Earnings Call Transcript - ONON Q2 2024

Operator, Operator

Thank you for standing by. My name is Krista and I will be your conference operator today. I would like to welcome everyone to the On Holding AG Second Quarter 2024 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I will now turn the conference over to Jerrit, who is Head of Investor Relations. Jerrit, you may begin.

Jerrit Peter, Head of Investor Relations

Good afternoon. Good morning to our Investor Community. Thank you for joining On’s 2024 Second Quarter Earnings Conference Call and Webcast. With me today on the call are On’s Executive Co-Chairman and Co-Founder; David Allemann; CFO and Co-CEO, Martin Hoffmann, and Co-CEO, Marc Maurer. Before we begin, I will briefly remind everyone that 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 20-F, filed with the SEC on March 12th 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 reconciliation to the most comparable IFRS measures. We will begin with David, followed by Martin, leading through today's prepared remarks, after which we look forward to opening the call for a Q&A session. With that, I'm very happy to turn over the call to David. A warm welcome to our second quarter 2024 results call. Martin, Marc and I are coming to you from our improvised studio in the Swiss Alps and hope you had a restful and good summer. Wow, what an exciting summer and quarter it has indeed been for all.

David Allemann, Executive Co-Chairman and Co-Founder

Zendaya joined our team as a partner and already played an air tennis tournament against Roger Federer in front of On Labs. Our groundbreaking innovation LightSpray has been equally discussed in 325 media articles around the world over the past weeks. And more importantly, this new technology has already been validated by the amazing performance of all athletes in their competitions. On the financial scoreboard, the second quarter saw our reported net sales grow by 28%, resulting in net sales of CHF567.7 million. These very strong results keep us well on track to reach our goals set out for the year. Importantly, we continue to operate and take decisions for the long-term success and health of On. With that, I would like to point out that we have once again increased our profitability levels both from a gross profit and an adjusted EBITDA margin perspective. Over the last weekend in Paris, it struck me that the Olympics do not measure the performance of athletes in a yearly cycle as other tournaments do, or even over quarterly cycles. The Greeks knew 2,800 years ago that big dreams require a longer period to train, evaluate, and prepare. This is why I want to speak to you today about how On's unique ambition to dream big over long cycles leads to extraordinary achievements, breakthrough innovations, and ultimately durable growth. As a founder-led company, our mantra, Dream On, is a rallying cry to pursue the most daring dreams with long-term determination and a diverse, incredible group of people who dream together. We dream together to win. The Games ended just two days ago, yet the extraordinary achievements of all athletes will fuel our passion and inspiration for a long time going forward. It was a true privilege to see the determination, passion and energy across the competition firsthand, to be reminded of the four years of preparation that many athletes go through for that one big moment. And of course, the Olympics stand for more than simply the competition for medals. The games' three values, excellence, respect, and friendship, express the unique ability the event has to bring people together in a way that only sport and movement can. These Olympic values inspired us to create a standout campaign with our new partner Zendaya, as you may have seen together with millions of people across social media or through the streets of Paris. Zendaya reminds us that winning is never the work of just one individual, but a highly capable team with a long-term commitment to put the work in and see it come to fruition over time. Winning together continues to scale with our powerful team and brand. We are so fortunate to have the opportunity to dream on with our incredible team of athletes. 66 on athletes from 25 different countries made their way to Paris to take part in one of the biggest moments of their careers. We could not be more proud of each and every one of their achievements. On Saturday, Dominic Lobalu, whose quest and dream to run in Paris came true, offered us all a memorable moment and came incredibly close to the podium, finishing fourth in the thrilling men's 5,000 meters. And on Sunday, Hellen Obiri raced her way to a bronze medal at one of the final competitions in Paris, the women's marathon. Iga Swiatek made history by securing the first-ever tennis medal for an unsupported athlete, earning a bronze that also marked the first-ever tennis medal for Poland. Our triathlete, Lisa Tertsch also made her way into the history books in the Mixed Relay, being the first unsupported athlete to ever win gold in the Olympic Games. And who could ever forget Yared Nuguse's final sprint? His incredible performance earned him a bronze just hundredths of a second behind getting silver. So truly historical moments that we'll never forget. In fact, 20 athletes from 12 different countries competed in the Games from our very own On Athletics Club alone. The On Athletics Club follows a unique model that highlights