Earnings Call Transcript - ONON Q2 2022

Operator, Operator

Ladies and gentlemen, thank you for being here. Welcome, and thank you for joining the On Holding AG Q2 2022 Results. I would now like to hand the conference over to the Head of Investor Relations. Please proceed.

Caspar Coppetti, Executive Co-Chairman, Co-Founder

A warm welcome to all of you joining us today. I hope that you have been able to spend some quality time over the summer with your families and friends. We are excited to discuss On's performance in the second quarter of 2022 with you, share some big milestones and give you some color on how we look at On's continued growth trajectory in the current macro environment. This is our fourth earnings call post IPO and on behalf of the whole On team, we are very proud to present another record quarter. Consumer demand for the On brand remains very high. On grew 67% overall in the second quarter of '22 and many key markets had outstanding growth rates, such as the U.S. and Japan, which doubled; or the U.K. and Australia, which grew by more than 60%. All geographies, channels and categories contributed strongly to this outstanding result, confirming On's tried-and-tested strategy of maintaining a well-balanced product and distribution portfolio. On is winning with consumers and also on the racetrack. As a result of this strong growth, On is making significant market share gains in the specialty and high-end distribution channels that we choose to play in. The growth comes from both established as well as new product franchises, and I would like to call out some of these new products that have become instant fan favorites. On's promise to run is to run on cloud, and we are doubling down on this with more underfoot protection and ultra-light comfort. This spring, we have introduced the Cloudmonster for maximum cushioning and the Cloudrunner for ultimate all-around comfort and performance. The Cloudmonster is already amongst the best sellers in our own distribution, and it has given us access to an additional consumer and first-time purchaser of our brand. The Cloudrunner, introduced early in Q2, jumped straight to being one of On's most successful performance running shoes when looking at the combined On's specialty and general sporting goods channel. In Performance Outdoor, the Cloudvista also launched in Q2 is quickly rising to the top of the leaderboard. And last not least, the Cloud 5, which we launched earlier this year is continuing its winning streak in performance all day. We also have new styles in this category. If you are looking for a light summer shoe for your August getaway, we can recommend the Cloudeasy with its ultra-light, slip-on knit upper. On the apparel side, Q2 saw the entry into a new product category with the launch of our Active Bra and Performance Bra. Both have received great feedback from customers, being covered by numerous media channels and both bras are now among the best-selling apparel items in On's e-commerce. Now let's move on to our fastest product and race track. You will remember that we introduced you to On's lightening program at our last quarterly update. This includes a dedicated team that works on making the fastest shoes to unleash our athletes' full potential. What we didn't expect is that we will be able to stand here only 3 months later and talk to you about On's first track & field Diamond League victory. On's first Commonwealth Games Victory and On's first World Championship medal as well. You most likely have never heard of Dominic Lobalu from South Sudan. Well, you're in good company – neither had the elite field in the 3,000 meters of the Stockholm Diamond League meeting, where Dominic came first, ahead of the favorite who will go on to win 3 medals at the World Championships at the Commonwealth Games. Stockholm was Dominic's first elite race for the simple fact that he's a refugee and does not have a passport. On has supported him for some years now, first through the athlete refugee team and now here in Switzerland, and we are very happy for him and this incredible achievement. Only a couple of weeks ago, On's athlete Hellen Obiri added another huge milestone by winning On's first track and field World Championship medal in Eugene, Oregon. And OAC family member, Ollie Hoare, took the 1,500 meters gold at the Commonwealth Games in Birmingham. We are not just winning on the track, we're also making strong progress on sustainability. First, I would like to give you an update on our circularity program, Cyclon, the shoe that you will never own and is only available through a subscription called Cloudneo. Circularity and the use of lower impact materials are a big part of our mission to decouple On's resource consumption from our strong growth. One of On's core company values is the survivor spirit, and it stands for innovating our way to a more sustainable future. Over the past weeks, our very first community of recycle subscribers in the U.S. and Switzerland received the Cloudneo and we will look forward to giving more and more people around the world the opportunity to run and exploring On's most sustainable products to date. This very special launch has brought On a step closer toward our sustainability mission to lower On's carbon footprint by designing products made for circular systems and engineered with fossil-free materials. As we observe the consumer behavior in connection with Cloudneo and our subscription model, we are not resting in our push for more sustainable products on all fronts in the short term as well. For example, we have significantly increased the level of recycled polyester in some of our more recently launched running products. The Cloudvista, Cloudmonster and Cloudrunner contained 74%, 84% and even 90% recycled polyester, respectively. In comparison, in On's spring/summer '21 range, the level had been at 16% on average. We are on a steep learning curve and fast implementation cycle. And some of the learnings from the groundbreaking Cloudneo have already found their way into other products. The newly launched sneaker Cloudeasy is made with only 15 pieces, about half of what the regular On uses. Less parts mean less impact and higher recyclability. This, combined with the new half Speedboard made from injected TPU and the full knit upper made of 100% recycled polyester leads to significant waste reduction without any compromise on performance nor comfort. We also believe that what gets measured gets done. On has set ambitious, clear sustainability targets, and we are committed to transparently reporting on our progress towards them, which brings me to the pleasure of making you aware of the upcoming publication of On's latest impact progress report. Not only will we be updating on our goals and progress, you will also find a number of fascinating case studies on projects our teams have been passionately working on over the past months and years. In sum, while looking back from the halfway mark of our 2022 race, half year 1 has been incredibly strong for On. Despite the supply challenges and macro headwinds, we have achieved new record numbers, launched well-resonating products and reached new milestones together with our exceptional team and athletes. At the same time, we have plenty of energy and stamina for the second half of the race. While we are staying vigilant and financially prudent as always, all indicators show that demand for the On brand will stay very high. This puts On in the privileged situation to consciously select which of the levers we want to pull at which point in time to deliver durable and controlled growth. With that, let me pass over to Martin for the Q2 financial review and the outlook for the rest of the year.

