q4 versus Q3, or do you mean in terms of dollars? Thanks so much.

So let me start this, Mark, with wholesale, just some anecdotal evidence. Hey, we know the sales for numbers and obviously, unfortunately, we cannot share all the numbers here. Some anecdotes, we are the number three brand at Fleet Feet, which is very, very important to us, as you know. So we continue to gain share from other brands there. Also in a market like Germany, we are the number three brand at The Running Expert, which is basically kind of the Fleet Feet or a summary of some of the doors there. that are very much kind of focused on running and run specialty. So we see that that strategy is really paying out. We have very, very strong sales through in DSG. So really exceeding our expectations. We had weeks and months where we were the number one brand in running in DSG by far. So I think we're seeing very strong numbers. And this is also how we will continue to kind of manage the expansion going forward, making sure that we are in a strong position in the doors where we're in, and then expand from a position of strength.

And then to your inventory question, so that comment referred to the absolute number. So we are very happy with the inventory level that we have and very proud about the work that the team is doing and the focus that they're putting on this. And where we are standing now is what we communicated in the past or we are executing our plan that for the last six months we have produced less than what we have sold. And so we expect to maintain plus minus that current inventory level towards the end while our sales continue to grow. And then also in the outlook and we maintaining freshness in our inventory. which will support our high share of full price sales in the future, as I just mentioned on the cross-profit comment.

Terrific. Thanks so much.

Your next question comes from the line of Alex Stratton of Morgan Stanley. Your line is open.

Perfect. Thanks so much. Congrats on another great quarter, guys. Quick one from me. A number of wholesale peers have expressed more cautious front half order book outlooks. on their latest calls compared to three months ago or so. So I'm just wondering how has the first half shaped up for you all relative to your expectations and relative to that high single-digit level that you're expecting in the fourth quarter? Thanks a lot.

Thank you, Alex, for the question. So we are very positive around 2024. So from when we spoke last time about it, also from when we shared our three-year plan in the investor day, nothing has changed. We see absolutely no cancellations. So we have the right mix in the order book so we can really double down on performance. We see new silhouettes. For example, Kasper spoke about the cloud tilt resonating really well and being adopted. And especially I want to highlight that apparel has seen a very, very strong pre-order. So we're very confident in how spring-summer 2040 is shaping up.

Alex, if I may add here, we're the most premium brand for most of our partners, and that means we're also the most profitable brand for them. So obviously, they're strategically invested in the on-brand. And if anything, we expect that in a more difficult environment, the on-brand will gain versus our competitors.

Thanks a lot. Good luck.

Your next question comes from the line of Aubrey Chianello of BNP Paribas. Your line is open.

Hey, thanks for taking the questions. I wanted to follow up on gross margin. I think to get to your guidance of at least 59% for the year implies 4-Q gross margin for flat year-over-year. Given that it should be a bigger DTC quarter relative to 3-Q, Just wondering what some of the offsets are that would prevent 4Q gross margin from being higher than 3Q gross margin.

Yeah, as I mentioned, if the situation continues to be favorable as we had it in the moment and in the last weeks and months, then we clearly see an upside potential to that. At the same time, like in the past, we want to be prudent on our guidance. But at the moment, we clearly see that the trend is strong and that's reflected in the strong margin.

All right, thanks. And just as a quick follow-up, since the last earnings call, as you called out in your prepared remarks, on athletes have had a lot of high-profile wins. Could you talk about the impact some of these victories have on brand awareness and brand momentum and you know, what effects you're starting to see that you can maybe share with us?

Thanks a lot for your question. Look, athlete wins are very important. If you look at Helen winning New York now after Boston, that mainly adds to credibility in the running space. You know, this is not necessarily a prime TV moment where our brand awareness would go through the roof. That's more the case with tennis. And what we've seen definitely in the numbers When Ben Shelton reached the US Open semis and played against Djokovic, he was the talk of the town and a lot of people were introduced for the first time on mainstream TV and social media to the on-brand. And this moment is probably comparable. to a moment when we announced the Roger partnership, you know, where all of a sudden the mainstream name was associated with ON and just drove brand awareness. So the athletes and especially linking athlete to brand campaign to product will be a key cornerstone of our strategy going forward.