how sports unite rather than divide us. This team of talented and committed individuals trained together year round to prepare for competitions around the world. It is a model where teamwork and the will to win coexist and thrive. So even an individual sport like running benefits from athletes, motivating, supporting, and inspiring each other to perform at the very highest level. Our commitment to our athlete team extends beyond traditional elements such as supporting them in their physical and mental preparation. Overseen by former professional athletes, our program offers assistance in health and recovery, financial planning, personal branding and media, as well as career development beyond their athletic years. Former triathlon world champion Nicola Spirig, who won the first Olympic medal for On in Rio in 2016, has now joined On as a team member. She supports the unique model of our athletic club, which is already becoming generational. Performance is at the core of On. At On, big dreams lead to breakthrough innovation. Dream On, the spirit that drives our athletes is the same mantra that fuels our team's bold, innovative vision and mindset. Our new LightSpray technology is proof of that. It came to life after one of our team members saw the potential to use a hot glue gun to spray a shoe like Spiderman would do with web fluid. 40 years ago, we backed this crazy dream as one of our innovation moonshots with resources at On Labs. From there on, our team came together to test, challenge, and build on every setback to reach new ideas for what would eventually result in the new Cloudboom Strike LightSpray. It features an ultralight upper that is sprayed, not built, in a one-step process automated by a robotic arm in just three minutes. We'll admit when marathon star Hellen Obiri saw it for the first time, she was fairly skeptical. It truly doesn't look like a performance running shoe you have ever seen before, but after putting them to the test in her training session, she decided they were too good to leave behind for competition. She then stunned us all by winning the marathon in Boston earlier this year wearing this groundbreaking shoe. Looking forward. This is just the start of a dream that we believe will challenge the norms of outstanding performance, manufacturing efficiency, sustainability, and potentially near-shoring all at once. In fact, this marks a turning point in manufacturing with the potential to be brought to many more On products in the future. A few lucky folks might have caught a firsthand glimpse of the innovation live at our On Labs pop-up in Paris over the past few weeks. I believe it is safe to say that our guests' reactions to the LightSpray robots were incredibly positive. It left a clear message that On will always be there to take bold bets on our mission towards achieving long-term innovation-led success. In essence, innovation and new technology enable us to create the best sports gear available. This allows us to broaden our product offering and reach an even larger community. Or in other words, through our mission to ignite the human spirit through movement, we inspire others to Dream On. While LightSpray is a look into the future, our innovation pipeline continues to deliver new and exciting products in the short-term. An example is the Cloudboom Strike, our latest high-performance product for race day. Available in a limited first colorway since early July, it will be more broadly launched in early September. The shoe revolutionizes the fast running experience with an innovative, ultra-responsive drop-in midsole construction tailored to marathon racing. For the everyday runner, the newly launched Cloudsurfer Next offers a dynamic running sensation with our patented CloudTec Phase technology and an aesthetic inspired by the Cloudboom Echo series. We dream on with global talents. As I mentioned earlier, success is a team sport. Through authentic connections, we build long-lasting relationships with athletes in the On Athletics Club, as well as partners like Zendaya, FKA Twigs, Iga Swiatek, and Roger Federer. These partnerships allow us to create incredible momentum for the brand, as seen most recently in Paris where our presence was felt. From our pop-up On Labs located in the heart of the French capital to our newest and largest flagship store on the legendary Champs-Elysees, Paris has given us the opportunity to leave a mark on the world's largest sports stage. Sport remains one of the last and ultimate life moments to build cultural relevance for brands in performance and lifestyle. In the last weeks, On Storytelling reached a global community of millions, and together with our global talents, we are just getting started. If you remember three things from my introduction, I want you to remember this. First, On is dreaming and building for the long term with an outstanding team of athletes, talents, and global brand partners. We dream and win together as performance is at the core of On. Second, the risk-taking approach of a founder-led company leads to radical innovation that will fuel On's product ramp and durable growth for years to come. And third, our bold long-term dreams are creating enduring brand and business value. The 2024 Games have ended, and On left its mark. The road towards 2028 in LA starts for us at On today. It's my great pleasure to hand over to Martin for a more detailed review of the quarter. Martin, please.