Martin Hoffmann, CFO and Co-CEO

Thank you, Caspar, and hello everyone from my side. With CHF 291.7 million and a growth of 66.6%, net sales in Q2 have reached the highest level in On's history. In June, we surpassed CHF 100 million in net sales for the first time in a single month. Additionally, net sales for the first six months of the year have increased by 67.2% to CHF 527.3 million. Our adjusted EBITDA has more than doubled compared to Q1. Excluding the extra airfreight needed to address the lingering impact of last year’s factory closures, our gross profit margin and adjusted EBITDA margin for both Q2 and the first half of the year would have reaffirmed our long-term profitability targets. We could not achieve such remarkable results without the dedication and passion that our team demonstrates across all areas of the business daily. Our team has grown from 1,150 to nearly 1,500 members since the beginning of the year. Recently, Caspar, David, Marc, Olivier, and I visited our North American team in their new Portland office, our tech and happiness delivery team in Berlin, and our development and innovation team in Ho Chi Minh City. After two years, we were also able to visit Tokyo again to meet with our Asian teams and see how strongly On's new store resonates with Japanese customers. We visited several of our factories to align on our growth plans. Moreover, we opened On Labs in Zurich, where all our Switzerland-based teams can now work together in the same building, fostering a community environment. We have also welcomed many global key retail partners to this new home. On Labs serves as the heart of our innovation, with over 30% of the space dedicated to research and product development, allowing us to elevate our Swiss engineering efforts. We have established an on-site sample production line for shoes and apparel. With advanced computer simulation programs and a world-class sports science laboratory, we can now test and refine innovations more rapidly. On Labs also hosts our first own retail store in Europe, helping us to test the latest store designs and strengthen our local running community. Now, let's discuss our financial performance in more detail. Our net sales growth has exceeded expectations across all channels, regions, and product categories. The success of our latest product launches has surpassed our own forecasts, and lower airfreight costs have allowed us to meet the strong demand from both our retail partners and direct-to-consumer channels. In Q2, our omnichannel strategy showed impressive results, with wholesale growth at 70.1% and direct-to-consumer growth at 60.8%. In wholesale, this growth is driven by market share gains with our existing retail partners, fueled by successful existing and new products and a selective expansion with key accounts. Our strong growth in the direct-to-consumer channel, consisting of On's own e-commerce and retail, demonstrates our ability to build and retain a loyal fan base while providing an authentic customer experience. For the first time, direct-to-consumer net sales surpassed CHF 100 million in a quarter, reaching CHF 105.6 million. The D2C channel contributed 36.2% of net sales for the quarter, slightly down from 37.5% in the same period last year. It's important to note that D2C sales last year were inflated by ongoing lockdowns, particularly in Europe, where restrictions in Germany were only lifted in May 2021. Starting in October, we plan to launch our new website that will offer a more tailored brand experience, showcasing additional product details that we believe will drive further apparel growth. Within D2C, we are encouraged by the growing contribution from our own retail stores. Our new flagship stores in Tokyo and Zurich performed very well financially and have become community hubs. Our New York City flagship store experienced its strongest quarter ever, driven by a significant uptick in in-store traffic, which instills confidence for upcoming store openings in the U.S., including On L.A. in September and On Miami in December. The opening of our London store has been slightly delayed to early 2023. By the end of '22, we expect to operate 13 owned stores in China and 6 in other markets. All regions have significantly contributed to our net sales growth. In North