On Holding AG

NYSE:ONON

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the On Holding AG Q1 2023 Results Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions]

I would now like to turn the conference over to Jerrit Peter. Please go ahead.

[Jerrit Peter, Investor Relations]

Good afternoon. Good morning and thank you for joining On's 2023 first quarter earnings conference call and webcast. With me today on the call are Executive Co-Chairman and Co-Founder, Caspar Coppetti; CFO and Co-CEO, Martin Hoffman and Co-CEO, Marc Maurer.

Before we begin, I would like to 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 21st 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 Caspar, followed by Martin leading through today's prepared remarks, after which we are looking forward to opening the call for a Q&A session.

With that, I'm very happy to turn over the call to Caspar.

[Caspar Coppetti, Executive Co-Chairman and Co-Founder]

Thank you and a warm welcome from my side. It's a great pleasure to be here with you to discuss our first quarter performance and recent milestones. On entered 2023 with high ambitions of continuing our growth journey, capturing market share and further increasing profitability.

We are pleased to share that the On growth story continues. We were able to exceed our expectations and post record net sales of CHF420.2 million in the three month period. This reflects a growth rate of 78% versus Q1 '22, which had been somewhat constrained by the supply shortages that had affected our industry a year ago.

As we have shared before, delivering best-in-class profit margins is a focus for On and I'm happy to report that we have been able to substantially expand our margins in the first quarter. Gross margin for the first quarter was 58.3% and adjusted EBITDA was 14.5%. We are tracking well towards our mid-term ambition of delivering best-in-class gross profit margins of 60% and EBITDA margins in the high teens and Martin will expand on this in his comments in a minute.

But first let's have a look at some business highlights from this quarter. On is an innovation company at heart. And we are happy to report that On's recent running launches have met with very strong consumer demand and have helped On capture additional market share in the running category.

I'd like to highlight the extremely successful introduction of the Cloudsurfer 6, which is the first On product to feature computer optimized technology, which we call CloudTec Phase and will roll out to further models in coming seasons and On is also capturing mindshare in the running space.

An emotional highlight was On's first win in the Boston Marathon with On athletics club member, Hellen Obiri distancing a very strong women's field and once again proving that On's highest performance running shoes are some of the fastest marathon products. The Cloudboom Echo 3, for example, will be more broadly available to consumers starting in July this year. We are very satisfied to see that On's lightning and rain strategy, winning races and converting everyday runners to On is delivering strong results.

To illustrate with the Cloudsurfer, the Cloudmonster, the Cloudrunner and the CloudGo four running products that were only launched within the last 12 months are now making up 45% On sales at the leading US running store franchise fleet. On the tennis side, we are thrilled to see world number one, Iga Swiatek and Ben Shelton competing on the court in their new On gear.

Iga stunned us all, coming back from an injury to win her first tournament as a non-athlete by defending her title at the Stuttgart Open in late April. Both the Roger Pro Tennis performance products, as well as the Roger Lifestyle tennis franchise are in high demand and have been growing even significant faster than On overall. The On brand is strong and keeps getting stronger. In recent months, we have started to shift some of our marketing spend to awareness, image and top funnel investment and it is paying off.

In March, the Cloudsurfer and our tagline Dream On were part of a global brand campaign that featured mega posters in key cities and airports supported by digital ads. In preparation for the spring marathon season, an additional emphasis was put on apparel with the Feel Nothing campaign dedicated to the design and functionality of On's apparel.

Boston Marathon was supported by concerted PR outreach, resulting in strong media presence before and after the race and amplified by Hellen Obiri's stellar performance. As you know, On, is regarded as the thought leader for sustainability among sports brands. And we have further put significant steps into action.

On strategy is to pioneer sustainable technologies and scale them rapidly. And so we have taken learnings from Cyclone, On's circular subscription and have scaled them to mass market products. The new Cloudsurfer, for example, is the first commercial running shoe to feature a single material upper made from recycled polyester, which makes the product ready to be recycled.

In addition, we use dope dyeing, which saves 90% water compared to conventional dyeing. We are now rolling these technologies out to further models in the coming seasons. We will give you further insights into On's unsustainable transformation in the upcoming Impact Progress report due to release in Q3.

Overall, we are extremely happy with how the brand and products are resonating with our fans around the world and we still have a lot more to come in 2023 to be excited about. Our deepest gratitude goes out to our stellar team here at On, who have planned and executed this quarter to perfection.

With this it is my great pleasure to hand over to Martin for the Q1 financial review, market deep dives and elevated outlook for the full year.

[Martin Hoffman]

Thank you, Caspar, and hello, everyone. You mentioned the win of Hellen Obiri in Boston. We are so proud to be one of only four brands to win one of the marathon majors during the last four years.