Martin Hoffmann, CFO and Co-CEO

Thank you, David, and bonjour from my side as well. Please first allow me to begin with how a revolutionary technology like LightSpray links to our most important asset, our culture. The level of dedication and energy that our team put into this project became visible to the world over these past weeks. Witnessing the team presenting their innovation to global media, star athletes, and leaders in business and politics from around the world was a big highlight for us. Their pride and passion nearly matched what we saw from athletes winning medals, and we are thrilled and proud to work with such an exceptional team. Not too long ago, we talked about our big dreams for the summer. Looking back at the past weeks, it is clear that we have laid the groundwork for what we believe will shape On for many years to come. Zendaya, LightSpray, our athletes, our largest flagship store to date, leading community events like On Track Nights. These big moments were not created to boost short-term sales, but to build the foundation for the long-term, durable, and profitable growth that we outlined at our Investor Day one year ago. To elevate our brand awareness with a wider fan base and to push our credibility as an innovation-led global premium performance sportswear brand. While huge moments in themselves, we further boosted them with significant marketing investments across all our channels, and it is clearly working. The brand is maintaining its incredible momentum based on direct customer feedback, continued sell-through strength, our brand awareness tracker, a strong increase in Google searches, and millions of media impressions. Our multi-channel strategy allows us to capture the brand momentum globally and to convert it into continued strong sales growth across all channels. As a result, we’re very pleased to have reached net sales of CHF567.7 million in Q2, up by 27.8% year-over-year on a reported basis and 29.4% on a constant currency basis. With that, we’ve for the first time surpassed CHF1 billion in net sales in a six-month period and CHF2 billion when looking at the last 12 months period, both marking incredible milestones and achievements that we are extremely proud of. As mentioned, the strong brand momentum converts into strong demand for On across all our channels and partners. The ability to convert this momentum to sales, especially in the Americas region, would have been even higher, but the ongoing transition of our Atlanta warehouse led to some product availability constraints, including key franchises like the Cloud and delayed or missing deliveries towards our D2C and wholesale customers. As anticipated, we saw a strong growth reacceleration in our wholesale channel in Q2 in comparison to the last two quarters. Wholesale net sales grew by 27.6% in the quarter on a reported basis and 28.8% on a constant currency basis, reaching CHF358.2 million. We continue to execute on the communicated strategy to focus on our existing distribution partners, driving our ongoing growth paths with deeper penetration at strategic accounts, same-store growth, and ongoing market share gains. At the same time, we’re adding a lower number of incremental wholesale doors than we have over the past years. We’re pleased to see that the growing brand awareness drives strong full-price demand to our existing wholesale partners across key accounts and specialty retailers, both in their physical as well as digital channels. Our D2C channel continued to outperform wholesale and reached CHF209.4 million in Q2, growing by 28.1% year-over-year on a reported basis and 30.4% on a constant currency basis. As a result, the Q2 D2C share increased versus the prior year period reaching 36.9%. In our e-com business, we had seen some softer demand in the first days of the quarter, followed by a reacceleration of growth in the second half paired with record high traffic on our website. This includes a very strong start for some of our recent digital channel expansion. The global launch of our first commercial app is now complete with both downloads and transactions well ahead of our expectations. In addition, we are encouraged to see a very high apparel share on the app comparable to what is reached in our retail environment. The increasing brand awareness is also visible in a wave of new visitors to the expanding network of retail stores, in our new Paris location and beyond. Our New York City Lafayette store remains a vibrant hotspot, attracting some of the highest traffic levels among all our retail locations this quarter. We are excited to open our second store in Manhattan in a few months, where visitors will have even more space to immerse themselves in the full On experience. Just a couple of weeks ago, we also opened our first-ever store in Hong Kong, which we celebrated with some of our closest partners and tastemakers in the region. Despite the early days, the store has clearly exceeded our internal expectations, effectively doubling the initial projections and showcasing the remarkable brand feat that's noticeable in the region. At our Investor Day last October, we outlined our focus on owned retail as a key pillar for global growth. During the last year, we expanded our network to 12 stores outside of China and 25 stores in China, and we gained a lot of additional confidence in the power of the channel to drive growth, high engagement levels with new and existing customers increasing and strong apparel shares, and very importantly additional profitability. Now let me switch to the regional performance. EMEA reached net sales of CHF138.4 million in the quarter, growing by 21.8% year-over-year or 22.2% on a constant currency basis. We are very happy with the performance in the region both from an absolute net sales achievement as well as a product composition perspective. We continue to see exceptional momentum in the United Kingdom across all channels. But from a smaller base, sales in France, the Netherlands, and Belgium clearly accelerated. But most important is the acceleration in the increased share of sales from our performance running range within some of our legacy markets in Central Europe, which we see as a result of our strategic prioritization over the past months. Moving on to the Americas. The region contributed CHF370 million in Q2, by far our largest quarter in terms of absolute net sales and representing a reported growth rate of 24.8% or 25.8% on a constant currency basis. We already mentioned the impact of the ongoing transition of our Atlanta warehouse, which was even more visible in our D2C than in our wholesale channel. While we are fully focused on improving the situation, we expect a continued impact in the second half of the year. But this transition is essential to scale our distribution capabilities in the US in the long term and ultimately fulfill the incredible brand momentum and demand that we continue to expect in the region. In the APEC region, we continue to win market share faster and across more countries than expected. The region grew by an incredible 73.7% in Q2 to reach CHF59.2 million. On a constant currency basis, the growth was even higher at 84.7%. From the continued strong momentum in China, daily queues in front of our store in Japan, record sales in very nascent markets such as Indonesia or the Philippines, and of course, the already mentioned success of our new store in Hong Kong. Current demand is clearly exceeding supply. Turning to the performance by product. Shoes grew by 26.7% year-on-year, reaching CHF542.5 million in Q2. Demand for our products