America, we have seen strong brand momentum fueled by the IPO, the solid product market fit of existing and recently launched products, and the successful expansion of our collaboration with leading key accounts and specialty stores. In Q2, net sales in North America more than doubled, rising by 102.5% to CHF 181.7 million, representing 62.3% of our business in the three-month period. Net sales in Europe grew by 17.5% to CHF 83.3 million, with wholesale growing disproportionately as we observe a stronger shift from online to offline shopping. D2C sales in Q2 last year were elevated due to lockdowns. Furthermore, net sales growth has been negatively affected by a weaker euro and British pound against the Swiss franc, but we remain optimistic about developments in European markets, including the U.K. and France. In Asia-Pacific, net sales rose by 52.2% to CHF 17.9 million, driven by strong growth in Japan and Australia, which helped us mitigate the impact of extensive lockdowns in China. Our Shanghai warehouse and half of our China stores were closed for two months, leading to about CHF 5 million in lost sales, primarily affecting our D2C and apparel business. However, once restrictions were lifted, we saw a strong recovery, with our retail locations achieving their best month ever in June. Finally, net sales in the Rest of World category grew by 224.2% to CHF 8.8 million, reflecting post-COVID recovery in many distributor markets and earlier shipments of fall/winter products compared to Q2 last year. Moving on to product category performance, our expanded range of innovative performance running shoes continues to drive market share gains. The Cloudultra and Cloudvista have become favorites among trail runners, while the Cloudnova has expanded our customer base. Net sales from shoes rose by 68.2% year-over-year for the quarter to CHF 280.6 million. Apparel sales increased by 31.3%, which was below our expectations but indicates a significant opportunity due to our brand's strength in footwear. Our strategy to position On as a sportswear brand received validation in Q2, with strong apparel sales in our retail locations and shop-in-shop environments. The apparel share in our new Tokyo store is 18%, and in Zurich, it's at 19%. In Europe and North America, we continue to invest in shop-in-shop setups, such as at Nordstrom and Sport Chek, resulting in both strong sales uplift and a higher apparel split of 15% to 25%. Net sales from accessories rose by 51.9% to CHF 1.8 million. Gross profit for Q2 2022 was CHF 160.8 million, up from CHF 106.3 million in the previous year. As anticipated, we selectively utilized airfreight in Q2 to ensure product availability. We have moved closer to normalization, reducing the required airfreight share compared to Q1. Consequently, our gross profit margin decreased from 60.7% in Q2 last year to 55.1% this year but improved from 51.8% in Q1. We continued to invest in all areas of the business while achieving profitability despite significant airfreight expenses. SG&A expenses, excluding share-based compensation and CHF 3.3 million in IPO-related equity transaction costs from Q2 2021, were 48% of net sales in Q2 this year, compared to 48.7% last year. Share-based compensation led to reduced expenses in both Q2 this year and the prior year due to adjustments in existing provisions related to future option exercises. Despite airfreight investments and managing higher SG&A expenses, we reported a strong adjusted EBITDA of CHF 31.4 million, an increase of CHF 4 million, or 14.7%, from the prior year. Our adjusted EBITDA margin for Q2 this year was 10.8%, down from 15.7%, primarily due to airfreight costs. Turning to the balance sheet, capital expenditures for the quarter totaled CHF 11 million, or 3.8% of net sales, mainly for new retail stores, office construction, and IT infrastructure. Inventories increased by CHF 54.3 million since the end of March, reflecting improved supply conditions. This positions us well to fulfill strong preorders for the fall/winter season starting in early July. The rise in working capital contributed to a decrease in net cash from CHF 600.4 million at the end of Q1 to CHF 557.7 million at the end of Q2. Our robust balance sheet allows us to pursue ambitious growth plans and make future investments. Looking