On Holding AG

NYSE:ONON

Earnings Call Transcript 2022-Q4

[Operator]

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome and thank you for joining the On Holding AG Q4 2022 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].

It’s my pleasure and I’d 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 2022 fourth quarter and full year earnings conference call and webcast.

With me today on the call are Executive Co-Chairman and Co-Founder, David Allemann; 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 statements regarding future events and performance within the meaning of 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 earlier this morning for 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 Davis followed by Martin leading through today's prepared remarks, after which we are looking forward to opening the call for Q&A session. With that, I'm very happy to turn over the call to David.

[David Allemann, Executive Co-Chairman and Co-Founder]

Thank you very much. And welcome everyone to our fourth quarter results update call. The last three months of our first full financial year as a public company saw an exceptionally strong finish to an exceptional year.

It is fair to say that at the time of the IPO, we didn't expect that we would already have beat to the CHF1 billion net sales mark so comprehensively in 2022. So it fills me with a huge sense of pride to stand here 18 months later on behalf of the On team to speak to have various successful fourth quarter that brought us to more than CHF 1.2 billion in net sales for 2022 delivering a year-over-year growth of 69% versus 2021.

Since the IPO, we've often spoken about our philosophy that has guided us since we started, driving growth, while at the same time staying focused on efficiency and driving profitability. So it makes us even more proud of the team's achievement of finishing our first full year as a public company in a profitable way with a net income of CHF 57.7 million. We are so grateful to everyone that has shaped On with us over the past 13 years and set the foundation for this amazing achievement.

Finishing the year with such an outstanding Q4 is the perfect testament to the great work our team continues to do and an indicator of the continued momentum and the great opportunity that lies ahead of us.

With net sales of CHF 367 million, and the growth rate of 92% the quarter came in significantly ahead of even our own high expectations. Demand for the brand across all regions, categories and channels remains extremely strong and we are so excited that we were able to go into 2023 in such a great position.

By switching our URL to on.com, we've also made it even easier for consumers to find our iconic brand online. And we truly believe we are setting ourselves up for our best year yet. I'd say it is both in terms of that strong momentum that we have seen in the first months of the year, as well as there be and the industry odds, if you look at the normalization of operations.

The last three years of the pandemic roller coaster have been a huge challenge, and have put our teams and operations to the test. The factory closures in Q3 of 2021 meant a very tight inventory position at the end of 2021 and early 2022 as well as elevated air freight usage particularly in the first half of 2022.

Along with industry, we have seen tight production capacities at factory partners, disruptions of global trade lines, increased sea freight lead times as well as macro challenges. We were additionally challenged by our 3PL induced warehouse disruption in the third quarter of 2022.

Martin, will provide some additional perspectives on how these elements come to play in our financial review as well as outlook for 2023, but it is safe to say we are very confident and excited to be heading into a year of increasingly normalized operations where we can focus even more on driving our brand and continuing to build a community of athletes, fans and innovators, and an exceptional team that is excited to be part of the next phase of On.

But before we move to the detailed financial review of the fourth quarter, I want to take a few minutes to focus on three areas that are fueling the ongoing momentum we see around the brand as we move into 2023, namely, the way we are bidding and running our ambitious move into tennis and our growing popularity amongst younger consumers.

So let's start with running. It's clear to see that 2022 was a huge year for us with the introduction of the Cloudrunner, CloudGo, and Cloudmonster, we added three major silhouettes that have been strongly supporting our ongoing market share increase on runner's feet.

We can see this very clearly in our proprietary run account data, where in particular the Cloudmonster and Cloudrunner are positively over indexing with regards to their visibility on the running routes versus their contribution to sales. This of course further establishes our credibility as a brand root in performance, a key strategic priority for us.

We are excited to play our part in fueling run culture and amplifying it with story telling and content around the amazing sport of running. For example, with initiatives such as our new global event series On Track Nights, which we announced in January, to begin in May with the Trackfast, in Los Angeles these events held at different track meets around the globe will have their own unique local labor but all champion a fresh community focused, festival feel approach to track racing.

We also make running more inclusive thanks to our Right to Run social impact partnerships program. Right to Run brings together grassroots communities and organizations to make an impact in the realms of safety, access, adherence and inclusion in running and movement. We continue to expand the program and now partner with 17 organizations globally, helping us to achieve our ambition of reaching 100,000 community members.