remains strong across all product verticals. In line with our strategic priorities, performance running continues to drive a significant part of growth. We maintained strong growth across all our running franchises, including the Cloudmonster, Cloudsurfer, and Cloudrunner, and we keep fueling this growth with new products and innovation. The newly released Cloudrunner 2 has been a great success and elevates this important franchise and is a staple for the everyday runner. The Cloudsurfer Next, which we just launched in early August, extends our successful Cloudsurfer line towards a lower but still premium price point and significantly expands the reach and addressable market. In our Performance All Day vertical, the Cloudtilt continues to fly off the shelf. The Lyst Index just called the Cloudtilt 2.0 of our Loewe collaboration, the quarter's hottest product. From a smaller base but growing at a rapid speed is our Performance Tennis category. We are excited to be well-positioned to drive and capture the increasing cultural relevance of the sport. The Roger is amongst our fastest-growing franchises. Tennis inspires fans to own not only On footwear but also apparel pieces. The highly successful launch of our tennis apparel collection earlier this year clearly exemplifies this and was further fueled by the excitement surrounding the air tennis match between Zendaya and Roger. As previewed in our previous public updates, the initiatives we have been taking on the apparel side are beginning to show in the numbers too. Net sales in apparel grew by an outstanding 63% in Q2 to reach CHF21.9 million. Based on the momentum, we are seeing in wholesale and even more in our own channels, we’re confident in the ability to drive significant growth and to increase our apparel share consistently over the coming quarters. New products, but also exciting collaborations like the one with Loewe or South Korean Post-Archive Faction drove significant awareness for the category and also allow us to reach a higher level of engagement from our fans. For example, we provided members with early access to the Post Archive Faction collection, and the launch was a huge success. In China, the number of new members on launch day equaled what we typically acquire over a period of two weeks. Last but not least, we are very proud of our newest accessories offering, our first bag collection. It is another testament to the power of our team to innovate and redefine products. Innovations like the Swiss-style crab handles or our proprietary Fitlock design buckles meet a unique premium design centered around functionality for people on the move. I had the privilege to use the bags for my travels over the past year already and keep on receiving positive reactions at almost every security check. Moving down the P&L, gross profit reached CHF340.2 million in the quarter, representing a strong and premium gross profit margin of 59.9%. Compared to the prior year period, we benefited from lower freight rates in Q2 this year, slightly offset by the higher freight share versus historically low levels last year. SG&A expenses, excluding share-based compensation, were CHF275.8 million in Q2 equivalent to 48.6% of net sales, flat versus the same period last year. As planned, we increased marketing expenses to support our big brand building initiatives this summer. At the same time, distribution expenses as a percent of sales were lower compared to Q2 2023, as a result of lower warehousing costs, as well as operational efficiency gains. The resulting adjusted EBITDA margin for Q2 is 16%, notably up from 14.1% in Q2 2023. The more stable US dollar Swiss franc FX rate during the quarter supported a less volatile foreign exchange result than what we have seen in recent quarters. As a result, the strong bottom line for the quarter truly reflects our operational success and profitability. Net income reached CHF30.8 million, up from CHF3.3 million in Q2 '23. Moving to our balance sheet. Capital expenditures were CHF16.9 million in Q2, equivalent to 3% of net sales, up slightly from 2.5% last year. While achieving significantly more net sales, net working capital at the end of Q2 was at CHF567.1 million, almost flat compared to the CHF560.2 million at the end of March and even lower than the CHF598.6 million a year ago. Our inventory position stands at CHF401.3 million, a slight increase versus the CHF365.3 million at the end of Q1 but significantly lower than at the end of Q2 last year. While we remain laser-focused on actively managing our inventory at efficient levels, we are willing to lean-in on certain key styles in order to capture the high demand we are observing around the world. As a result of our strong operating cash flow of CHF102.4 million in the quarter, we have improved our cash position from CHF584.6 million at the end of Q1 '24 up to CHF652.4 million at the end of Q2. Over the past 12 months, we achieved an operating cash flow of CHF412.2 million and have improved our cash position by CHF315.3 million. With that, I’d like to move on to our outlook for the full year 2024. I am sure you can see it from our remarks today, and hopefully also from what you have been seeing and hearing about On over recent weeks and months. We continue to experience an incredible amount of momentum around the On brand, from amazing product launches to groundbreaking innovations, from athlete stories and successes to authentic brand partnerships. The summer has definitely lived up to our expectation, and we couldn't be happier with how all of our initiatives came to life. Seeing all the positive feedback and coverage gives our team so much energy and inspiration to continue on our journey of relentless innovation, challenging the status quo to deliver the best products and experiences to our fans around the globe. And we are thrilled to see that all the attention we are generating is leading to increased brand awareness and converting into online and offline traffic. This provides us with a lot of confidence for the continued high demand for the On brand and our products, even above our expectations. At the same time, we acknowledge some of the ongoing distribution challenges to ensure we have the right product at the right place at the right time to fulfill the specific and full demand that is out there. While we build our brand by relying on a certain level of scarcity, we are not fully and consistently delivering to our own high expectations from an operational perspective. That being said, the strong consumer demand, as well as actions taken on our aim to mitigate impacts from the warehouse transition give us a lot of confidence to reiterate our 2024 constant-currency net sales growth rate expectation of at least 30%. On a reported basis at current spot rates and reflecting the most recent strength of the Swiss franc compared to our most meaningful currencies including the US dollar, this implies CHF2.26 billion in net sales. We are further maintaining our gross profit margin guidance for the full year at around 60%, and continue to expect an adjusted EBITDA margin for the full year in the range of 16% to 16.5%. An incredible summer is slowly coming to an end. So many highlights in Paris and across the world give us even more energy and motivation to pursue our dreams and plans in the second half and beyond. As David mentioned, we have and always will be committed to building for long-term success. A huge thank you and congratulations to our team for all the amazing moments, as we continue to Dream On. With that, David, Marc, and I would like to open up your questions.