Thanks so much. Congrats.

Your next question comes from line of Abby's Vagenix of Piper Sandler. Your line is open.

Great. Thanks for my question and congrats on the marathon, Martin. I was, I was watching, I was just a spectator, but it was just really encouraging to see the number of ons on runner's feet, you know, just compared to last year, really accelerated. Just can you give any color on segmentation within wholesale, you know, as you continue to roll out new product, which varies from something more technical like cloud eclipse to more lifestyle, like cloud tilt and how you plan to really segment the product.

Yeah. You know, we, we gonna, We're going to give you an example first on consumer segmentation at New York Marathon. So if I run the marathon, I would run in the cloud boom. And Martin, what was the show you were running in? Cloud Stratus. So you see the segmentation is clearly working on runner's feet in the marathon. No, I think it's been very important for us that over the last two years, we were able to, especially in the running space, build franchises that are resonating extremely well and tier them. very, very clearly. And I think we've spoken about that a lot of times. So we are starting with which consumer in which store did they actually go into and then kind of, you know, which products are resonating with those consumers. And if we take a cloud boom that has been tiered very, very strongly around run specialty, for example, if we take a cloud Stratos, that's a product that is only available in run specialty and on our D2C engine. And then you have, you know, bigger franchises like the cloud monster or the cloud runner. that tier down to to more to more accounts and we will continue that strategy so so expect us to bring you know to kind of to continue to to build on running and the running space around these franchises and then within the franchises have a certain tiering depending on on uh you know the level of the product and i think what we can already share is that we will for example, introduce a new product next spring that is called the Monster Hyper. So this is an athlete version of the Cloud Monster. So the Cloud Monster Hyper would then be available mainly in D2C and in run specialty. And the Cloud Monster is available in broader channels like DSG. And this is how we'll continue to execute on the strategy.

Great. That makes a lot of sense. And then just one more. The commentary on second half wholesale growth is like the rate that we should think of going forward. I think that is kind of a reported basis, close to 25%. So, are you saying on like a reported basis or a constant currency basis that's how we should think of wholesale growth going forward?

So, more on a constant currency basis, but then considering the impacts that we mentioned earlier from the store closures in Europe.

Okay, makes sense. Thank you.

Your next question comes from the line of Cristina Fernandez of Telsea Advisory Group. Your line is open.

Hi, good morning, and congratulations on a good quarter. Following up on that question on wholesale, can you update us on what the wholesale count was at the end of 3Q, any changes to where it will be at the end of the year, and how should we think about wholesale door growth for next year in light of the Europe closures relative to the mid-teens rate I estimate we've seen in the first half of this year.

Thank you for the question. So by the end of this year, we'll be in roughly around 10,000 doors globally. In fall-winter 23, we've basically added roughly 200 doors in the US and 50 doors in Asia Pacific. And how you can think about this going forward or especially into 2024 that will most likely at, you know, around eight to 10% of doors and towards the towards kind of end of 2024. Now, what's important is that the structure of the doors really differs depending on which markets we're focusing on. Right? So we have pretty clear visibility in how we want to grow. basically key accounts like DSG and Foot Locker and JD. At the same time, we are entering markets like Korea where you will see doors being added, but at the slower size per door.

And then also on the product innovation pipeline, you've given a lot of details around some of the launches for next year. Should we think about the pace of launches being pretty evenly spread through the year, or are they more weighted to the first half versus the second half?

Thanks for your question.

Yes, we're trying to spread them out across the year. And of course, we want to have a good balance. We have a very, very strong innovation pipeline, but of course, We also don't want to bring too much to the market too quickly. We want to make sure that people understand the franchises, they get to know a product, and they can rebuy it, and it doesn't change too much. So we're trying to strike that disbalance. So expect a pretty balanced number of innovation launches next year.

Your next question comes from the line of Tom Nicky of Wedbush.

Your line is open.

Hey, everybody. Thanks for taking my question. To follow up on Christina's question, you know, HOKA talked about, you know, going into some new wholesale doors in North America in early 2024. Presumably, they're talking about, you know, more, you know, Dick's, Foot Locker, JD locations. Can you give us an update as to how many doors you're in for those retailers and how we should think about the pace of entering more doors with Dick's Foot Locker and JD?