Another way, we fuel the run culture and the key component of ON's mission to ignite the human spirits through movement is the ON Athletics Club, and incredibly inspiring group of young track and field talents with tremendous potential and big dreams.

Just last month, we announced the launch of Do Shania division of the [OAC] (ph) and together with their counterparts in the U.S. and Europe, we look forward to supporting the next chapter of track and field champions as they set their sights on the Paris 2024 Olympics.

While many On athletes are working towards their first Olympics games, we are extremely excited to have added a reigning Olympic champion to our roster Triathlon gold medalist at the Tokyo Olympics, Kristian Blummenfelt has joined us with the ambition to defend his title in Paris next year.

Alongside Kristian and IRONMAN World Champion, Gustav Iden, who joined On in full 2022, we also announced the signing of two more [trial leads] (ph) in January, reigning female IRONMAN World Champion Chelsea Sodaro and fellow superstar triathlete Paula Findlay Findlay, have also joined the On team. But all our OAC team members and On athletes across running, trail and triathlon have in common is to believe and knowledge that our products put them in a position to win at the highest levels of performance. They know that only that the forefront of innovation has the success of our athletes as its number one priority.

Just look at some of the amazing achievements of our athletes recently. This past weekend, we saw Helen Obiri, cruise to victory in the New York Half Marathon with a new course record. And at last month's Minerals Games, one of the most important indoor track events of the season, On had 13 athletes competing. A significant jump versus the four we had last year. And those athletes delivered career best performances including seven national records and wins, for Alicia Monson in the women's 3000 meter race and [Jared Nouguese] (ph) in the men’s mile. These runner form continued when On athlete Helen Bekele won the Osaka Marathon in February.

We look forward to seeing our Pinnacle products on the feet of many, many more runners in the near future. That's why we'll be making these products available to the broader market, for example, commercially launching the new generation Cloudboom Echo 3 which has been on the feet of our most successful athletes in Elite Competitions in the recent months.

And our next phase of innovation for the everyday runner is about to shake the market up too. Two days from now, we will officially launch the all new cloud server, which features our new cushioning technology called CloudTec Phase. This evolution of On’s existing technology was generated using a computer optimized technology called Finite Element Analysis, which simulates the effects of structures and materials of the human body to minimize stresses and to provide a whole new running sensation. Innovation within the cloud server is here to make waves and we've seen waves of positive feedback even ahead of the official launch.

Early media reviews have been hugely positive with testers describing being blown away by the new CloudTec Phase cushioning, calling it their favorite road running shoe of the year, and heralding the Cloudsurfer as an impressive step change for all.

And our innovations are not just reserved for footwear. Back in February, we kicked off our spring-summer ‘23 season with a focus on our full head-to-toe offering by introducing our latest apparel collection. The supporting campaign was centered around the message to [Indiscernible] , so you can feel everything, shining a spotlight on our innovative light weight and high-tech materials.

But coming to my second point, it's not just the road of running where we've been making ways. Yesterday, we made our ambitions clear for tennis when we announced signings of two of the sport's most exciting talents to our roster of top ranked tennis professionals.

The women's world number one ranked player Poland’s Iga Świątek and America’s

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despite the continued expected strong growth rates.

For the end of Q1, we expect a higher inventory level, including first products for the fall-winter season.

Overall, as the additional inflow is driven by current and future season products, our inventory remains very fresh and sets us up to drive a continued high share of full price sales in 2023, while creating scarcity at the same time.

Finally, turning to cash and liquidity. Our year-end cash balance of CHF 371 million together with our additionally available credit line of CHF 160 million puts us in a strong position to continue to support our ongoing growth plans.

With that, I'm excited to look ahead and present you our outlook for 2023. Let me start by reiterating our guidance philosophy. We aim to provide prudent yet aspirational guidance that appropriately reflects our belief and optimism in the On brands and the opportunities we see while taking into account potential risks and externalities.

We'll continue to provide guidance primarily on a full year basis rather than quarterly, reflecting the way we steer our business towards long-term success. The focus continues to be on our mission to build a brand that is set-up for the long-term by emphasizing high quality, durable and profitable growth. When I speak to our expectations for the first quarters in the bid, this marks an exception to this rule. Given where we stand in the quarter, we believe it is appropriate to give you an update on what we expect to achieve in Q1.