Operator, Operator

Thank you. We will now start the question-and-answer session. Your first question comes from Jonathan Komp with Baird. Please go ahead.

Jonathan Komp, Analyst

Yeah, hi good afternoon. Thank you. I want to follow-up and just ask a little bit more about some of the constraints in North America. Could you maybe discuss how you are choosing to prioritize some of the new launches and products across channels, given the constraints? And then how are you thinking about the steps that are needed or the timeframe that you are looking for to get things fully operational to the standards that you expect them to be? Thank you.

Marc Maurer, Co-CEO

Hi Jon, this is Marc. Welcome from my side as well. To put this in perspective, we are currently building a fully automated warehouse in our Atlanta facility. As a result, we are temporarily operating in a space that isn’t fully optimized, leading to capacity constraints in that warehouse. This causes unreliable late deliveries and inventory shortages. We can shift some capacity to our well-performing West Coast warehouse, but only if we have inventory there. The impact on our business affects both D2C and wholesale channels. It’s somewhat difficult to quantify, but we believe that without these impacts, we could have achieved global sales growth exceeding our full-year guidance and a stronger D2C share, as we missed opportunities in the D2C channel. In wholesale, there’s some buffer with in-channel inventory, and we observed that the wholesale channel managed to capture traffic that would have come to our website due to our constraints. We have already implemented many measures, and we noticed the strongest impact on D2C in the first half of Q2. Since then, we’ve seen a clear reacceleration in D2C growth, which has continued into the early weeks of the new quarter. We are optimistic about lowering the impact, but we still expect some challenges. For us, it’s more about not meeting our operational expectations than losing a few percentage points in sales. We will prioritize our key franchises and important retail partners, as well as our D2C channel, but we face limitations due to inventory not always being in the right place at the right time. It’s important to note that we are on track to have our automated warehouse operational in the first half of next year, laying the foundation for future success.

Jonathan Komp, Analyst

Great. That's very helpful. Thank you.

Jim Duffy, Analyst

Thank you. I wanted to talk about marketing. Q2 and Q3 have been big brand building moments. Are there any metrics you can share about consumer engagement specifically? I'm curious whether Zendaya led to any shift in demographics, and if there are any trends you can share around engagement following the Olympics? Thank you.

David Allemann, Executive Co-Chairman and Co-Founder

Hi, Jim, this is David. Welcome. So you mentioned it, On had an incredible quarter with the visibility of the brand very, very high around Zendaya but also around LightSpray, the innovation launching present in Paris. And of course, also strong presence of our On athletes. To just kind of share one step, is that Zendaya's air tennis match with Federer was viewed over 15 million times on Instagram and 7 million times on TikTok. And of course, you also saw that on our brand trackers and then also on the website visits to our site. So, On has clearly been in the conversation of a global audience of millions in the last three months, always with performance innovation at the core and at the same time reaching popular culture. And Jim let me probably just say this in a space where established brands historically had a monopoly almost on the headlines of innovation, athlete stories, and sporting emotion, we firmly placed ourselves, we believe, not just as a contender but a leading sportswear brand with a strong point of view. So really dreaming together represented a strong point of view that captured the community spirit of the games. So this is something that is building for the long-term. So we are not just looking, so we feel it's a little bit too early to look back, but we really look forward to how this will unfold in the momentum of product sales.