Back in 2014, we had our first sales boost in the corner of the Marathon Expo in Boston, and ever since, we had dreamed of winning this race one day. Therefore, this victory was a very special moment for so many people at On and now we can dream even bigger. Our starting Q1 was outstanding and exceeded our own expectations.

Net sales for the first quarter reached CHF420.2 million, up by 78.3% year-over-year. Our gross profit margin increased from 51.8% to 58.3% and our adjusted EBITDA margin from 6.7% to 14.5%. In our full year results call in March, we shared the strategic pillars that we are executing on to maintain our strong sales and profitability growth in 2023.

Our record net sales in Q1 are further validation of the strong brand momentum across all regions, channels and product groups. Our strong supply position and our ability to distribute the high volume allowed us to capture the full momentum.

This is a very different situation to the supply constraints that we had faced 12 months ago. To recall, these constraints in Q1 '22 had a larger impact on wholesale than on D2C. As a result of the very high demand from our retail partners, combined with a lighter quarter last year, wholesale in Q1 grew 86%, reaching CHF283.2 million.

The majority of this growth is coming from existing doors, both fueled by existing and new products. With the start of our new spring summer season back in January, we continued our selective door expansion globally. In our direct markets On products are now available in almost 9800 doors. This includes the now 58 doors that we have at Dick's Sporting Goods, a partnership that we are incredibly happy with, and that plays an important part in expanding our reach to new customers. In particular, we are very pleased to note that Dick's now boasts the highest apparel share among all key accounts, a significant milestone in our efforts to establish On as a head to toe brand.

The strong demand for the brand is directly reflected in our strong D2C growth across all regions. D2C net sales increased by 64.3% versus last year. A more normalized rate versus wholesale contributing CHF137 million to our top line.

All regions grew by more than 50% in Europe and in APAC DTC growth had been stronger than wholesale growth. In our DTC data, we can also observe that we are increasingly reaching a younger consumer with our newer running models. This strategically important trend is very visible, for example, with the Cloud Monster and Cloudrunner that are among the top of our youngest leaning models in our running range. Along with many of our younger leaning performance all day products such as the Cloudnova. This is further validating the successful expansion of our product offerings to younger audience.

We always emphasize the importance of our multichannel strategy to meet the customer wherever they are. While still a small part our own retail stores enable us to showcase On in the most premium way and we're very happy with how they are elevating brand awareness. This is evidenced both in the increased DTC traffic following store openings and at the same time a spillover to wholesale doors in proximity to our own stores.

In Q1, we more than quadrupled our retail net sales compared to the same period last year. We mentioned a strong start of our flagship store in London. We're very happy that this momentum has sustained. This is providing us with the evidence that there is a demand for selected larger flagship locations.

We're therefore extremely excited for the upcoming months, which will see the opening of new retail stores in Williamsburg and Miami. Both of these stores will have more than double the selling space compared to our current New York store.

Moving on to our regional performance where we continue to see strength in all geographies. As many of you will have seen in our press release two weeks ago, we are updating our disclosure to no longer report rest of world region as of this quarter. Our Middle East and Africa business will join Europe to form EMEA, while Latin America will be added to North America to form Americas.

Our press release from May 2nd provides a detailed walk over from the old to the new regional splits for all quarters of the 2022 fiscal year. Not impacted by this change as the Asia Pacific region. So let me start here. Net sales in Asia Pacific accelerated to CHF31.1 million in Q1, growing by 89.4% compared to the same period last year.

All three key markets Australia, China and Japan have seen a very strong growth rates between 75% and 100%. We have seen a strong increase of local customers as well as international travelers in our Tokyo flagship store as well as our China stores. The APAC region continues to be a very strong showcase of our success of our apparel business with over 10% apparel share across the whole region.

Moving on to Europe, Middle East and Africa, where net sales continue to grow strongly by 51.6% to CHF118.9 million in Q1. Sales in the UK more than doubled now making it a second largest country in the region.

We already mentioned the multichannel momentum in the London area, but we see a similar spike in demand in many other key cities. With some distance, Germany remains our largest market in the region as it continued to grow at 56%. With the launch of the new Cloudsurfer, On made big waves with strong presence in most key European cities such as Barcelona, Paris, London, Berlin and our home in Zurich.

Net sales in the Americas increased by 91.9% for the first quarter, reaching CHF270.2 million. This is 16.5 million more than the previous quarterly record sales in Q4 2022. This exceptional growth was driven by the strong demand in both channels, of course, supported by the controlled or expansion as outlined earlier.

Turning to our performance by product category. Net sales from Shoes grew 80% to CHF400.5 million. The second half of the quarter saw exciting new launches, which of course included a Cloudsurfer that Caspar elaborated on. In the first three months, we already sold more of the new Cloudsurfer than during the last two years of the old Cloudsurfer model combined.