Yeah, very happy to do so. Now you need to be fast in writing it down. So in Q3, we had 200 Foot Locker doors in the US and 110 in EMEA. DSG, we were by the end of Q3 in 170 doors. JD, 193 in the US and 120 in EIA. REI, 181. Lead fee, 256. And Nordstrom, 94. That's basically all the doors that those accounts have. And so expect us basically to now over the next quarters at around 25 doors per quarter with some of those accounts, especially Foot Locker. That's a meaningful number. I think if you look at JD it's similar so you know that's roughly what you will see and that will bring you kind of by the end of fall winter to 350 doors globally for foot, 170 doors still for DSG and then 338 doors for JD globally so you'll see there a bit a bit of stronger golf as well.

Great. Very helpful. And if I could just follow up there. As you've entered these retailers initially, how have you seen the consumer acceptance, the ramp up, et cetera? Has it been similar to when you've opened the new door in the specialty running channel?

Yeah, I think we have to distinguish the channel a bit. DSG is really a general sporting goods channel, so where we had a lot of experience in the past as well, if you take an account like Sportcheck in Germany. And we entered with, you know, shopping shops. We were entering with a big focus on apparel as well. And the openings have all been super, super strong. Foot Locker and JD was really speaking to a different consumer as well. So it was a slightly new channel for us. We were very prudent in how we entered and What we do with both of them is definitely creating a big focus around introducing the brand to their consumers through marketing, but also really focusing on the right silhouettes. And when we take a product like the Cloud Nova, that is doing extremely well in both channels, and they've been absolutely crucial to building that product. And when you look at JD in Europe, for example, it's our strongest partner on the apparel side. So they're really, really helpful in building some of our key franchises, and we're very happy in how the introductions have worked out.

Great. Thank you very much, and best of luck this upcoming holiday season.

Your next question comes from the line of Michael Benetti of Evercore ISI. Your line is open.

Hey, guys. Thanks for taking our question. Let me add my congrats on the marathon. Awesome win for you guys. I just want to follow up on one of the modeling questions earlier. How should we – the gross margin being potentially conservative in the fourth quarter, you've had a couple quarters now over 59, getting pretty close to 60, and you have a bigger impact from D to C in the fourth quarter. Can you just tell us where in the underlying business you – assumed conservatism in the fourth quarter gross margin? Is there a channel or a region in the quarter that you guys were looking at that could disrupt that historical mixed shift benefit you get from D to C being 500 or 600 basis point higher mix in fourth quarter this year versus last year? Also, in fourth quarter, I think direct-to-consumer implies like a low 40s growth rate, a little bit below a little bit below the third quarter. Just any reason you think that that's something you're seeing currently, or is it just conservatism as well? And then I think the bigger picture question is, you know, one of your biggest competitors is, you know, re-approaching the wholesale channel over the next year. Nike, it pulled back a bit over the last two years. And I think some of the indications that part of that push will happen in channels where you guys are obviously very competitive As you speak to retailers in those channels, do you have any idea how they're thinking approaching changes to the planogram or to the shelf space matrix as, you know, one of their bigger brands is presumably going to be taking up some more space than they have in the past few years?

Yeah, so I think you assume you mean Helen with the congratulations to the Marathon. For the cross-profit, I mean, FX remains an uncertainty and clearly an area, depending especially on how some of the non-US dollar currencies are developing. So that's an area where we remain a certain level of conservatism. And also the final DTC share will depend on, in wholesale, there are always timing topics as well. So as I said, we left a bit of room in there. At the same time, we are full throttle when it comes to full price sales and doing the right things in the long term to build a premium brand. reflected in the strong margin.

I'm happy to take your question on maybe these other brands that you have in mind, the rejoining run specialty. Look, we've been in this space for a short 14 years, but over this time period, these players have come and gone in the run specialty channel. I can speak about on and why this is important to us. You know, this This channel builds credibility, but it's also a very stable channel in terms of like, they're not not any big shifts happening rapidly. For on our partnership, and I've actually just spent the last couple of weeks on the road visiting most of these important run specialty partners also to introduce them to the updated on strategy that we shared at invest today. And really, it's a little bit of a love affair. And we feel that, you know, they feel the love that ON has given them over the last decade. They're definitely very loyal.