Jim Duffy, Analyst

Thank you, David.

John Kernan, Analyst

Thanks for taking my question and congrats on all the success and innovation. Martin, can you talk to the second half adjusted EBITDA margin guidance? It looks like incremental EBITDA dollars are going to start to accelerate on a year-over-year basis in the back half. What gives you that confidence? And obviously, gross margin you've given us a pretty good picture of gross margin and SG&A, but just curious if there's any dynamics between Q3 and Q4 that we should be aware of.

Martin Hoffmann, CFO and Co-CEO

Our implied guidance for the full year suggests a slight reacceleration in the second half. Generally, the second half will see higher volume, which means that our cost base will be offset by increased sales. We maintain our gross profit margin at a strong 60% for the full year, with a slightly higher gross profit margin expected in the second half compared to the first half, largely due to the holiday season, which is anticipated to be heavily focused on direct-to-consumer sales in the fourth quarter. Additionally, we made significant marketing investments in the second quarter in preparation for upcoming events. As a result, we expect a slightly lower percentage of net sales to be used for marketing in the second half, which leads us to feel confident about operating within the range of 16% to 16.5%. It is crucial for us to continue investing in the long-term growth of the company despite the temporary warehouse disruptions. We prioritize staying within that 16% to 16.5% range and believe we can effectively manage the business in the second half.

John Kernan, Analyst

That's helpful. One follow up is just on EMEA, and some of the channel dynamics there. I know Q1, there were some wholesale door closures. EMEA revenues did accelerate on a slightly easier compare in Q2. How should we think about the door closures in EMEA and wholesale into the back half of the year? And does that affect any quarter greater than the other?

Marc Maurer, Co-CEO

Yes, this is Marc speaking. Hello, everyone. I am very pleased with the strong return to much stronger growth in EMEA, with a 22.2% increase in constant currency. Key markets like Germany and Austria contributed to this positive growth. We are seeing acceleration in the UK and France is benefiting significantly from the Olympics as well as from our store openings and brand-building efforts. Regarding the closures, their impact is largely behind us now, so we have a much more stabilized outlook for EMEA in Q3 and Q4, which is reflected in our guidance. Historically, we have grown our store base by about 10% year-over-year, but we are currently anticipating a 5% growth. This adjustment stems from our confidence in both existing and new store growth across all key markets, and we are very satisfied with our partnerships and our ability to execute on the guidance we provided.

John Kernan, Analyst

Excellent. Thank you.

Jay Sole, Analyst

Great. Thank you so much. The two-part question. First you talked a lot about the LightSpray. Can you give us an idea of what's the plan for that product? I mean is it going to be just something for elite athletes? Or is that something that the mass-market will have an opportunity to buy? And then secondly, it sounded like the apparel initiatives around sizing and some of the things you've been working on over the last couple of quarters and years have been, have done well and you are seeing some positive signs there. Can you just talk about big-picture how you're feeling about apparel today versus 90 days ago? Do you see it on track to becoming a higher percentage of total sales, and if you can give us an idea about that, that would be helpful. Thank you.

Martin Hoffmann, CFO and Co-CEO

Let me take the LightSpray question then hand over to David, who will take the apparel question, by the way which we also see reflected in the pre-order growth. So a lot of positive signs, really, for the second half year, but also for '25 on the apparel side. So I think please think of LightSpray in three dimensions. I think first, it is really a manufacturing revolution. So we are very much moving from an OpEx led production model to more of a CapEx model. And this allows us to basically manufacture shoes way closer to the consumer. So think about near-shoring and with way less parts. So this is a first step. So we have our first station right now, and the goal is very clear that we can expand that significantly. Then, secondly, it is very much an upward technology that we were able to launch on the peak performance side. We were able to create a new look that has triggered lots of interest beyond our athletes. And it is very clearly our goal that we are able to bring this look, design, and feel to the mass market and not be limited just to the top athletes. And then thirdly, and we are very proud that it allows us to take huge steps in sustainability. So the upper has 75% less CO2 emissions than a traditional upper. And obviously, being able to manufacture closer to the consumer with fewer pieces allows us to be much, much closer to where the demand is, so also optimized from a supply versus demand perspective. And we feel these things taken together give us a lot of hope that LightSpray will allow us to really change some of the things that we're doing, but we are at the very, very beginning of the process. So please don't think in like a six-month perspective here, and think about this in a very much long-term perspective. And we are looking forward to bringing the product to more consumers in Q4. So we have a very clear plan, but sometimes it is nice to keep some surprises for our fans and we would love to keep this surprise, and you'll see it when the robot will be basically placed somewhere else across the globe and when our fans will be able to have access to the product.