ahead, let me provide insights into our financial outlook, starting with the macroeconomic environment. Despite some uncertainty, we do not currently see any signs of slowing demand for On products. Some key accounts are paying closer attention to in-store inventory, but sellout numbers for On remain strong. We are planning this year for continued strong growth while also focusing on sustainable and manageable growth. Secondly, due to macro uncertainties, we have opted for more conservative growth in our cost base and reduced our new hire goals for the rest of the year. While it’s essential for our teams to reconnect physically post-pandemic, we also aim to leverage virtual collaboration and decrease travel where necessary. Third, our financial performance is influenced by current currency volatility, particularly the strength of the U.S. dollar and the weakness of the euro against the Swiss franc. A strong dollar can benefit net sales and gross profit but negatively affect gross profit margin, while a weak euro impacts net sales and profit margins. We will report results based on current exchange rates while focusing on underlying business development, although currency volatility may affect reported results. Lastly, thanks to the commitment of our factory partners, we compensated for most lost production capacity caused by factory closures last fall. Our supply situation is now significantly improved, and as previously indicated, we expect to revert to standard ocean freight for most shipments. However, due to demand exceeding expectations for our recent Cloudmonster and Cloudrunner models, we will continue investing in airfreight in Q3, which may impact our gross profit margin by 150 to 200 basis points for that quarter. We also anticipate an additional 50 basis point headwind for Q3 and Q4 from current currency rates. Considering our performance in the first half of the year, we are raising our revenue outlook for 2022 from CHF 1.04 billion to CHF 1.1 billion. This adjustment reflects a strong full-year growth estimate of 52%, up from 44% in our previous guidance. While we aim to surpass this figure, we are committed to sustainable long-term growth. Our focus is on building a resilient company that merges performance, design, and impact. By managing growth, we maintain scarcity, essential for building brand desire and preserving our premium brand status. This approach promotes balanced growth across channels and regions while emphasizing efficiency to enhance profitability. Moreover, a strong focus on inventory control, premium positioning, and carefully managing our cost structure will bolster our resilience against potential economic challenges. The increased net sales will enable us to invest further in the brand and our teams while raising our adjusted EBITDA target for the year to CHF 145 million, reaffirming our goal for an adjusted EBITDA margin of 13.2% despite a significantly elevated revenue outlook. As you can see, we are laying the groundwork for a larger and more profitable company in the future. Since filing for our initial public offering just a year ago, we have made considerable progress. We have become a more diverse, inclusive, and sustainable organization. We launched innovative and sustainability-driven products for running, outdoor activities, and all-day performance. We ventured into new markets, including Latin America and Hong Kong, and began collaborating with major key accounts to boost our presence among runners and younger demographics. Our revenue has increased by 64% in the past 12 months, from CHF 570 million to CHF 937 million, despite ongoing challenges from COVID-19-related factory closures in Vietnam and recent lockdowns in China. Almost 600 new team members have joined On since the IPO, and we are proud to welcome them to our global offices. We are also proud of our athletes and their success, which drives our innovation and product development. Most importantly, our culture remains intact, governed by our five core values: the athlete, explorer, positive spirit, survivor, and team spirit. These will continue to guide us in the future, and we are excited about the opportunities ahead. We will continue to inspire the human spirit through movement. Now, let’s open the session to your questions.

