Energy in the room. Get us to do it.
We put so much effort in this video, and there's so much energy, and there's just silence.
All right, well, we'll bring the energy up here for you guys, keep you awake. I'm Alex Straton, Morgan Stanley's softlines, retail, and brands analyst. Super pleased to be here today with On, which is about a $15 billion market cap lifestyle and running footwear business, very distinctive silhouette. I'm sure many of you have seen them being walked around in at this conference here. Up on the stage, you see them everywhere these days. I'm joined by Marc Maurer and also Martin Hoffmann, co-CEOs of the business. Thanks so much for being here with us today.
Thank you for joining the stage with us.
Yeah, so maybe let's start with some big picture questions. I think this marks your 15th year as a business. Talk to me about how you've been able to generate such tremendous growth, sort of the big milestones as you see them.
Yeah, obviously very happy to have reached the 15th anniversary. I wrote a little love letter to the brand, if you want to check my LinkedIn profile, and you get some of the milestones that we had. Obviously, it's a big moment for the team, like 3,500 people, and so we will find a moment to celebrate this. We wanted to take the whole team to Sardinia for the 10th anniversary, but then COVID hit, so there's some catch-up to be done here. But I think important is that basically who we are today is who we always wanted to be. So we started On as a performance brand rooted in running, and we always knew coming out of Switzerland, we want to build a premium brand. And that lives really at that intersection of performance and design and sustainability.
Staying true to that core mission that we have, I think, gives us a lot of power because there are not a lot of questions on where do we want to go. This has basically been clear from day one, and we've been executing on that. I think, yeah, wouldn't have dreamed where we are now, but I think we have the same big dreams going forward.
Now maybe if we zoom in on 2024, specifically another great year of growth, margin expansion for you, what kind of did you accomplish so far in 2024, and how does that fit into your longer-term vision for the brand?
Yeah, 2024 for us was, I think, an even more defining year than just looking at the numbers and the growth of the numbers because of a couple of reasons. I think first we took brand awareness to a very, very different level. So in the U.S., we doubled brand awareness in 2024. So way more people know about On, which is great, and which is a new baseline that we can now use for 2025. Then I think we've brought innovation to the market that no one expected and that the industry hasn't seen before. So with the LightSpray product, we're not only bringing more sustainability, but we're also bringing a manufacturing technology, and we're bringing more performance. So I think it's really helped to position us as a run and a performance brand.
Then certainly, I think we were able to tap into new communities at scale with a partnership like with Zendaya. So we were able to tap into younger consumer segments. We were able to make inroads on the streetwear and performance all day side and on the training side. So a very, very defining year for us, and super happy that we can now build 2025 on this new baseline that we created in 2024.
Now, so we are sitting here in January. We've had a lot of companies come out with holiday updates this morning or at some point today, understanding that you all don't provide a holiday update. What can you tell us on the quarter so far or how holiday performed relative to your expectations? I'm not pressing you, whatever you can say.
Yeah, based on what Marc just said, we have done a lot of right and great things in the course of 2024. We really elevated brand awareness. We have launched a couple of really great, super successful products like the Cloudmonster 2. We have really elevated our ability to deliver the products to the customers. This has already been reflected in a very strong Q3. We were talking about this. We had seen more than 50% D2C growth in Q3. We really ended the holiday season with a lot of demand for the brand, but also our ability to fulfill this. This gave us a lot of confidence to also basically stay on our strategy, to push full price sales, and to not engage in the craziness of the holiday season. We are extremely happy with how the holiday season worked out.
Basically what we have already seen in Q3 continued in Q4. We worked a lot with our different partners in wholesale and retail to also make sure that everyone has the right assortment and is set up for the holiday season. Also, something that worked out very well, and so I think we go into 2025 with a lot of tailwind and a lot of confidence that all the things that we built in 2024 are actually driving a lot of demand into the brand, and we are able to capture that.
You both mentioned 2025 a number of times so far in our conversation. What are your big picture strategic focus areas for 2025 as you think about the year ahead?