With that as context, in 2023 we will continue on our strategic roadmap that we set out at the time of the IPO 18 months ago. We plan to launch exciting new innovative and sustainable products across all categories, but further growing our existing blockbuster franchises. We will establish even close and more direct connections with our fans and elevate the brand experience for our most loyal customers. Our new website and retail formats allowing more and more fans to discover On through our D2C channel and to drive a higher D2C share.

In addition to the recent London launch, we are looking forward to rolling out our next owned retail locations in Miami and Williamsburg, New York. Both will likely be opening their doors in the second or third quarter. At the same time, we will further expand our international footprint, with the conversion of important markets like Italy and Korea from distributor to own markets. We will carefully expand our presence in wholesale, with the goal to reach the relevant customer communities through the right retail partners.

With a focus on the Paris Olympics in 2024, we will further invest in our athletes’ team, both in talents and in product innovation and we will further strengthen our core and the operational backbone to drive efficiency and scalability. We're excited that the normalization of the supply situation will allow us to focus more resources on building the future. But most importantly, we are looking forward to continuing developing our high performing team and our culture. We closed 2022 on a high and the first month of ‘23 have been off to a great start and have strongly supported our optimism and excitement for the year.

As you will have seen in our release this morning, we anticipate reaching at least CHF 1.7 billion for the full year 2023 corresponding to year-over-year growth of 39%. This number includes around 300 basis points headwinds from the current currency environment and would reflect the currency-neutral growth rate of 42%. This full year number is around 30% higher than our aspiration back in September 21 before the IPO, a further testament to the great achievements that our team has accomplished since then.

We have been off to a great start in 2023, with ongoing very strong momentum across all regions and product groups and we expect our Q1 net sales to land around CHF 380 million or 61% above last year, maybe even higher.

As a result of the strong first quarter momentum, and the comparably heavy supply disruptions that we had faced primarily in the first half of 2022, we anticipate a higher growth rate of high 40s in half year on 2023 was a slow to mid-30s in the back half of the year. Based on the current momentum and pre-orders for the fall-winter season, we see an opportunity to achieve even higher growth rates in the second half, but we remain prudent in the life of the many risks in the current macroeconomic environment.

Despite the strong growth of net sales this year, we do not expect a meaningful further increase of our absolute inventory positions throughout the year. Depending on phasing, we may see modestly higher or lower inventory levels in the quarters, but over the course of the full year this will allow us to choose our net working capital balance relative to net sales and to improve our cash flow.

Turning to margins. As we have already seen in Q4, we foresee a more normalized supply chain situation in 2023, and consequently a significant reduction of the use of air freight together with lower freight rates. We expect to resume our path towards our mid-term gross margin target of 60% and currently anticipate a full year 2023 gross profit margin of around 58.5%.

We are committed to continue our focus on efficiency and profitable growth, and plan a further increase of our adjusted EBITDA margin to 15% for the full year 2023, representing a 54% increase of the absolute adjusted EBITDA. The continued maturity in key markets and higher efficiencies across key processes is expected to drive future scale gains in SG&A.

During the course of 2022, we had intentionally held back on marketing spend to make up for some of the additional air freight expenses. To further increase the brand awareness for On and to drive our D2C business, we plan to reinvest a part of the scale gains and to increase marketing spend in 2023, back to around 12% to 12.5% of net sales. We also expect temporarily higher distribution expenses as a result of the expansion of our global warehouse capacity and several automation projects that are foreseen to drive cost efficiencies in the years to come.

As mentioned, for the year we expect the reduction of net working capital in relation to net sales and also lower relative CapEx investments following the completion of our main build-outs. We will additionally be expanding our existing credit line with the closing of a new facility during the course of Q2 or Q3. Our momentum and outlook are result of all the achievements and progress we have made in 2022.

Today, On is a very different company than a year ago. We have further elevated our brands and our reach to set ourselves up for ongoing success and market share gains. We have reached new customer communities through our multi-channel approach and our ability to tell the story of running and run culture. We have strengthened our operational backbone and further professionalize our processes and brought our digital platform to the next level. All of this makes the opportunity for 2023 and beyond even larger than ever.

The foundation is the belief in our mission, to ignite the human spirits from movement and to dream On. Thank you so much for being a part of this journey with us.

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]. We have the first question from Alex Straton from Morgan Stanley. Please go ahead, sir.