Operator, Operator

The first question comes from Cristina Fernández from Telsey.

Cristina Fernández, Analyst

Congratulations on the nice quarter. I wanted to ask about your view of the industry inventories across the marketplace. And what impact, if any, that is factoring into the outlook? I mean there's definitely a conversation of inventory picking up and promotions increasing in the back half of the year. So how are you thinking about your outlook in that context?

Marc Maurer, Co-CEO

Thank you for the question. This is Marc speaking. Hello to everyone. We're monitoring the situation very closely. We're in regular contact with all our factory partners to understand how production volumes are progressing. We're also focused on sellout and inventory data from our key retailers to gauge the market dynamics regarding discounts that we might encounter in the second half of the year. It's important for us to note, as seen in our Q2 numbers, that we're actively pursuing market share rather than just seeking incremental growth. We believe that our strong brands will maintain their momentum in the second half of the year, as confirmed by our partners regarding their order book with On. Generally, there is an expectation that some brands with less momentum will have higher inventory levels and may experience a slowdown in production.

Cristina Fernández, Analyst

And then a follow-up. Can you talk about demand trends by region? North America continues to be an outperformer. Perhaps Europe, where growth has been a little bit slower, how are you expecting that to progress over the back half of the year?

Marc Maurer, Co-CEO

I believe the numbers reflect what we anticipate for the latter half of the year. The U.S. market remains exceptionally strong, and our order book for this period looks promising. Key metrics for our direct-to-consumer business, such as traffic, are also robust. We're seeing strength in Japan and Asia, and after reopening our warehouse and stores, China's recovery has been swift. The U.K. is performing well too, partly due to ongoing door expansions with key accounts. We're also pleased with the positive outlook in Germany, which is a significant market for us. We're noticing a shift from online to offline shopping, which is likely to persist in the second half of the year. This trend is reflected in our Q2 results regarding direct-to-consumer versus wholesale business. Thus, you can expect the ongoing performance to be consistent with what we are currently experiencing.

Operator, Operator

The next question comes from the line of Michael Binetti from Credit Suisse.

Michael Binetti, Analyst

Congratulations on a strong quarter, especially considering the challenging macroeconomic environment. I'm pleased to see this progress. Could you provide some clarity on your model? You mentioned an impact of 150 to 200 basis points from freight and 50 basis points from foreign exchange in the third quarter. What were those two components in the second quarter? Additionally, what are your projections for airfreight for the full year? I believe you're anticipating an EBITDA margin of around 17% for the second half of the year, which accounts for some unusual freight costs. Given the limited historical context we have for this model during a typical macro environment, is a 17% margin plus what you consider to be a normal profitability level for this business realistic for the latter half of the fiscal year?

Martin Hoffmann, CFO and Co-CEO

Michael, thank you for your question. To provide some clarity, in the second quarter, we utilized about half the amount of airfreight compared to the first quarter, indicating a significant improvement in our supply situation. For the third quarter, we anticipate investing around CHF 5 million to CHF 6 million in airfreight to ensure adequate supply for our products, primarily the Cloudmonster and the Cloudrunner. By the fourth quarter, we expect to return to a normal ratio of airfreight to ocean freight, similar to what we experienced prior to the factory closures. Regarding foreign exchange, we faced some headwinds in the second quarter, which we expect to persist due to the strong U.S. dollar against the Swiss franc and the weak euro against the Swiss franc. If this trend continues, the impact could be about CHF 3 million to CHF 4 million for the second half of the year, contributing to a 50 basis point effect. On the EBITDA front, we have chosen to be more conservative in expanding our cost base, and we have tempered our pace of new hiring. This doesn't mean we will cease hiring altogether, as we plan to grow significantly, but we will proceed with more caution to offset some of the additional impacts on gross profit and maintain our 13.2% EBITDA target for the year.

Michael Binetti, Analyst

And to follow that thought, looking beyond 2022 and hopefully back to normal, what do you see as some of the biggest opportunities coming up on both the apparel side and in expanding the footwear assortment beyond the Cloud platform?