We also launched the Roger Pro Clay and our Kids collection. [indiscernible] by our emerging presence on tennis courts, demand for the Roger Pro is exceeding our own expectations. This is also true for Kids shoes. We launched the Cloud Play and the Cloud Sky at a very selective number of key retail partners as well as our own D2C channels and continue to see very strong sell out numbers.

Apparel reached net sales of CHF16.9 million in the quarter, with a 48.9% year-on-year growth. Our new collections, introduced for the spring summer season under the Feel Nothing campaign have resonated very well with our fans in both channels. The growth and uptake in apparel continues to be skewed more towards our D2C channel and newer markets as evidenced by the APAC example. This includes the proven ability of our D2C and our own store retail to fully showcase our head to toe looks and increase cross-selling between categories.

Moving on to gross profit which reached CHF244.9 million in the quarter, more than doubling year-over-year. We achieved a gross margin of 58.3%, up 650 basis points compared to Q1 '22. The significant uplift year-over-year is largely a result of the normalized supply chain environment and the resulting discontinuation of the exceptional airfreight usage, which had been most elevated in the first quarter last year.

Our strong margin in Q1 also validates our full year gross profit margin target of around 58.5%. Considering that Q1 normally has a much lower D2C share compared to the rest of the year. SG&A expenses excluding share-based compensation were CHF197.7 million and 47% of net sales in Q1 reduced from 49.1% in the same period last year. A couple of call outs in the individual SG&A items. Working through the temporarily above optimal inventory volumes comes with slightly elevated distribution expenses for additional storage space alongside the cost for the ramp up of our warehouse automation projects around the globe.

With 44.6 million marketing expenses, we invested more in brand building in our position as a premium performance brand rooted in running and in the consumer awareness for On as a head to toe brand than in any previous quarter. Our big brand presence at key airports like Los Angeles, at the latest festival in China or the Tokyo Marathon are just a few examples of more upper funnel investments to drive brand awareness globally.

More and more customers experience On, from a brand perspective, brand with exciting, highly innovative and sustainable products. A very controlled and disciplined cost management and a strong net sales created economies of scale in both selling and general and administration expenses.

We continue to invest into our team while leveraging outsourcing opportunities. We also continue investing in our digital capabilities to connect more directly with our customers while using our tech landscape to drive efficiencies in key processes. As a result of these dynamics, our adjusted EBITDA reached CHF61 million in the quarter, 288.2%, up from CHF15.7 million in the prior year period.

We achieved an adjusted EBITDA margin of 14.5%, considerably up from 6.7% in Q1 '22. Now moving to our balance sheet. Capital expenditures were CHF9.7 million in Q1 '23 or 2.3% of net sales. A significant reduction compared to the CHF16.3 million we had in Q1 '22 when we were building out our new offices in Zurich and Portland.

As expected and communicated in our full year results call, our inventory position at the end of Q1 increased slightly as a result of the normalization of lead times. Our inventory position stands at CHF465.2 million, up by 17.6% compared to December '22. The increase is driven by the early inflow of first fall winter season products.

Overall, our inventory remains very fresh and sets us up to drive a continued high share of full price sales in 2023. Our cash balance at the end of Q1 was CHF361.3 million, only slightly below the CHF371 million at the end of Q4 '22. We are progressing well on the expansion of our existing credit line and continue to anticipate closing the new facility during the course of Q2 or Q3. With that, let's look ahead.

We had a very strong first quarter. We continue seeing a strong end customer demand during the first weeks of the second quarter. Also, as expected, growth rates have moderated as we approach a more comparable year-over-year situation. Our new products are resonating very strongly with existing and new fans. And we maintain a strong order book for the second half of the year, driven by existing and exciting upcoming new products.

As a result of all of this positive momentum, we again raise our guidance for the full year '23 and expect to reach at least CHF1.74 billion in net sales and implied year-over-year growth of 42%. We continue to embed an element of caution in our outlook for the second half of the year in the light of the many risks in the current macroeconomic environment.

On gross margin, as I briefly alluded to, we are retaining our gross profit margin guidance of 58.5% for the full year '23, which would for the first time bring our gross profit in absolute terms to over CHF1 billion for the year. On adjusted EBITDA margin, we maintain our target of 15% for the full year even at the higher net sales expectation, implying a year-over-year absolute adjusted EBITDA increase of close to 60%.

With this strong outlook and business momentum, we expect to generate a positive cash flow in 2023. Last week we introduced our exciting Spring Summer '24 collection to our team and key partners at our global meetings in Ho Chi Minh City in Portland and in Zurich. We are highly energized and motivated by the initial waves of positive feedback for our apparel and footwear products from our retail partners and by the continued excitement around the On trend.

Our teams are working with full speed to deepen our relationships and to build the foundation for continued strong growth for our partners and for us. We are so grateful for the strong and collaborative partnerships we continue to form and take this optimism and energy to our daily efforts to build an even more diverse and impactful business going forward.