Yeah, so I think On's strategy is clear. So we want to be the most premium sportswear brand, very much driven by performance, design, and sustainability. Martin already mentioned it. And I think on that journey, we had very consistent priorities within 2024, and they also go into 2025. And they're also consistent with what we communicated when it comes to our midterm to long-term targets on the journey to 2026, 2027. And so I think the first part is really building and continuing to build run culture. On is a performance run brand at heart. That's our core. That's our authenticity. And I think we're going to continue to put a lot of emphasis and focus on this. We are currently the number three brand in the U.S. in the run specialty field. And we're not going to stop before we're the number one brand.
We're going to put a lot of effort in that. The second thing is we feel the way we want to gain the consumer is through bringing more innovation to the market faster. We're not about bringing old things back, but about creating new things that the world hasn't seen. We refer to LightSpray, and we're very much looking forward to the product launches we have next spring, next fall. Looking at the Cloudsurfer 2, which is a very important franchise for us that's going to renew. We're going to bring the Cloud 6. We're going to bring the Cloudboom Next, which is the first performance or kind of carbon plate shoe for a little bit the slower marathon runner. We're going to bring a lot of newness in the apparel space as well.
Continuing to push innovation is going to be a big, big topic. Then we'll very much continue to focus on building training, tennis, but also tapping more and more into the outdoors with trail running. That's a big topic. Continuing to build On as a sportswear brand head to toe. We're very proud that we can not only sit here in footwear also, but also showcase our apparel pieces, and our own retail stores will help to bring apparel to life in an even better way. A very big piece of work that the world probably doesn't see so prominently is what's happening in the background of the company. For us, really elevating our operational capabilities is super, super important.
You saw part of the result of that already in Q3 and Q4, but that's going to be a big, big focus into 2025 and 2026 as well, so that we're really building the backbone for a company that can be much, much bigger than what it is today.
So I think that's a great kind of high-level overview of what you guys are focused on. Maybe for Martin, just thinking about this in the context of your targets that you've put out there, 26% CAGR at the last investor day as it relates to revenue. Everyone's gnashing their teeth. What are the key puts and takes into 2025 as we think about top-line growth? I know sitting in my seat, it feels like there's a lot of things that might be helpful to you, whether it's your wholesale being reworked, whether it's some of these supply chain challenges changing. Just walk me through maybe the high-level dynamics you're thinking about.
Yeah, so we will come out with an official guidance in March, so you need to wait for that.
Not today, not right now.
If we take a step back, with the investor day in 2023, we basically announced how we want to double the sales over the course of three years. We laid out a couple of building blocks that we intended that will help us to reach that. So those were things like building retail, building apparel, China, continue to grow in running, enter tennis and training, and some more. In 2024, we were really focusing on building the foundation for all of those elements to work. I think being able to have a current guidance at 32% constant currency growth for 2024 clearly shows it works. Now if we look at that projection for 2026, I think it becomes very, very clear how we get there. The company has all the confidence that those are the right building blocks that bring us there.
At the same time, within the company, we are now looking at what's beyond. So what's after the CHF 3.5 billion, CHF 3.6 billion that are standing behind that 2026 aspiration? And what do we need to build in order to really become the most premium global performance sportswear brand? And so I think this is the important message going into 2025. All the things that should drive our business are working, and we have the confidence, and we will be able to execute. So there'll be a lot of focus, you heard it from Mark, on the execution of those building blocks, but the validation is there.
Speaking of execution, Marc, you alluded to this. There were some challenges this year as it relates to the warehouse automation, some DC constraints. Can you just give us an update? Where are we at in terms of where that stands and what it means for '25?
Yeah, so for 2025, we're very confident that the business can really deliver where the consumer demand is. We did a lot of work on it. The main topic was really the Atlanta warehouse and some shortcomings we had there in Q1 and Q2, which led to a performance that we would have wished was better in Q2. It already got much, much better in Q3 and Q4. We really feel the last two quarters, the company were still kind of in Q4. We really feel the company was able to execute against the consumer demand. We had the right product at the right time in the right channel. We're foreseeing no major disruptions for 2025. We're very happy that the automation is planned to go live in Atlanta in the first half of the year of 2025.
