Dive Brief:
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Giving big props to newly arrived brand ambassador Zendaya, Swiss athletic shoe company On Holdings on Tuesday reported that Q2 net sales rose 27.8% year over year to 567.7 million Swiss francs ($656 million at press time).
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Citing record visits to its website, the company said direct-to-consumer net sales rose 28.1% year over year to 209.4 million Swiss Francs, while wholesale rose 27.6% to 358.2 million Swiss francs.
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Gross profit margin reached 59.9% from 59.5% a year ago, as net income rose more than nine-fold to 30.8 million Swiss francs, missing some analyst expectations in both measures.
Dive Insight:
Superstar actor-singer Zendaya signed with On just a couple of months ago, but has already had an outsize influence on the brand, executives told analysts Tuesday. During a conference call, they also evoked the spirit of the Olympics, which ended in Paris on Sunday.
In coming weeks, the company plans new releases that she helped develop, executives said.
“The Olympics stands for more than simply the competition for medals. The games’ three values — excellence, respect and friendship — express the unique ability the events had to bring people together in a way that only sport and movement can,” David Allemann, On Holdings co-founder and executive co-chairman, said during the call. “These Olympic values inspired us to create a standout campaign with our new partner Zendaya that 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.”
Like Nike, Crocs and Levi’s, On is focused on growing sales via its own DTC channels, both online and in stores; the company noted that a second store in Paris and its first store in Hong Kong opened in recent weeks. The company has said it plans to open 100 locations in the next few years. The company expects that its gross profit margin will escalate in the second half of the year and the first half of next year, as DTC sales continue to outgrow wholesale revenue, executives said.
However, it’s unclear how much runway this strategy really has. Nike has backed away from it, for example, reiterating in June that it needs to recalibrate its DTC-wholesale balance; some analysts have said that Nike took the shift to DTC too far. Most direct-to-consumer EBIT margins are “meaningfully below” wholesale margins, according to a report this year from BMO Capital Markets, building on earlier research that found brands tilting toward DTC may risk both sales and margins.
In the second quarter, the wholesale channel beat expectations, which did “put some pressure on margins,” according to Willaim Blair analysts led by Dylan Carden.
“We would allow that the company could have pulled back on marketing until closer to the Olympics, which may have impacted DTC growth earlier in the quarter,” Carden said in a Tuesday research note. “We still view this print as displaying healthy results across all facets of the business, suggesting continuing brand momentum.”