David Allemann, Executive Co-Chairman and Co-Founder

Yeah. So Jay, this is David. Regarding apparel, we've observed a remarkable 63% growth in Q2, which is impressive. This growth stems from the strong brand presence we've previously discussed. People are increasingly interested in fully embracing the On brand, which is driving even greater momentum. Marc mentioned that pre-orders for fall winter 2024 are doubling, indicating this trend will continue. We believe this growth is not only due to brand popularity but also because we've learned how to effectively merchandise apparel through our own channels, such as retail and digital. For instance, in our new Paris store, one out of every four items sold is an apparel piece. This also boosts the confidence of our wholesale partners. As we expand our retail presence, this trend will likely grow. Moreover, we are not just addressing immediate needs; we are also enhancing our verticals. For example, training is becoming an apparel-first focus, allowing us to reach more communities. The same applies to tennis, where we've experienced significant success with tennis gear. Expect many product launches in Q3, including exciting innovations. For instance, we introduced new training gear designed for high-intensity workouts targeted at the gym, featuring a dry tech fabric that provides a cotton-like feel while maintaining the performance of high-quality materials. We are advancing fabric innovation in apparel as well. All of this is contributing to our growth, but importantly, apparel also represents a tremendous opportunity for the brand as we aim to offer complete head-to-toe options.

Cristina Fernandez, Analyst

Hi, good morning and congratulations on the strong demand. I wanted to follow up on the constraints you're seeing on the supply chain. As you look at the second half, I know early in the year, you had talked about very much stronger DTC growth than wholesale. Should we expect wholesale to be stronger than expected and DTC perhaps not as strong? And then can you talk about the impact it is having on the gross margin?

David Allemann, Executive Co-Chairman and Co-Founder

Thank you, Cristina. We still anticipate that D2C will grow significantly faster than our wholesale channel, despite the challenges we've planned for. Consequently, I previously mentioned that we expect our D2C gross profit margin to be higher in the second half of the year compared to the first half. We are not currently operating at the optimal level for our D2C business, and there is more demand we could capture. Nevertheless, even with the current challenges, we are confident that our D2C channel will continue to outpace our wholesale channel.

Aubrey Tianello, Analyst

Hey, thanks for taking the question. I wanted to ask about new products. We have seen a lot of new products launched over the past year. You called out several of them in the prepared remarks like Cloudtilt. I would love to hear which of this year's launches you're most excited about and among the new launches on the footwear side. Could one of these new launches become your eighth franchise that reaches 5% revenue share?

Marc Maurer, Co-CEO

Hi. So I'm going to give you a bit of look into history and David will take you into the future. So I think very excited, definitely about apparel. And so we still feel especially on the apparel side, we were not able to capture all the demand from a product availability perspective. I think that the confidence that we see with retailers also going to the preorders now coming from the products that have already launched is very, very high. So I know we are not talking footwear franchises here, but we just want to reiterate that we are very, very happy with what we're seeing on the apparel side. Then I'm super happy with how the Cloudrunner 2 and with that the overall Cloudrunner franchise has launched. It’s important to us because it really captures that core run consumer. So for example, it already takes or in June it took 25% of our sales at Fleet Feet, which is very, very strong. We are also seeing the Cloudmonster franchise growing almost at a triple-digit rate. And then also the Cloudsurfer, with the launch of the Cloudsurfer Next being able to bring two different price points is working well. So you see those are three franchises that are really in the core running segment which reconfirms the efforts that we are doing with positioning On or continuing to position On as a core performance brand. And then we could have sold way, way, way more Cloudtilt if we had the inventory. So the energy that Zendaya was able to bring to the product is outstanding and we are looking forward to bring more Cloudtilt to the market. You also saw the collaboration we had with Loewe. Martin mentioned it in the prepared remarks. And so we really feel we were able to create a couple of new franchises that are performing well. Well, at the same time for example, the Cloud is still the largest franchise, so we're not forgetting about the things that have been there. And so really see that we're growing in existing products but also growing in new products is very, very important for us. And David will give you an outlook into what's happening in the second half of the year.

