Premium footwear maker On (ONON, Financial) saw its shares drop by around 2.8% today following a Q2 earnings miss and a slightly lowered FY24 net sales outlook. The decline was due to capacity constraints and inventory shortages stemming from the transition of On's Atlanta warehouse to a fully automated facility. However, the stock quickly rebounded as the day progressed.
On has implemented several measures to mitigate the adverse effects of the warehouse transition, which helped reaccelerate its Direct-to-Consumer (D2C) growth rate in the latter half of the quarter and into Q3. Although management acknowledged the impact on its FY24 net sales, now forecasted at CHF 2.26 billion from CHF 2.29 billion, they emphasized that the transition is crucial for scaling distribution capacity in the U.S., promising long-term benefits.
- Despite the warehouse issues, On's consolidated net sales grew by 27.8% to CHF 567.7 million. In the Americas, wholesale and DTC net sales increased by 27.6% and 28.1%, respectively. The EMEA region saw a 21.8% year-over-year rise in net sales, driven by strong momentum in the U.K. The APAC region experienced a 73.7% surge in net sales, bolstered by sustained momentum in China.
- On's performance mirrors that of Deckers Outdoor (DECK, Financial) and aligns with Adidas AG's (ADDYY, Financial) recently raised FY24 sales outlook. With NIKE's (NKE, Financial) ongoing issues, On and its competitors are capitalizing on a relatively stable demand environment.
- On reported EPS of CHF 0.14, slightly below analyst expectations due to the Atlanta warehouse issues. However, the company improved its gross profit and adjusted EBITDA margins, benefiting from lower freight rates and stable foreign exchange rates. On remains on track to achieve its profitability goals for the year, including gross margins of around 60% and adjusted EBITDA margins of 16.0-16.5%.
The primary issue for On is inventory optimization rather than demand problems, unlike NIKE (NKE). Although the Q2 results were impacted, these headwinds are more easily reversible than structural demand issues. Investors seem optimistic, maintaining the stock's upward trend after a brief decline. With the company taking steps to resolve its warehouse challenges and focusing on its higher-margin DTC channel, the future looks promising for On.