That's a super important project for us because it will allow us to execute on our D2C business, on our e-com business. We're constantly reviewing the footprint that we have across the globe and how do we not only deliver the best possible consumer experience, but also reap kind of efficiency benefits in the backbone of the company. How we're looking at warehouses, how we're looking at manufacturing partners, and how we're optimizing that constantly is a very important part of who we are. Obviously also will show in our bottom line.
That's great. Good to hear. It'll be mostly in the rearview this year. One thing we haven't actually touched on at all is China, which has really been a bright spot for you all, whereas for many others, it's been a source of challenge. So can you just walk us through kind of what you're seeing there and then what your hopes for this year are as it relates to that market in particular?
You want to? Okay. See, we're trying always to play ping pong, but no, thank you. Thank you, Martin. We were actually just in China end of last year together. I think it's really nice to see, and we said this also before. I think it's really nice to see how On is gaining credibility in China and reaching a completely different level in terms of access that we get to amazing retail space, which is super important for us. So the retail locations we were able to bring to life two to three years ago versus today are on a very different scale. This is super important that we can reach the right consumer at scale. We're looking forward to opening two flagship stores in China this year, which are very, very important to us.
Then we see, despite kind of a backdrop in overall consumer demand, On is still extremely small compared to where the market is. In an environment that we just had at Double 11, where basically you have some of the players like Tmall being negative, On is almost doubling, and it's doubling at full price. It's one of the very few brands that didn't discount throughout that period. So I think our partners and consumers are really understanding On in a better and better way. They're appreciating us for the innovation that we bring to the market and the consumer experience that you have, for example, in our stores. That allows us to tap into that growth. On top of that, there's an overspill into some of the Asian markets.
We see a lot of Chinese consumers going to Japan, and they shop in Japan. We have amazing domestic demand in a country like Japan, but then we also have a lot of demand coming from the Chinese consumer being able to travel and basically shopping abroad. We are super, super positive about where On is in China.
Maybe keeping on the geographic track, I mentioned this briefly earlier, the European wholesale distribution right-sizing. For those that are newer to the story, can you just talk about what exactly you did this year and then what does it mean for setup this year? Is that totally behind you? And what also any success you can highlight there would be helpful too.
Yeah, I think that the big vision that we have is in the end, the brand messages that you hear, so how you experience the brand, that should match with the products that you see from the brand, and it should match with where do you buy the products, and I think over the last years, we have done a lot of work in order to balance that in a much, much better way, so already when we develop products, it's very clear what is the channel where we want to sell that product, that DNA is flowing into the product, and then the brand messages are basically resonating with that, and that's a strategy that is deployed all around the world, so in the U.S., there was no need to close distribution channels, but there's still a shift of the assortment underneath.
If you look into run specialty in the U.S., the share of performance products that they are selling today is much, much higher than it used to be two, three years ago. Now in Europe, we had a couple of stores that basically weren't able to work through that assortment shift. As a result, we had to close them. We closed about 200 doors because they didn't live in that triangulation that I was explaining. We are through this now, and we see it working. The share of performance products, of younger products has increased significantly. At the same time, the share of a product like a Cloud has decreased as a result of that. That's exactly where we wanted to be as a brand. That's behind us.
Already, I think during the Q4, we have seen that working and continue to see good numbers in Europe.
I'll ask you this only because I've received this question a little bit recently. Is there any, it sounds like the answer is no, but is there any repositioning that needs to be done in the U.S. from a wholesale footprint perspective at this point in time?
No, absolutely not. I think we're super happy where we are in the U.S. with our partners. I think really just restating what Martin also said, that for example, in the run specialty channel, we still had quite an amount of, for example, Cloud and Cloud X being sold. And what we did was really kind of taking the assortment out and having the right products in the right channel so that in the end, the performance run range is really what's in run specialty now. But we are in an amazing position from a wholesale perspective, and you will continue to see what you already saw last year. So absolutely no change. What we're happy is in Europe that we're also gaining some partners.
For example, we'll start working with Snipes, which is a very, very young, reaching into a younger consumer, which is important for us, especially for Germany and Switzerland and Austria. We're able to tap into some of the partners that weren't on board yet, and we're very excited about that.
It sounds like wholesale is in great shape globally now, but you can't reach every customer via wholesale. And so as a result, retail has become a bigger part of your story over time. Can you talk higher level about how retail fits in within your bigger strategy and then what we should expect in 2025 as we think about that channel?