But even more important was the opportunity during the global meetings to connect with so many people from our team, from across the world, and to speak about dreams and obstacles and about our culture, because this is the fundament of everything. It is such a privilege for Caspar, Marc and I to present our strong results on behalf of our whole team, and we could not be happier about where we stand today.

With that, we'd like to open up the session to your questions. Operator, we are ready to begin the Q&A session.

[Operator]

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question is from the line of Abbie Zvejnieks with Piper Sandler. Your question please. Abbie, you are now live. Miss Abbie Zvejnieks from Piper Sandler. You are now live.

[Abbie Zvejnieks, Piper Sandler]

Great. Thanks so much for taking my question. Congrats on the quarter. Just given the strength in Q1, I mean, I know you slowed the beat through the top line, but are you seeing any changes in consumer behavior that give you any more caution or are there any quarterly headwinds that we should be thinking about in terms of tougher compares or I think some peers have called out some softer wholesale trends into Q2. Just any color there would be helpful. Thank you.

[Caspar Coppetti, Executive Co-Chairman and Co-Founder]

Thank you, Abbie, for the question and welcome, everyone, also from my side. So what we saw on the wholesale side in Q1 and it's kind of the picture continues in Q2 as well. If there's still a lot of, in general, there's still quite a bit of inventory in some of the channels. So it's very important we're monitoring sell through and to demand for the brand was continued to be strong and that's what you're seeing in the result. That's what we're continuing to observe.

It's a bit volatile in general. So the wholesale environment, when we look at sell outs, some weeks are very strong and then some weeks are a bit weaker. And this is also why basically we want to look at Q2, Q3 and Q4 with an element of caution. We know we are all aware of the macro environment and it's really, you know, some uncertainty there.

But when we look at On, we are very confident, and I just want to probably share with you also kind of looking at Dick's, for example, where we're now life in 58 doors and already those doors have the highest average sell through of all doors that that we have had On all wholesale doors. So also the new doors that we're adding and the brand has been received super strong.

[Abbie Zvejnieks, Piper Sandler]

Got it. And one follow-up, if I can, just on the apparel business I mean this is the strongest year-over-year growth in four quarters. So can you talk about any changes to the assortment or the strategy and like specifically more color on where you see price points going for that business? Thank you.

[Caspar Coppetti, Executive Co-Chairman and Co-Founder]

Yeah. Thank you. So we feel very confident where we're bringing the collection. And, you know, we would have loved to welcome you at our global meeting, so you could already see what's happening in 2024. In the end, we feel there's a lot of opportunity to take something that's born in performance, running and move it into the movement all day, all day active space.

This is why we're partnering with some of the doors that we're partnering as well, and the products continue to evolve. The demand in that comes from the selling that we have with the key accounts was very strong. Again, looking at Dick's, for example, they are our strongest apparel door in terms of apparel share.

And especially I want to highlight that our own retail stores see very, very strong apparel numbers. And that's also one of the reasons why we were looking forward to continue to evolve our own retail network. From a price point perspective, we feel confident where we are and there's definitely room to probably have a few more pieces in a little bit, kind of a little bit lower price point, which is close to where our current lowest price point is.

But then we also feel we have a spot where there is demand and we're meeting the right consumer at the right place with the apparel pieces that we're having.

[Abbie Zvejnieks, Piper Sandler]

Thank you.

[Operator]

The next question is from the line of Aubrey Tianello with BNP Paribas. Your question, please.

[Aubrey Tianello, BNP Paribas]

Hi. Thanks so much for taking the questions. I wanted to ask on the updated revenue guidance and just if you could maybe elaborate a bit more on what's driving the higher guide, whether there's anything specific to call out either from a region or product perspective. And then second, you mentioned strong pre-orders for fall winter in particular in some key styles, gave you optimism for the back half of the year. Is there any change to your expectation on 2H revenue growth kind of in the low to mid 30s range?

[Martin Hoffman]

Aubrey, happy to take that one. So we really have seen a very strong demand, but also very good capabilities in fulfilling that demand in the last days of the quarter, which has resulted in the overachievement compared to the number that we indicated in our last call. And now we have given that number into our full year outlook because we stay fully confident on the year to go. As Marc just said, our business remains strong, where the demand remains strong with the changes that we see in from on a week to week basis.

Our pre-orders for the fall winter season are very strong and the growth rate there indicates that we are in a position to overachieve the number. But at the same time we want to stay in a position that we take the right decisions even in a weaker environment. We don't need to chase sales, but continue to think long-term.

And therefore we embedded that element of cautiousness from our how we look at the first half year versus the second half year. This stays pretty much in line with what we shared in our last call. So now with the updated Q1 number, we more look at a mid-50s growth rate in the first half and then the low to mid 30s in the back half of the year.

[Aubrey Tianello, BNP Paribas]

Great. Thank you.

