On Running’s Q2 2022 Holds a Compelling Discussion on Reach and Research

On had a very strong first half of 2022, with second quarter 2022 results again exceeding expectations to surpass CHF 500 million net sales for the half year. Q2 2022 net sales increased by 66.6%, driven by a strong wholesale growth of 70.1% and DTC growth of 60.8%, as well as continued exceptional momentum and demand in On’s North America region, growing at 102.5%. On records Q2 2022 net sales of CHF 291.7 million, net income of CHF 49.1 million and adjusted EBITDA of CHF 31.4 million

Source: On Reports Results for the Second Quarter and Six-Month Period Ended June 30, 2022

Reach and Research are two words that won’t show up in analysts’ reports, or discussions with On Running. That’s because an analysis of On Running requires nuance beyond simply staring at the numbers. Reach for On is a matter of expanded distribution. Research for On consists of a considerable amount of marketing and product development. On has utilized the playbook of bigger brands who have sponsored running clubs and taken feedback from athletes to build smarter, better performance footwear.

On is compelling because there are several important factors that analysts can’t understand because they don’t look at all aspects of how sneaker retail works. When a company goes public, they reach a bigger audience. What does this mean? Let’s break it down into small details:

If we think about On Running’s model prior to IPO, on a big scale (these are made up numbers) On sells 100 sneakers DTC and 50 sneakers via wholesale with running specialty stores. After the IPO they distribute to mainstream retail sneaker stores like Foot Locker, Finish Line and Shoe Palace. This introduces On Running to an entirely new market. This market tends to buy sneaker culture footwear like Yeezy and Jordan Brand. There is a small percentage of the visitors to these mainstream retail stores who might try On because they look comfortable. These consumers may have never heard of the brand, but they like the fit. On adds 5 more sales at this new door. In the grand scheme of things 5 sales doesn’t seem like very much, but On has 150 sales already. Adding 5 more delivers growth of 3.3% which is very good. Now, let’s base this same idea with a more realistic picture. At specialty retail where On has seen its success, they reach about 20 consumers. Through their own doors they sell 15 pair. Now add those 5 pair from mainstream retail and the growth rockets to 14.29%. This is obviously not exact data, but the numbers provide insight into the initial spike for On Running via new accounts. On doesn’t have to be a major player in these new doors to show considerable growth because they’ve never been there before. The initial spike takes three – five years for a company that is already performing well to level off.

On understood their market prior to the IPO and they’ve doubled down on performance while also adding a new demographic. If On doesn’t make any wild acquisitions, or decisions based on the spike, when the growth tapers the company won’t collapse and lose steam, they will simply adjust. Compare this to Allbirds who was not making running shoes and had very limited SKUs, a niche market, and hadn’t turned a profit prior to their IPO and the result is much different. Allbirds didn’t add wholesale, they didn’t have a product that was easily distinguishable, and the outcome has been in direct contrast to On.

There are a number of moments where analyst could have predicted that On would do well. I’m still not big on the expanded distribution, but until retailers like Foot Locker begin to place On in a promotional cycle, which is less likely with Nike decreasing their allotment to Foot Locker, On will have a solid presence at retail. This is the first instance where On’s timing has benefitted them. Nike’s closing of accounts provided wall space and opportunity. This wasn’t the only place where On’s potential was. Below are two posts showing how On was using Research.

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On being profitable before the IPO was critical to the growth they are experiencing, but the introduction to new distribution outlets was almost a guaranteed bump. The issue for On will be when those new outlets place them on promo and RTVs become an issue. Without regional brand doors around those areas where On is being carried in these new retailers, On will incur ridiculous expenses with returns and that’s a ballgame that has to be played in a different way because those red tags and “on sale” promos will shape how specialty running may have to counter the expanded distribution. I can’t write this as if I always knew On would perform well. I’ve written posts explaining that On product was dusty on shelves at JD Sports. I even shared video of sneakerheads on YouTube having no idea of what the brand was. I wrote those posts before Nike announced they would be reducing Foot Locker’s allocation. The ripple effect around Nike’s removal of wholesale accounts has had an unintended consequence. The rise of smaller performance brands. Brooks, Puma, New Balance have all seen considerable growth as Nike’s presence has been reduced at the biggest retailer in the world in Foot Locker. It’s a very compelling topic to consider. Reach and Research are vital, but it definitely helps when the biggest brand in the biz has made it easy for retailers to give shelf space to upstarts.

UPDATE 8-22-2022

In a recent post about On Running I explained why On’s amazing growth and the successful year they’ve had are emblematic of what I call the initial spike post-event. The event can be a variety of things. For a retailer like Hibbett Sports it was the creation of their e-commerce site. When the initial spike momentum begins to slow, the decision making becomes extremely important, or other events shape the brand/company. Hibbett Sports never hit the decline because of Covid and Nike’s elimination of accounts. They got a reset.

On running’s spike was their IPO. I explained that it would take a few years before they would have to adjust and make decisions. I also stated their decline would be shaped by the expanded distribution into doors where they shouldn’t be. I thought On would be safe for at least three years. Yesterday in a mall I did an unofficial retail dive and found this table. On had a display table in the middle of the store. The visual merchandising was poor, but standard for this type of retailer. On had wall space between Nike and adi and I noticed the white sticker. When I continued walking through the store that’s when I saw the footwear stacked on tables in the back of the store.

In my post explaining why expanded distribution concerned me and that On’s growth was due to more availability in non-traditional stores than the specialty running stores that made On profitable, my concern was always the bloody wall. It’s only 20% here, but when there are three locations for products in a store, including a warehouse styled stack of shoes it’s extremely problematic. On will be at the one-year mark post IPO and the post spike decline is starting. The 3-5 year bump has been accelerated. On will have to adjust much sooner than I thought.