Yeah, so I think this is probably one of the biggest achievements of 2024 that we were able to basically build a retail company within On. And you can imagine that it's a very different environment where you need to operate in retail. One third of our team is now basically in retail. And we had to learn a lot about how to build stores also in a cost-effective way. What's the layout of the stores? How do we merchandise them? And really, the team has done an amazing job. And we really see great numbers from all our retail stores around the world. So in terms of profitability on net sales, but also on bottom line. And this gives us the confidence to really follow through the plan that we have. So we said we want to be on a trajectory of opening 20-25 stores a year.
That's what we can expect from 2025. We'll be all around the world. We really see that retail works in two dimensions. First, it's extremely important for apparel. It's driving the highest apparel share of all our channels. With a growing apparel business as part of On, retail will become much more important. We expect that in apparel, actually, the D2C share is higher than in footwear. Then we really see that retail allows us to show the brand in a very premium way, which I think is a very strong foundation for also offering even more premium products down the road. What we have also started is now working with some distributors in markets where monobranded retail environments are extremely important. The Middle East is one area, Southeast Asia is an area, and Latin America is an area.
You can expect also seeing monobranded stores there. They will not be operated by ourselves, but by our partners. But in the end, it will increase the retail footprint. I think it's really one of the key learnings from 2025 and 2024 and one of the key achievements.
So we've spent 20 plus minutes talking about revenue. I'll finally move on to profitability with you guys. One big achievement this year is you're already surpassing the gross margin guidance you set out at that investor day around 60%. You're on track to do better than that this year. So how do you think about the path for gross margin in 2025? What are the key puts and takes around that?
Oh, I do too.
Yeah, you can do too.
What are the key elements of the premium gross profit margin that we have? It's first being able to ask for premium prices with our products. And I think this is something that we have demonstrated all over again. And if you would look into the last three years, we were definitely able to level up our average price point that we are selling on. I think products like the Loewe collaboration is a good example that we can also sell products at $400. And so that's one element. The second element is not discounting. And this is something that is extremely important for us. It has always been important for us over the last 15 years. Mark was mentioning the strategy in China. I mentioned our discipline that we continue to have in Q4 in the holiday season. So this protects the margin.
The last element is the channel mix. So D2C has a superior margin profile to wholesale. And as I just explained, retail is a new element in that. We also elevated our capability in e-comm in a big way. So we are really well positioned to drive a higher D2C share over time. And so I think you all should have the confidence that we can deliver on that 60% plus margin. At the same time, there's always something happening in the gross profit environment, which we can't influence, which is out of our control. And so I always like to be sensible on talking about that number. But in good times, yes, we can drive a higher margin, but maybe there are times where the supply chain is out of sync and you need to do something, and then you have an impact there.
But I think it is the foundation of being that premium brand, and it's the foundation and also driving profitability down the line.
So maybe to bring this all together, since we only have a minute left, the final target you guys have out there is adjusted EBITDA margin, 18% over time, sitting at about 16.5% now. What are the building blocks that get us from here to there in the next couple of years? Three for you.
No, I think we spoke about gross margin, right, which is an important part, obviously, going into this. Then I think we're very happy where we see our marketing spend going. So I think we want to keep it roughly at where it is. What we see is that we're able to move more of the spend to upper funnel and with that drive more brand awareness. And so I think we're very happy with where we're there, bringing also more and more talents into the brand and working with partners on the sports side, but also on more of the lifestyle side. And then obviously you have economies of scale going into kind of staff costs and the team. And so it was always important for us that we're growing the top line over proportionally to that, and we're continuing to see that evolvement.
I think it's conscious decisions that we're making while continuing to build a growth path for the brand in the mid and long term. So could we theoretically drive the business at an even higher margin today? Yes. Would that be the right thing to do to be speaking to you here again in four years from now and talking about the journey to, I don't know, a $10 billion company? Probably not, right? And so this is how we're trying to continue to steer investment into the business while continuously growing the bottom line.
This has been great. Glad to join you up here. I wish you luck in the rest of your time today and in 2025.
Thank you. Thanks for joining in.
Thanks for joining me.