[Alex Straton, Morgan Stanley]

Great. Congrats on another great quarter guys. I have two quick questions for you. First, just on the revenue guide for the year. Can you just talk about underlying assumptions by channel and geography?

And then secondly, it peaked my interest when you guys mentioned that you kind of walked away from a number of wholesale doors. Can you just talk about the rationale and how you assess that on an ongoing basis? Thanks a lot.

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[Operator]

Ladies and gentlemen, just stay online. One moment please.

[Martin Hoffman]

Hey, sorry, I think we had a technical problem here. But hopefully we're back now. So Alex, thank you for your question. I will take the first one, Martin here, and Marc, will take the second one. So, as you have seen, we had very strong momentum in Q4 in all regions and we foresee that really the growth is also driven by all regions. Of course, North America on an absolute term will drive the majority of the growth. And I think we are in a good position to exceed CHF 1 billion of sales in North America alone.

Then Europe, you have seen that we had an 80% growth in Q4 and we see continued momentum also in the first quarter. And here really a lot of the markets where we have a relatively low market share are driving growth like U.K., but then also France, Spain, Italy as well as lot of fresh products that will come into the dark region. And then really in China and Asia, we are super positive in the light of basically the post pandemic area. So, we can fully execute on our plan to continue growth in China and expanding our retail network there. And we really see that a lot of traffic is coming back into the retail stores in recent weeks. So, this gives us a lot of positivity for very high growth rates in the APAC region.

[Marc Maurer, Co-Chief Executive Officer]

Yes. Hi, Alex. So you should actually see this because we're having this beautiful technical setup here, and now we're pausing an iPhone around to answer your questions. But I hope you can hear us well. So, on the channel focus, I think we keep on speaking about this.

I think we want to reach our consumers kind of provide them an elevated experience through our own D2C channel. So that's also why we're expanding the retail network, but also through our most important wholesale partners. And will continue to focus on the partners that we feel they can continue to and they will help us to elevate the brand, which means we continue to closed doors that are a bit less additive and to the positioning of the brand and those are mainly doors that are focused on comfort and prime shoes. And we've done that in U.S. And we'll also start to do that a bit more in other regions, especially in Europe.

[Alex Straton, Morgan Stanley]

Thanks a lot.

[Operator]

The next question comes from Jim Duffy from Stifel. Please go ahead.

[Jim Duffy, Stifel]

Well, thank you. Let me start by complimenting the team on the execution through the pandemic and related disruptions, excellent work. My first line of questioning is about operating expense budgeting. Martin, with the step up to CHF 1.7 billion in 2023, can you speak to where you see leverage opportunities? If I heard you correctly, you plan to reinvest about two points to marketing. Where do you see G&A expense? Or is there opportunities for leverage over the real estate investments you made in 2022 in the new offices? And what's the state of your investments in apparel infrastructure? Thank you.

[Martin Hoffman]

Okay. Thank you, Jim. I will speak about the expenses and then, David can speak a little bit more on the apparel side. So, I think first and foremost, it's important that we see a normalization of the supply chain. So, really the excessive use of air freight that we had this year, that's the biggest upside potential that we have and that is reflected in our gross profit guidance.

At the same time, we still have high growth aspirations and we continue to invest into the business in order to build a business that can handle and further scale from that while at the same time fully focusing on scale gains and further efficiency.

So, we will reinvest some of the upside and savings from air freight back into marketing, for very different reasons. So first, to really install On as a head-to-toe brand in customer minds, but also to drive and higher D2C share over the future. And at the same time, we will also invest a bit more on the distribution side because we have some double costs for a temporary period of time by expanding our warehouses, that with a clear goal to automate our warehouse and to drive efficiency in the future and basically overtime bring our distribution costs below the current level.

And we have a lot of opportunities to create efficiencies of scale and there are some already baked in. So, we have started projects to outsource our happiness delivery. We have a lot of scale gains in markets that become more mature like North America but also European markets. We invest into the automation of warehouses. We invest into the automation of factory lines.

So, those are elements. And for us, it's very important that we are committed to drive higher profitability if we exceed our sales goals and the guidance that we have given to see some of that additional upside flowing through the P&L as well.

A - David Allemann

Jim --

[Jim Duffy, Stifel]

Martin, can you maybe --

[Martin Hoffman]

Go ahead.

[Jim Duffy, Stifel]

I just wanted to ask a follow-up to, Martin. Could you please speak specifically to the G&A line would you expect to lever on the G&A line? You made the big investments in real estate in 2022. And I believe you've been making a lot of investments in the apparel infrastructure, would you expect to lever those in 2023?