So we're not factoring that into our plan. Understood.

Your next question comes from the line of Sam Poser of Williams Trading. Your line is open.

Good morning. Thank you for taking my questions. I have a few. One, can you do some color on the wholesale versus DTC business in EMEA and especially in the UK, which you called out? And then I have a few more.

Hi, Sam.

So we called it out on the call for the last two quarters. We have seen stronger growth in our D2C channel in the whole of EMEA compared to our wholesale channel. So it's also reflected in the door counts. So what we would see on the global level is already reflected to a certain extent in the numbers in Europe. So less incremental door growth, while at the same time having a lot of measures in place to increase brand awareness in the markets, and that's converting into our D2C channel. We will see how our store closures are capturing an increased and even more increased demand in D2C. So that's something to observe how the customer is reacting there. and then we clearly have markets where all our channels are growing strongly like the uk with our very strong flagship store in in london but then also strong uh partnerships like like like jd um and also our ecom environment but there it's important it's it's really performance first growth uh we we shared it um we are counting on runners

share on runners feed every half year and uk is clearly leading there in terms of growth that we are seeing along the running routes thank you and then um can you talk about uh one what your what you view as your optimum inventory annual inventory turn and then secondly given the given um that you're doing significantly better it looks like on the gross margin growth story Does that give you, does that, do you plan to reinvest that upside into SG&A? And then, you know, I know you haven't guided next year, but, I mean, are we looking, I mean, you're going to grow SG&A this year, you know, close to 50%. How should we think about that going into 24? Thanks.

So let me start with SG&A. Our aspiration for all in three years is to achieve an adjusted EBITDA margin of 18% plus and to have a cross-profit margin of 60% plus. So that embeds that we will see and expect to see economies of scale, scale gains in our SG&A. We spoke about our automation projects that we are doing on distribution side, which is expected to lower Our distribution expenses, but then also scale gains across across the organization so we our view is that next year will be clearly the first year on the road towards that that 18% plus and So we we expect to to basically see the higher cross-profit margin to some extent flowing through into the adjusted EBITDA.

Your next question comes from the line of John Kernan of TD Callen. Your line is open.

Excellent. Thanks for taking my question. So this is a bit of a follow-up, but it looks like SG&A rates will still be up year over year in Q4 as you invest in growth. You talked about some of the investments in distribution. How do we think about the gross margin and SG&A rates beyond Q4 as DTC starts to take the leading growth?

So again, it's embedded in our 60% plus. The assumed DTC share is embedded in there. We mentioned that on the investor day. We also have other effects and mixed effects in our margin in the future. So it's a geographical mix. We have countries that run at a lower margin and countries that run at a higher margin. Currently, our apparel margin is still below our footwear margin. So there's some effects that also go against the higher DTC share. And as a result, we established a target of 60% plus, and with that driving an overproportionate bottom line growth.

Understood. Maybe just one follow up on China. I think you'll have 30 retail stores there by year end. Maybe talk to what you're seeing on the ground in China with brand awareness and how you're scaling with that consumer.

Yeah, so I think we shared and Martin shared in the script how Double 11 went. We are seeing really, really good traffic in the stores. We are seeing very strong sales in the stores. I think this is really also reflected in our Q3 numbers. We're also super positive around APEC in general, but also especially China and Japan for Q4. Unfortunately, especially when you look at Japan, there's quite some currency effects that are going against it. But if you really look at the number of products and how that growth is coming together. It's extremely positive. And the focus now in China is going to be to continue to scale obviously Tmall and everything that we're doing on e-comm to work with our social channels. WeChat mini program, for example, is working super well, but then to continue to expand the store, but on number of stores, but mainly also on footprint. So we want to invest in bigger stores in China. Currently, the traffic is almost too high for the size of the store, so we can't really capture all of that. So as of 2024, we'll definitely start focusing around finding bigger locations in some key traffic areas. In general, I think there's quite a difficult environment in China right now for many brands. we don't see it and we can, you know, we're gaining market share at full price, which is very, very positive.