[Operator]

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

[Jay Sole, UBS]

Great. Thank you so much. Just wondering if you can elaborate a little bit on the growth in the Asia Pacific region, particularly in China, what you're seeing there and really maybe what your outlook is not just for this year, but even if you look out a little bit beyond how you see that market developing? Thank you.

[Caspar Coppetti, Executive Co-Chairman and Co-Founder]

Thank you for the question, Jay. Hey, I think, China we're all aware of how the market came back. And I think January, February was still a bit slower. And then it really started to pick up. And we see we're very happy with the traffic that we're seeing in the store. So we currently have 15 stores in China and two of those opened in Q1 2023, and we're planning to have 18 to roughly 21 stores by the end of 2023.

So the traffic is there. We're happy with the sell out that we have in the stores. We're very happy with the product portfolio and how we're able to tell a performance message that's rooted in running, but that actually reaches consumers way beyond running in an active space, in a movement space. And we remain very, very confident for the mid and long-term.

And we said this before, right? I mean, we're in China because we want to make it one of the top two markets and that's what we're -- that's what we're aiming for. And this is what you see reflected in the growth rates. Obviously, a lot of investment going in there. We have a team of over 100 people and making sure we have a very tailored marketing approach as well with a lot of local content and that we can bring to the market. But the brand is received well and that's in the end what you see in the numbers.

[Jay Sole, UBS]

Terrific. Thank you so much.

[Operator]

The next question is from the line of Cristina Fernandez with Telsey Advisors. Please go ahead.

[Cristina Fernandez, Telsey Advisory Group]

Good morning. I wanted to ask about the inventory. Can you give more color around how you expect this to flow over the next couple of quarters? It's one to the peak on an absolute basis and then it declines sequentially to deliver that inventory. Any more color there would be helpful?

[Martin Hoffman]

Cristina, happy to take this one. Recalling what we shared on the last call, the increase in inventory that we see and the additional increase that we also saw now in Q1 was fully intentional and driven by the high demand that we saw and continue to see in the spring, summer and in the fall winter orders. So our inventory continues to be fresh and basically will allow us to fulfil the demand in the coming months at full price.

Now the increase of the inventory as we shared it last time is the result of shorter lead times transit times together with more reliable factory outputs that we have seen. And so back in December, we started to adjust our production orders going forward. But because you have a certain commitment towards your factories, those adjustments will only come into place at scale now in the second quarter.

But we already see the first results of that. If we would look one level down on inventory, at the end of December, we had 145 million inventory in transit. Now, at the end of March, we only had 124 million of inventory in transit. So 20 million less. So that means that there's already less inventory in the pipeline. And so as we have shared in the last call, our goal is still to reach around 30% of working capital in terms of net sales by the end of the year.

So looking at an inventory in the range of somewhere 425 million to 450 million. So this is where we want to be. So at a lower level than where we are at the moment. Somewhere in between end of March and end of December.

[Cristina Fernandez, Telsey Advisory Group]

Thank you. And my second question is, when you look at the demand you're seeing globally, are there any call outs by regions or are the products that are resonating, for example, in the Americas are the same in EMEA or APAC or are there differences in performance by lifestyle or any call outs there as far as what's working in one region versus the other?

[Caspar Coppetti, Executive Co-Chairman and Co-Founder]

So if we got that correctly, the question is on regional differences from a product side and how the products are received. So when I mean really aside and we mentioned it in the notes as well, I think, we saw strong growth across all regions, right?

So EMEA, Americas and Asia Pacific, we just spoke about China where January and February was still a very difficult environment and despite that, we still almost had 90% of growth in Asia Pacific. When you look at markets like Germany with 56% growth or the UK with above 100% growth, then I think the essence is always the same.

It's run products that are performing very well and the Monster to Cloudsurfer we spoke about it making up 45% of our performance run range. So new products that have been received really, really well and we're closely monitoring that the products are being adopted by runners and being worn on runner 's feet along the key running routes.

So when we look at share and there we sometimes reach above 15%. And then you have products that are slightly different especially on the performance holiday side. So if we look at the US, the Cloudnova is extremely strong and it's performing very, very well. If we look at China you, for example, have a product like the CloudX that is the strongest franchise. And we feel this is very, very healthy because it allows us to basically balance different products and then also use them over time for different regions.

So we're not reliable on one product. And there was also a clear goal to reduce basically the share of the cloud over time, which we're very much achieving. And just one more remark I want to make here, which is, we invested a lot in really rooting and communicating the brand from a performance perspective and also reaching a younger audience.

And it's paying out in all the countries. And just an example there also in the UK, we're very happy to have over 100% growth and very much coming from an audience that is among the youngest that we have globally.

[Cristina Fernandez, Telsey Advisory Group]

Thank you.

[Operator]

The next question is from the line of Jim Duffy with Stifel. Your question, please.