Caspar Coppetti, Executive Co-Chairman, Co-Founder

That's a very good question. We're focused on delivering innovation to the market, which attracts consumers to our brand. Innovation at On encompasses several aspects, primarily performance-driven, which for many means comfort, especially in our running products. We've made strides in design and have a strong emphasis on sustainability. As we progress through the latter half of the year and into 2023, we plan to deliver on these fronts in both footwear and apparel. We're experiencing tremendous success with products like the Monster and the Runner, which offer excellent underfoot cushioning for runners, and we're successfully meeting the demand for these items. We're very pleased with the launch of Cloudeasy, which incorporates insights from our Icon program to create a simpler, more comfortable shoe with a positive environmental impact, while also featuring a new look that resonates with consumers. Additionally, our franchise continues to thrive. In apparel, we're concentrating on running-related products, as we see a smooth transition for consumers moving from footwear to apparel. Our running bras have become a notable addition and are now among the top 10 in our distribution. We're planning to introduce more styles in the next year and are excited about our forthcoming insulation pieces for fall, focused on lightweight and stretchable designs. Looking ahead to spring '23, as mentioned in our previous call, we're set to innovate on CloudTec with a new product featuring an evolved CloudTec face, allowing for enhanced cushioning in a more streamlined design. Overall, these products are significantly contributing to our growth, revenues, and profitability.

Operator, Operator

The next question comes from the line of Alex Straton from Morgan Stanley.

Alexandra Straton, Analyst

Congratulations on another excellent quarter. I understand that you've mentioned slowing your hiring rate, which seems reasonable given the current macroeconomic uncertainty and aligns with feedback we've heard from several other companies. I would like to clarify whether this slowdown will affect all areas or be specific to certain ones. Additionally, beyond the reduced travel expenses you've pointed out, what other cost-saving measures can On implement to help maintain profitability if revenue remains steady for the remainder of the year?

Martin Hoffmann, CFO and Co-CEO

In the first half of the year, we added about 350 team members, bringing our total to 1,500. We anticipate a similar increase for the second half, although we could have grown faster. We're taking a more cautious approach now to ensure efficiency and improve our processes. We won't compromise on customer engagement, especially in happiness delivery, where we plan to expand our team in line with business needs, particularly during the holiday season in the U.S. We're dedicated to investing in brand development and sports marketing to strengthen our brand presence. We're also putting money into inventory to meet the current demand, as we want to ensure we can fulfill orders without limiting our potential. However, we have the ability to adjust costs in various areas as needed. In this growth environment, our focus is not on cutting back but on being more deliberate with our expenses.

Alexandra Straton, Analyst

Great. That's super helpful. And maybe one quick follow-up. It seems like price increases are also a way to kind of maybe offset some of the headwinds. Can you just remind us how much you guys have taken price this year, what the plans are for the back half and then next year as well as if you've seen any consumer pushback? It seems like not for the results, but just any color there would be great.

Martin Hoffmann, CFO and Co-CEO

Yes, we fully execute on what we announced in the past. So in the U.S., we have increased our prices on about 40% of our volume, mainly the Cloud, by USD 10. Another 20% of volume will be affected in the second half of the year and then another 20% to 30% in Q1 next year. And then Europe will see the price increases on about 80% of the volume in Q1 next year. So I think that we are in a good position also to offset some of the higher costs that we expect on the purchase prices for products. I think we have now a pretty good picture how that looks like also for spring next year. And we feel we're in a good position with the price increases that we have planned. At the same time, we continue seeing markets where we have strong pricing power and where we will use that and then selectively use price increases in some of those markets.

Operator, Operator

The next question is from the line of Jim Duffy from Stifel.

James Duffy, Analyst

Very impressive 2Q results, and congratulations on the strong market reception of new products. I wanted to start by asking about the June strength that you highlighted. Some others have reported slowing trends in June. Can you speak to the composition of your June strength? Was that driven by D2C or increased volume of wholesale shipments? And was it led by any particular geography?

Marc Maurer, Co-CEO

The question addresses the growth mentioned by Martin regarding June being the strongest month in On's history. If I understand correctly, June aligns with the Q2 numbers and is not an outlier compared to the other months in terms of direct-to-consumer sales and geographic distribution. Ultimately, it represents the highest level we have reached so far with a similar distribution. We do experience some seasonality in our business, and historically, June has been a significant month for On. In contrast, July is not as important or substantial, highlighting the role of seasonality.

James Duffy, Analyst

Can I also ask about the D2C growth? Can you speak about how that splits between new customers versus repeat purchasers, perhaps given some context of the growth in the D2C customer file?

