On Wants DTC Sales to Outgrow Wholesale

On Holding is making moves to rein in its wholesale presence as the company posts gains in its direct channels.

The Swiss running brand on Tuesday said in its earnings release that it would add fewer additional wholesale doors moving forward as it looks to focus on its existing partners as well as growing its DTC presence through e-commerce and its owned retails stores.

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“There will be less incremental [wholesale] doors coming compared to what we already have now and as a result, that growth will come down and we expect to see this in the fourth quarter,” said On co-CEO and CFO Martin Hoffmann told FN in an interview. “At the same time, we expect that our DTC growth rates stay very strong and that we are capturing the customer there.”

On also said its results in Q4 would include the impact of its decision announced in Q2 to cut ties with about 200 wholesale doors in the EMEA region that are not focused on performance and run. Hoffmann said there are no immediate plans for any more wholesale exits.

In Q3, On reported that direct-to-consumer net sales increased 54.6 percent to 164.7 million Swiss francs. Wholesale channel sales were up 42.6 percent to 315.7 million Swiss francs.

In a late October note to investors, Williams Trading analyst Sam Poser called out On’s rapid increases in the wholesale channel as being detrimental to the brand in the long run.

“On’s growth is being driven by expanding wholesale distribution, which will, in our view result in over saturation of its product, then an erosion of revenue and earnings growth,” Poser wrote.

Moving forward, On said its goal is to have DTC sales outgrow wholesale. In Q2, the brand’s DTC penetration was 35 percent. While Hoffmann did not outline a specific share target for this channel, he said DTC sales outperforming wholesale is part of the company’s broader plan to achieve at least 3.55 billion Swiss francs in net revenue by 2026.

“Since the beginning of the of the brand, we have grown our DTC channel stronger than our wholesale channel,” Hoffmann said. “This is still our aspiration with owned retail and e-commerce, as this is the place where our consumers can really experience the full breadth of the brand.”

On will also accelerate the rollout of its own retail stores and plans to eventually be able to open between 20 and 25 stores per year starting in 2025.

At the same time, the company will still carry out its wholesale expansion plans with existing key partners, including Dick’s Foot Locker and JD Sports.

“On is a brand that has been built through multi-channel distribution from the from the very beginning,” Hoffmann said.

The DTC-wholesale balance has been a burning issue for many brands in the post-pandemic climate, which left some players with excess inventory. A number of big names from Nike to Under Armour recently started reviving their wholesale business with some retailers after previously going all in on DTC.

On said its DTC channel helped it achieve overall growth and stronger gross profit margin in Q3. Higher full-price sales, favorable freight and foreign exchange rates and less airfreight usage also contributed to this gross profit margin growth, On said.

The brand raised its full year sales outlook and now expects sales to grow 46 percent to 1.79 billion Swiss francs. This assumes a 21 percent growth rate in Q4, driven by DTC strength. The wholesale growth rate in Q4 is expected to be in the high single digits due to “transitory impacts” from early holiday shipment of orders in Q3, closures in EMEA and challenging year-over-year comparisons.

Overall, On reported that total net sales in the third quarter increased 46.5 percent to 480.5 million Swiss francs. Adjusted net income was 65.5 million Swiss francs up from from 22.3 million Swiss francs the prior year. Adjusted diluted EPS was 0.20 Swiss francs, up from 0.07 in the prior year. In the first nine months of the year, On’s set sales increased 57.2 percent to 1.35 billion Swiss francs.

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