[James Duffy, Stifel]

Thank you, Caspar, Marc and Martin. I want to start by asking about regional differences in channel mix and momentum. Martin, I believe you mentioned Europe and Asia D2C growth outpaced wholesale. That implies imbalance of wholesale growth in North America. I'm curious, is that the function of comparison supply chain issues in the prior year or is that simply reflective of sell through momentum and pure wholesale appetite for the product?

[Martin Hoffman]

I think if we just look at the growth rates, it's a bit of function of the comparison. So Q2 will be the first quarter where also COVID doesn't play a role anymore in our prior year numbers. Maybe with the exception of China. But we continue to see and it's fully our strategy to have a stronger growth rate in our D2C channel, both e-com and online compared to our wholesale channel.

And that's the strategy that we follow in all the geographies. And we see a similar momentum in all the geographies. Now on a more comparable base, we invest significantly in our digital capabilities to connect more directly with our customer to increase our service level with our customers in our direct channels and the experience overall.

And as Marc said, our own retail stores play an important part. We gave the example of London, but we see a similar pattern also in LA or in Tokyo where our retail stores are additive to our online channel, but also additive to our wholesale channel.

[James Duffy, Stifel]

Thank you. I'd also like to ask about the planned timing of marketing spend across the balance of the year and any specific marketing plans around the upcoming tennis majors like Wimbledon and the French Open.

[Caspar Coppetti, Executive Co-Chairman and Co-Founder]

Yeah. What do you see happening in marketing and I think what you experience is really a shift from lower funnel to upper funnel. So we are, we will continue to build the brand and to reach a wider audience. This is what you saw with the launch of the Cloudsurfer. And this is one of the key reasons why we also decided to move into tennis.

We're very happy with the impact that that Iga and Ben already have. It allows us to bring the On logo and the On brand on the chest of some of the best players to a very, very large audience. And so what we will do is basically have a major launch event around the US Open with the two players.

It's going to be around August, so late August, just before the game is starting. And it's our very clear goal to continue to make tennis and a very inclusive sport that we can also connect between different audiences. So not to just to have it as a spectator sport, but basically how can we connect the pro-tennis players with the audience that is playing it all day and every day.

And so what you experienced with the On track nights, which is essentially what we're doing on the performance running side, we're going to bring the same concept to tennis and this is how we want to activate the players in, during the US Open. And then I just want to highlight two more key elements for On, the world champs in Budapest are going to be very important for us and it's the clear goal to be competing for medals on one of the biggest stages.

And then this is also the last test, so to say, before Paris, which is going to be a very important moment for us. So how can we bring more sustainable innovation and lead from a performance side to a huge audience through athletes? And this is what Paris will be about.

[James Duffy, Stifel]

Thank you.

[Operator]

And the next question will be from Alex Straton with Morgan Stanley. Your question please.

[Alexandra Straton, Morgan Stanley]

Great. Good morning. Thanks for taking my question and congrats on another great quarter. Martin, I have two that are probably best for you. Just first, I wanted to clarify something on the guidance. Looks like you only flowed through part of the first quarter EBITDA beat to the full year. From the commentary, it just sounds like that's conservatism, but I want to make sure I'm not missing anything there that's limiting the flow through. And then second, just on gross margin, I think freight was like a 800 bps impact last year and I'm seeing gross margins up 650. So I'm just wondering, does that mean you didn't fully recapture the air freight or there's something else pressuring margin. I just want to make sure I'm understanding all the moving pieces there. Thanks.

[Martin Hoffman]

Alex, happy to go there. So let me start on the margin side. So really, we continue to see a very high share of full price sales. So there's no discounting embedded in there. Compared to last year, we still have a negative ethics impact in there, especially from the weaker euro. And then that elevated inventory level that we have had also created some additional freight costs, especially for delayed unloading of container which are also reflected in the gross profit that we had for the first quarter.

But we are out of that topic. So going forward we foresee that we continue driving a high gross profit margin in line with our long-term goal of 60%. Again there is still pressure from the weaker euro on the margin side of 60 basis point to 100 basis points. But the rest of the business is really set up to deliver on that higher margin. Our price increases have been very well received by the consumers. We haven't seen any demand impact.

On EBITDA, again, our philosophy is to invest into the business and into the future growth while driving profitability. So this is why for us, the full year number is the one that we are managing the 15% EBITDA. And so we are investing into people, we are investing into marketing, into brand building, into innovation in order to become a bigger brand in the future. At the same time, we also have a lot of initiatives to drive economies of scale being in happiness delivery. But then of course also in the operations of our warehouses and this is reflected in the full year guidance on the EBITDA level.

[Alexandra Straton, Morgan Stanley]

Great. Thanks a lot.