Marc Maurer, Co-CEO

Yes, thank you. We're not disclosing specific details about new and repeat customers, but we are closely monitoring these metrics as they are crucial for assessing the health of the business. In the U.S. market, which has seen significant growth, we've gained more new customers compared to more established markets like Switzerland or Germany. One major focus for us in the upcoming months and years is to create a strong brand environment for our consumers to encourage their return or retention within our ecosystem. This will help us reduce our reliance on paid customer acquisition, which we are continuously working to improve. Retention, new customer acquisition, and conversion are metrics we consider important, and we analyze brand performance versus categories. We are closely monitoring Google data to understand how categories are evolving online compared to offline and how our brand is performing, and we observe that our own brands are staying robust across all metrics, with our conversion rates remaining strong across different consumer segments.

Operator, Operator

The next question is from the line of Jonathan Komp from Baird.

Jonathan Komp, Analyst

Yes. I want to ask about Martin, I know you mentioned your ambition to exceed the full year revenue guidance, which is the typical approach. I'm wondering if you could discuss some of the factors you see that could drive revenue growth, such as distribution opportunities. I know you talked about the upcoming e-commerce site, or any other drivers that you believe could be important going forward.

Martin Hoffmann, CFO and Co-CEO

I'm happy to address that. When we consider our potential for growth, whether in line with our guidance or exceeding it, the expansion and ongoing increase in sell-through with our key accounts are significant factors that provide us with various levers. We talked about new products launching in early Q3, like the CloudGo, which is expected to be a high-volume model, and its success will play a crucial role in our growth. The holiday season in the U.S. is also a vital aspect of our direct-to-consumer business each year. Currently, as Marc explained, the data indicates we are on course for strong growth. However, there can always be fluctuations in either direction. To put the growth outlook for the second half of the year into context with the first half, it's important to note that the growth comparison is affected by the seasonal shift we experienced in the first quarter, making it not directly comparable to last year. Additionally, in the U.S., we've seen a significant uplift since the IPO in September, which introduces a year-over-year comparison effect. Therefore, we are cautiously evaluating the underlying growth rates of the U.S. business as of October. All these factors combined highlight the substantial opportunities we have. Nonetheless, it is essential to plan with a long-term perspective and not focus solely on short-term growth. As mentioned, we are prepared to meet demand if it arises, but we will not pursue growth in ways that do not align with the long-term vision of our brand.

Jonathan Komp, Analyst

Yes, that's really encouraging. And then Caspar, if I could, I had 2 product follow-up questions. First on the Cyclon, any learnings that you've seen from the behavior from the consumers or any expectations around longer-term economics or profitability of that model as you prove it out over time? And then secondly, just on the Roger, any update on that franchise and the plans we should expect going forward?

Caspar Coppetti, Executive Co-Chairman, Co-Founder

Thanks, Jon. Regarding Cyclon, it’s still too early to gauge consumer behavior accurately since we have just received the shoe. However, it’s encouraging to see that people are liking the product. There is a learning curve for everyone involved. This will be a game focused on retention and managing churn moving forward. We believe these factors will have a positive impact on our overall direct-to-consumer business. We were quite pleased with the initial reactions, and we are considering introducing additional models within the Cyclon program in the next year, both in footwear and apparel. Now, regarding the Roger franchise, which is very significant for us, with the U.S. Open approaching, Roger has put together an exciting retrospective on the early stages of his career, and we plan to launch a limited edition model. I can’t reveal too much yet, but it’s set to be an exciting launch, maybe even causing some lines outside key retail stores. However, we need to keep these details confidential until the official announcement. Additionally, this mid-top model along with other updates on the Roger line will be available this fall, allowing people to enjoy stylish options wherever they are in the world.

Operator, Operator

The next question is from the line of Jay Sole from UBS.

Jay Sole, Analyst

Caspar, Martin, can you give us an update on just the wholesale door count globally, sort of if you can give us an idea how much it's grown in 2Q over last year and sort of give us an idea of where you think it can go bigger picture. Maybe how some of the performance in the newer wholesale doors like a Foot Locker has been.

Marc Maurer, Co-CEO

Our door count by the end of the first half of the year is 8,612 doors, with apparel accounting for just over 2,000 of these stores, similar for accessories. At the end of 2021, we had 8,364 doors, indicating growth. Importantly, much of this growth is coming from same-store sales rather than just adding new doors. We anticipate a slight increase in the second half of the year, but again, growth will primarily stem from in-store performance instead of door expansion. We've opened new accounts, including DICK'S Sporting Goods, in Q2, and our expansion with Foot Locker and JD is progressing well. We're closely monitoring sell-through and are very pleased with the customers and product performance. We're focused on capturing the running market, making DICK'S a key partner, and our performance has been strong in the new stores we've opened. We expect to see an increased emphasis on key accounts in the latter half of the year.