[Martin Hoffman]

Yes, a lot of the build out in our new offices that's reflected in the CapEx expenses that we had which was significantly higher than our long-term aspiration of like 3.5% to 4.5% of net sales. And of course, utilizing the new offices to a higher extent by growing our team and our sales that's also an area of efficiency. And then a lot of efficiency, it really comes from growing our team at a slower pace than growing our net sales.

So, looking into 2022, we have grown our team by about 50% while we had grown net sales of this more than 60%, and next year we are looking into adding around 400 people. So, also there, you see significant economies of scale happening.

[Jim Duffy, Stifel]

Thank you.

[David Allemann, Executive Co-Chairman and Co-Founder]

And Jim, when it comes to apparel, so as you know becoming a sportswear brand is multiyear journey for us, and we feel that all the right pieces are falling into place. So, it's fantastic to see that our apparel lineup that we have is really resonating with our communities, specifically also in our own retail stores where the share is growing.

Now, when it comes to investments, we definitely invest into additional talent where we made some key hires in the apparel space. It will still take a bit of time for this to flow through the collections that you see the full scope of that. And but again, we're working towards the goal of being a global sportswear brand and this means that we'll be spending even more time on apparel in ‘23 to further drive this business.

So, definitely core investments, in talents but also in upper funnel campaigns that increasingly best builds our sportswear brand.

[Jim Duffy, Stifel]

Thank you.

[Operator]

The next question comes from Tom Nikic from Wedbush Securities. Please go ahead.

[Tom Nikic, Wedbush Securities]

Hi, thanks for taking my question. I think obviously you've made good headway in some of the bigger sneaker retailers, especially in the U.S. with Foot Locker and Dick's Sporting Goods. Can you give us an update where you are in terms of number of doors with those retailers and I guess, at the end of 2022 and where you expect to get in 2023?

[Marc Maurer, Co-Chief Executive Officer]

Yes. So, with Foot Locker at the end of Q4, we were at 160 doors. Just want to give you an example also on the success that we're seeing and the feedback that we're having from some of those partners. So, with Foot Locker in Q4, we had our highest sellout quarter ever. So we had 59% unit increase over Q3, which was the second highest quarter and is really also what's been driving the expansion.

So, we don't really want to give an exact number on where we're going to be by the end ‘23 because it will all depend on how many consumers can be reached in a sustainable way with the products that we want to make available to them.

So, you can expect all the partners to continue to grow, but the speed of growth will really depend on how fast we can also bring an elevated brand experience to life. Then at JD, we stood at 166 stores globally by the end of Q4, and Dick's Sporting Goods actually really only started in January ‘23. So, we had very few Dick stores and seven [indiscernible] stores by the end of ‘22.

We're currently in 58 doors with Dick's Sporting Goods and you can expect that number to increase to around 150 doors towards the end of 2023. And then probably just one more retailer we want to highlight here, with Fleet Feet we are at 275 stores right now. Very, very happy about the growth that we're seeing, especially because it's playing into mainly and almost only into our core running community, which is very minor, which is absolutely a very minor.

[Tom Nikic, Wedbush Securities]

Great. Thank you very much and best of luck for continuing to progress this year.

[Operator]

The next question comes from Cristina Fernández from Telsey. Please go ahead, ma'am.

[Cristina Fernández, Telsey]

Good morning and congratulations on the amazing performance in the fourth quarter. I had two questions related to, I guess, products and distribution. One, the brand momentum that you're seeing in the new customers coming into the brand how much is it, did they’re buying the core franchises like Cloud 5, and those you've had for a while versus the new products that you just launched in the last year? And then the second question is the distribution of new products like tennis and kids, will that follow kind of similar sort of wholesale partners that you’ve had in the past, or is that mainly going to be on the D2C channel?

[Marc Maurer, Co-Chief Executive Officer]

Yes. So thanks for that. So, in Q4, 65% of the growth came from new products and 35% of the growth came from existing products. And when we look at new products and you have a go, you have a monster, you have a runner that are really, really resonating with the consumer and this is also what allows us to be very positive for 2023 because we see that these core styles are resonating very, very well, with our consumers. And then if you look at the Cloudnova, which is one of our most important silhouettes that's also targeting a younger consumer. We also had a lot of growth coming from that product and we have very, very strong preorders, for example, for the fall-winter season on that product line.