[Operator]

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

[Tom Nikic, Wedbush Securities]

Hi. Good afternoon, gentlemen. Thank you for taking my question. I just wanted to ask, I know you were growing very, very rapidly, and I'm sure you have ambitions so you'll continue growing over a multiyear period. Do you have today sufficient manufacturing capacity with your partners to support the growth that you expect to see over the next couple of years? Or will you have to find more manufacturing capacity as you continue to grow?

[Caspar Coppetti, Executive Co-Chairman and Co-Founder]

Yes, thank you for the question. I think it's very clear that in -- on the manufacturing side, in general, there is rather overcapacity right now than under capacity. So it's not so difficult to have enough capacity. Nevertheless, we've been planning for that for many years, right? So we've been working with the same partners over time. They know our growth aspirations.

And I think the key here is not just to get capacity, but it's basically to allow to partner with the best innovators, right? And so what we're very much focusing on is how can we bring the most performance from to the market, how can we have the best in light this membrane, how can we have the most sustainable products in the market.

And in the end, we're investing a lot of time on partnering with the best chemical companies that are out there and this then leading to the best OEMs that will help us manufacturing the product. And we're very confident that we've built a group of partners globally that allows us not just to reach the growth ambitions that we're having, but also to continue to be the most innovative friend out there.

[Tom Nikic, Wedbush Securities]

Great. And just one quick follow-up. When we look at EMEA, I think we talked about really great growth in the United Kingdom and strong growth in Germany. That would kind of suggest that maybe there was some slower growth elsewhere in the region. Are there sort of pockets of EMEA where maybe the brand has not picked up as much momentum as elsewhere? And would you view those as opportunities?

[Caspar Coppetti, Executive Co-Chairman and Co-Founder]

Yeah. So when we're looking at it I think with the formation of the region, EMEA, there's many different elements in there. So let's start with the Middle East, where we basically there's very, very strong demand, but we have a lot of opportunity in setting up a good retail and wholesale footprint.

So that's just a very under-penetrated region. And compared to the demand that's out there, then we look at Spain, Italy, which are huge markets and also on the lifestyle side where we're literally just getting started and we're growing strongly in France, but France, but it's still relatively underrepresented as a brand to some other markets.

We've spoken about Germany and the UK and then then there's Switzerland and Austria, where we very much focused on working with the right partners and bringing a performance run range to life. As part of that, you can also expect some changes on the partners we're working with, especially then for next year, very much trying to focus on the channels that allow us to reach the right consumer, which means we're going to going to get go out of comfort doors and brown shoe doors.

And obviously there's some change happening there. But the impact is going to happen over time, and especially the northern spring, summer '24. We're quite confident that we can compensate a lot of that with new channels and with our own retail channel and our own B2C channel that we continue to expand.

[Tom Nikic, Wedbush Securities]

Great. Thank you very much and continued success for the rest of the year.

[Operator]

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

[Jonathan Komp, Robert W. Baird]

Yeah. Hi. Good afternoon. Caspar, if you're still there or Marc. I'm curious. I wanted to ask, really what you make of the strength of the newest performance models you're launching, and just any perspective how that might be influencing your forward product strategy? And then if you could comment at all on the Road to Paris 2024, any high level thoughts on what we should expect?

[Caspar Coppetti, Executive Co-Chairman and Co-Founder]

Thank you, Jon, and thanks for asking a question about product. That's what we care about first and foremost. Yeah, as you mentioned, there's been a lot of anticipation for the Cloudsurfer launch.

CloudTec Phase is a very intuitively understandable technology and we've been blown away really and surprised by how well it's been taken. Most retailers and other web shops have been selling through this very, very quickly. I think Martin shared some numbers earlier, and that's good news because we're about to roll CloudTec Phase to more products into higher cushioning products to the trail side and also to one of our lifestyle models.

Overall, you follow the market share gains that we've had in the running space, and that's really driven by some of the latest innovations that we've introduced over the last 12 months, most notably that the Cloudmonster, very prominent product that continues to be extremely strong, where we're going to go into almost like a family of Cloudmonsters for spring '24, but then maybe a little bit less exciting model like the Cloudrunner, you know, that now is usually among the top two sellers in run specialty doors that allows us to capture market share from those bread and butter models from other brands and giving the retailers an opportunity to expand their average price points, because typically it's about $10 to $20 more expensive.

And then towards Paris, you know, many of you may be aware that there's an arms race going on currently among the top performance brands of who makes the fastest shoes. And we started this lighting initiative within On only about 18 months ago. So to have someone like Hellen Obiri beat pretty much all the favorites on the women's side for the Paris '24 Marathon gives us a lot of confidence going into next season.

And at the same time we're looking how can we bring some of these performance technologies like the [indiscernible] foams and so on to more consumers. Maybe not the ones that are running a two-hour marathon, but maybe the ones that are running more of a four-hour marathon. Probably pretty much everybody on this call could benefit from these technologies. So those are the things that we're working on, Jon.