Operator, Operator

The next question is from the line of Tom Nikic from Wedbush Securities.

Tom Nikic, Analyst

I just wanted to ask about the gross margins. I think when you reported 3 months ago, you said that excluding airfreight, your gross margins would have been close to 60%. Is that the way we should also think about Q2 gross margin, excluding freight? And when we look at the back half of the year, I know you've highlighted you're little bit of in Q3 and some FX headwinds. But should we think about gross margins being higher year-over-year in the back half of the year?

Martin Hoffmann, CFO and Co-CEO

Yes. If we exclude the airfreight, we confirmed our capability to reach 60%. In Q2, we also faced a negative impact from foreign exchange, which would also need to be excluded to surpass the 60%. For the second half of the year, as you mentioned, 60% can be viewed as the baseline, with the airfreight impact added on top. Typically, Q4 may even be slightly stronger due to robust direct-to-consumer sales anticipated from the holiday campaign, but this largely hinges on the proportion of direct-to-consumer to wholesale sales in Q4, not in Q3.

Operator, Operator

The next question is from the line of Sam Poser from Williams Trading.

Samuel Poser, Analyst

I wanted to understand the headwinds you mentioned of about 200 basis points for gross margin in Q3 and around 50 basis points in Q4. Can you provide more detail on the offsets and give us a clearer expectation of where you anticipate gross margins to be by quarter? Just to keep it straightforward.

Martin Hoffmann, CFO and Co-CEO

We don't give the guidance on gross profit. More indicative of what I just said is that the commentary is there against last year and the long-term expectations. And I also mentioned a bit the absolute impact that we are expecting from both the FX headwind as well as the higher airfreight.

Samuel Poser, Analyst

But you would expect, and I have one other question after this. You expect gross margin in Q4 to be higher than it is in Q3 from a mix perspective, I gather from what you said. And that's from more.

Martin Hoffmann, CFO and Co-CEO

Yes. And based on current expectations from the fact that we will not be using excessive airfreight as we have outlined for Q3 with those CHF 5 million to CHF 6 million additional spending for Cloudrunner and Cloudmonster.

Operator, Operator

The last question comes from the line of Abbie Zvejnieks from Piper Sandler.

Abigail Zvejnieks, Analyst

Do you have an update on your market share in specialty run? And then how does this differ in North America versus Europe? And then secondly, I guess who is the new consumer that you think you're reaching with products like Cloudmonster? And can you comment on which brands or maybe which styles do you think On is gaining share from in that specialty run channel?

Caspar Coppetti, Executive Co-Chairman, Co-Founder

Thanks, Abbie. So with the Cloudmonster and Cloudrunner we're really reaching maybe some people that didn't previously consider themselves runners because the shoes were too light or didn't have enough cushion. With these 2 models, we're able to provide underfoot protection and unparalleled comfort to very, very average runners that maybe wouldn't consider themselves as runners but they run for fitness or to stay in shape. Maybe they're a little bit older – I tell myself in that same target group – where you go past 40, running becomes harder. Now we're seeing with this success of these 2 models that we've almost left out this market segment. And part of the U.S. success is also explained by that there's just a lot of these kinds of runners in North America, and we're now able to offer them a product as well. Over to Marc on the market share.

Marc Maurer, Co-CEO

So when we're looking at market share, I think we are in most of our own specialty doors in the key markets such as Germany or elsewhere amongst the top 3 brands. We're seeing in many doors, for example, in the U.S., still a growth rate of above 50%. This is all growth that comes from same-store because run specialty is definitely the area where we already have the highest distribution and highest density. So we continue to gain share. We continue to grow much stronger than the channel is growing and also looking at the order book and looking at some of the product innovations that Caspar already spoke to, we are very positive that consumers will continue to benefit from that.

Operator, Operator

Ladies and gentlemen, this concludes the Q&A session. The conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.