David Allemann, Executive Co-Chairman and Co-Founder

Building on what Marc said, I can assure you that the second half of the year will be just as busy as the first. First, in addition to the Cloudsurfer Next that Marc mentioned, we will enhance the Cloudsurfer brand by launching the Cloudsurfer 2, renewing the entire franchise. Additionally, we have introduced the Cloudboom Strike, a performance marathon shoe that takes inspiration from the LightSpray shoe and is quickly gaining popularity. This is expanding the appeal of the already successful LightSpray. We have also launched the Cloudnova tool, and our running sneaker has become a staple. We will follow up with the Cloudnova X in August, which is a crossover model designed for training. Just like how the Nova transitions into running, the Nova X transitions into training, creating a comprehensive franchise that appeals to young consumers seeking versatility for everyday wear and sports. Furthermore, Marc mentioned the Cloud VI, which will be significant when it releases in February next year, as it represents one of our most prominent franchises, entirely refreshed and continuing as a hallmark of innovation and design. I can also share that there will be a special edition Cloudtilt releasing in Q4, created in collaboration with Zendaya, and we are very excited about that.

Michael Binetti, Analyst

Thank you for addressing all the questions. I'd like to focus on a question that may have been asked earlier regarding the previous guidance for the year. You mentioned that direct-to-consumer would gain about 200 basis points in revenue share this year, similar to past trends, which would position direct-to-consumer around 30% with mid-30s growth for the year and possibly high-30s in the second half. Is that still a valid perspective? Additionally, could you provide some insights considering the impact Atlanta will have on direct-to-consumer? How do you foresee the third and fourth quarters as you manage demand, given the improvement in direct-to-consumer in the third quarter, alongside some of the self-help initiatives in Atlanta?

Martin Hoffmann, CFO and Co-CEO

Yeah. Thanks, Michael. So going a bit back to the big picture, our D2C channel is extremely healthy and we see record visits coming to our website. We see that all our key D2C metrics. So from new customers to repeat purchase rates to average item value, all those things are at historical high levels and basically showcase the strength of the channel. And we talked about the app and other new elements that clearly put ourselves in a strong position to capture that customer that is shopping online. At the same time, we are then not able to convert all of them at the moment into the final sales. The expectation that we’ll outgrow our wholesale channels, our D2C channel just confirms it. And if you look back in the past, we were able to win or increase the D2C share by 1.5 to 2 percentage points every year. And we expect that this journey continues. And I also shared that we have seen a reacceleration of our D2C growth basically already in the second half of Q2, but also in the first weeks of Q3. And so that means a growth rate above the 30% that we had for the full quarter. And so I think this provides the confidence that the consumer demand is there and the strength of our D2C channel is there.

David Allemann, Executive Co-Chairman and Co-Founder

We're focusing on building a strong performance brand for the long term. We're emphasizing channels that connect us with younger consumers, and we're not just reengaging our current customer base but also reaching new segments. The retailers we're partnering with now are crucial to this strategy, which is evident in our strong wholesale numbers and sales at retailers like JD and Footlocker. Our sellout rates are significantly exceeding our on-hand inventory levels. This positions us well to attract new consumers, and we anticipate steady growth over time. We've observed pre-orders for spring-summer 2025 and noted which accounts and countries are participating. The positive reception of our market messages reassures us that we made the right decisions, even if it involved some short-term setbacks. We believe this strategy will strengthen us in the long run, and we have no indications that it's unsuccessful.

Alex Straton, Analyst

Great, thanks a lot for fitting me in here. I just wanted to move it big picture here. There has been a lot of fears around a recent potential US consumer stepdown. Can you just share what you've observed on the consumer either in the quarter or quarter-to-date? And if you've noticed any differences in consumer behavior across the regions that you are exposed to, so if there are any differences between the US, Europe, or Asia, that would be super helpful. Thanks a lot.

David Allemann, Executive Co-Chairman and Co-Founder

Thank you, Alex. I believe Marc addressed this regarding the US. We have reaffirmed our strong guidance because we have confidence in the consumer. We've observed very positive trends over the past few weeks. What we're experiencing within our channels and what we're hearing from our partners does not align with some of the market reactions, which reinforces our confidence in the US for the remainder of the year. We see that our branding efforts in Europe, particularly in France and the UK, are effective. We're pleased with our partnership with Zalando and how we're engaging their consumers. As for Asia, Japan is experiencing significant growth, though there is uncertainty concerning currency fluctuations and their impact on tourism. We are seeing a lot of inbound tourism to Japan, contributing to our sales. We are mindful of these factors and are taking them into account. In China, we are successfully meeting the existing demand with the new stores we are opening. Overall, we are feeling optimistic as we head into Q3 and Q4, and based on recent weeks, we have no concerns about the immediate future.

Operator, Operator

And ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.