[Jonathan Komp, Robert W. Baird]

Sounds like something I could benefit from. Looking forward to that. And then just maybe a follow up, Martin, I'm thinking about the financial guidance, the revenue guidance for the year. It looks like the guidance implies first quarter should be about 24%, 25% of the full year revenue. Historically, it looks like first quarter's been closer to 20% or below. So anything that would change the shape of your revenue cadence throughout the year or is that more a reflection of the conservatism that you're baking into the model? Thank you.

[Martin Hoffman]

So I think if we look historically, there's -- it's really hard to find a comparable year with all the disruptions that we had. And then remember, back in 2021, we also changed our logic of launching new products from basically a launch in the second half of the year to launch in the more in January, February.

So I think it's hard to use historical and as I said in the beginning, if we look into the second half of the year, our order book is strong and indicates that there is an opportunity to overachieve the number that we have. But we also need to keep in mind we had a very strong holiday season last year with very strong Black Friday Cyber Monday sales, where we apply a certain level of cautiousness.

But again from our product pipeline and some of the things that Caspar mentioned, there's a lot of confidence that we should see also strong reorders based on the preorders that we have on book. But we don't want to be in a position where we have to take short-term decisions in order to chase growth.

[Jonathan Komp, Robert W. Baird]

Very helpful. Thank you.

[Operator]

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

[Sam Poser, Williams Trading]

Good morning. Thank you or good afternoon. Thank you for taking my question. Most of the questions have been answered. I have two. One is just about inventory and where and really how to think about what you want your optimum turn to be once we clear through this year. Because you know and then I have a follow-up. I have a separate question as well.

[Caspar Coppetti, Executive Co-Chairman and Co-Founder]

Let's start with inventory. So, as I mentioned, for us a good way to think about is on a working capital basis, as a lot of the payables and inventory are ultimately related. So 30% working capital as a goal in percent of net sales over the last 12 months is for us a good indication on where we want to be.

We had lower levels in the past and of course we will continue working on optimizing our inventory through direct shipments to some of our key account partners, of course, working with our factory partners, but also optimizing our internal processes. So we are clearly on this, but for the moment we are focusing on basically bringing our lead times back to where we see the reality now with this transit times.

And then for us important is to keep the inventory fresh, to keep the inventory in a position that we have more demand than supply. So that's an important part of planning the business in a conservative way.

[Sam Poser, Williams Trading]

Thank you. And then secondly, you talked about not too much promotions. I was wondering, one in Switzerland, one of your larger wholesale accounts, I believe, has just broke price and is 20% off of all your shoes, at least 20% off. There are some old ones that are marked down more. That's something that just popped up in the last week. Ochsner Sport. I assume that's a good customer of yours. Why are they breaking price right now?

[Caspar Coppetti, Executive Co-Chairman and Co-Founder]

Thank you. Thank you for that question. I think what's important to know, first and foremost is that all the markets have different policies on how we can control pricing, right. So the US knows math and well, it's very controlled in Europe that doesn't exist. So every partner is free to decide on how they want to price in the end to product.

We're working very closely with all the partners and it's important that they're showing the product in a premium way and that they're reaching the right consumers. And you can rest assured that, you know, we're making sure that we're not selling in too many products and that we're working with our partners on showing the premiumness of the brand in the right way.

[Sam Poser, Williams Trading]

But they wouldn't break price unless there was a need to break price, I would say, regardless of what is permitted in a marketplace.

[Caspar Coppetti, Executive Co-Chairman and Co-Founder]

Sorry, could you repeat that?

[Sam Poser, Williams Trading]

We wouldn't be promoting your product unless they thought they needed to promote your product to drive more sales. So we haven't really seen that here in the US yet. But I'm wondering, is that because there's too much inventory in that particular retailer or and again, you know I understand there are different rules and you can't tell them what to do. But at the same time, it was sort of odd to see it.

[Caspar Coppetti, Executive Co-Chairman and Co-Founder]

Maybe if I could jump in here. This particular retailer is 20% off site-wide on all their running products, so this is not on specific.

[Martin Hoffman]

Let me just highlight two additional points. One is what we're having in Europe is there is a topic of euro versus Swiss francs as well. So, as you know, we have different prices and between markets. So this always plays an important role also in terms of where and different people can shop and can get access to the product.

And then I just want to highlight again, Switzerland is by far as you know, the most penetrated market. And what we already said that we're trying to make sure we're working with the right partners to reach the right consumers. As part of that, we're also not working with doors any more and more on the brown shoe and comfort side. So and then Caspar already mentioned the fact that this one is a site-wide and not just a promotion.

[Operator]

So there are no further questions. And I hand back to Jerrit Peter.

[Jerrit Peter, Investor Relations]

Thank you, everyone, for being on the call. Have a good day.

[Operator]

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.