Your next question comes from the line of Anna Andreeva of Needham & Company. Your line is open.

Great. Thank you so much for taking our questions and congrats on nice momentum in the business. We have a couple. I just wanted to follow up on wholesale. So you mentioned looking at the third quarter and fourth quarter together. is a good proxy to think about growth going forward, just given all the timing shifts. And apologies if I missed this, but what was the constant currency growth in wholesale in 3Q? Just sounds like there should be improvements from high single digits into next year, even with the door closures. And then secondly, really great to hear about the Lowy Collabs working so well at a healthy price point. Can you talk about how you think about additional collabs that are right for the brand going forward? And how do you think about price elasticity there? I know you've taken prices up on footwear in the last year here in the U.S. and in Europe. Just curious if you're seeing any pushback to those. Thanks so much.

So on the first question on the FX impact, basically the FX impact was quite equally spread across wholesale and D2C. So you have about 11% growth impact in wholesale and 12% growth impact in T2C from the FX in Q3. So very similar to the overall number.

And then on the collapse, we believe less is more. So we're aiming for very high quality collapse where there's really a connect between the two brands and and the two designers like in this case jw anderson and tila brunner on our end actually do spend time together working on a collection this is not just about combining our social media following um and and by being very um selective uh i feel we can support our premium positioning and the ones that we do do make uh like the louisville one will be more meaningful. And labor has become quite successful, not just from a brand perspective, but also from a revenue perspective.

Your next question comes from the line of Ashley Owens of KeyBank Capital Markets. Your line is open.

Great. Thanks so much. Just focusing on doors, you know, it looks like many stores in Miami and London are showcasing that high apparel share you guys are working towards. Is there a certain layout or tactic that you're seeing help increase apparel share in these stores?

And then I will follow up.

Yeah, so, so, I mean, you're referring to the 24 and 19% apparel share that we're seeing and we're, you know, I think we spoke about again at the investors day. how we want to continue to grow apparel and own stores are a key element in there. We're very excited about the upcoming Paris launch. So we'll have a store in Paris Saint-Germain opening up on the 17th of November. And this is, we feel, really the first store where you kind of see our take at how we want to bring apparel to life in the future in the store. So apparel will get way more space. We focused a lot on merchandising the right product. We're focusing a lot on creating categories for the different communities that shop at the store. We're focusing a lot on branding and storytelling. So you shop apparel way more in a self-service environment versus footwear. So you want to find elements of education as you're shopping in that environment. And some of these things are already happening in Miami and London, and that's reflected in the apparel share.

And your last question comes from the line of Janine Stichter of BTIG. Your line is open.

Yeah, thank you. I just wanted to follow up on the apparel question. Sounds like it's working really well in BTC, especially in owned retail. So as you now look to build apparel at wholesale, we just want to know more about how you're looking to work with your partners to translate that presentation and maybe any numbers you can put around the number of shop and shops you're doing, just how you're going to market with apparel at wholesale. Thank you.

Yeah, so I think it's the exact same playbook, right? So it's very important for building shopping shops. You pointed it out. That takes a bit of time. So we don't have, you know, we can't have like all the wholesale partners shopping shops executed in all of them within a couple of weeks. So we're focusing very much on really bringing the full collection to life. Then with all the things we've just mentioned and one key element I want to highlight is that we're also building a visual merchandising team out so that whenever you visit those stores that you experience on and our apparel collection in a premium way. And again, when we spoke about how we're looking at spring, summer 24 pre-order, this pre-order comes with the confidence that not only the product has evolved a lot, but also our capability to execute the apparel collection at wholesale. And we believe that, you know, kind of in the long term, apparel will have clearly above ten percent shower in our share in our own d2c so this speaks to retail all retail stores you know we're already showing now with some of the uh with london miami and so on that that we're clearly tracking above that but also ecom should be able to execute versus that and if you take wholesale as a channel overall it will probably stay below 10 but also because we have many many wholesale channels where apparel will not be a focus and if you take one specialty it's still very much focused around around footwear so i'm giving you a bit of long hands for here but we're excited about what we're seeing on apparel and and we're very very positive that in the long run um apparel is going to be a an amazing contributor to the growth of on thank you and this concludes today's conference call you may note