So, if you compare it historically, we're definitely reducing the percentage dependency on the Cloud and we really bringing the right consumer into the right product through the right channel.

And then very quickly on tennis and kids. So, I think tennis for us has two parts. One, is the tennis for tennis distribution, which is going to be quite limited, in the beginning. So we're going to focus on a couple of wholesale partners that are really catering exclusively almost to that community. And then on our own D2C channel. And then what we expect to happen is that tennis will have quite a strong impact on how On comes to life as a performance all day brand as well that is inspired by tennis.

So, the Roger franchise has been growing very, very strongly and we'll continue to distribute through Roger franchise our most important wholesale partners, but also through our own D2C. And kid is very much a D2C focus with a couple of selected partners, so Nordstrom would be one of them, but please don't expect kid shoes to follow the same logic and that some of the other products did.

So, we're trying to have a bit stronger us on D2C because we feel we can reach the consumers in a very, very meaningful way through our own channels.

[Operator]

Ms. Fernández, does that answer your question?

[Cristina Fernández, Telsey]

Yes. Thank you.

[Operator]

The next question comes from Abbie Zvejnieks from Piper Sandler. Please go ahead.

[Abbie Zvejnieks, Piper Sandler]

Great. Thanks so much for taking my question. Maybe clicking back down on that reducing dependency on Cloud. So, does that dynamic change about in the near-term with the elevated inventory position? Maybe just [indiscernible] 38:11, are there any categories where that inventory position is more elevated than others? Thank you.

[Marc Maurer, Co-Chief Executive Officer]

So, it's very important to understand that the increase of the inventory cost, very much intentional driven by the growth and the momentum that we see. And so that increase has happened in the areas where we also foresee the strongest growth and where basically our products see the strongest demand. And at the same time, we mentioned that we that we have some cumulative effect out of the fact that we are in the phase of the normalization of our supply chain and we had factored in longer lead times in the past. So at the moment, there's more product in transit than in an optimal state. And so overtime, it's the goal to reduce this. But it's very important. Our inventory is in-line with our with demand plans and what we see on the preorders, but also in the current quarter. And as such, we expect that a lot of that inventory continues to drive a high share of foot prices.

[Abbie Zvejnieks, Piper Sandler]

Great. That's helpful. And maybe one more just on converting some of the select international markets to owned versus distributor. Are there any significant changes on the P&L either from a growth or operating margin perspective that you should think about or are those just smaller impacts?

[Marc Maurer, Co-Chief Executive Officer]

For next year, so for 2023, the impact is relatively small. It's about building those markets. So we mentioned Korea, which is a very important market in the Asian region, both for running but also for outdoor and lifestyle. Then in Europe, Italy is a focused market for us. And then there are also other markets in the future that could be converted.

But it's about generating growth for the future and building now the distribution in those markets in the right way and focusing really on the channels where we want to be. And as such, the impact is relatively small both from a conversion effect as well as from a sales increase effect.

[Abbie Zvejnieks, Piper Sandler]

Thank you.

[Operator]

The next question comes from Michael Binetti from Credit Suisse. Please go ahead.

[Michael Binetti, Credit Suisse]

Hey, guys. Thanks for taking our question. I'll add my congrats on a great quarter. Obviously, there's not much to pick out in the quarter. The results were well ahead of what we thought we'd see. I am curious if you could unpack the gross margin though a bit in the fourth quarter and as we try to connect it to the longer term. I think you were lapping about CHF 7 million in air freight from last year, so about 370 basis points of a tailwind. I don't know -- if maybe you tell us how much the mix effects from regional or channel impacted you? How much of that impacted the gross margin but help us connect it to the margin expansion this year? And then what really is the driver of the expansion from [58.5 %] (ph) to the long-term 60% as you get past some of the volatility this year?

I guess and then one last one , I guess you could end multiyear as we look out to ‘24 and ’25. Is the low to mid-30s growth rate that you pointed in the second half of ’23? Is that the right way to look at growth going forward when you're lapping a more normal baseline in the second half?

[Marc Maurer, Co-Chief Executive Officer]

Okay. Thank you. So, let me go through the different bridges. So, if we compare Q4 versus Q4 last year where our gross margin stayed stable. Basically, you have two effects that balance each other. Last year, we were using -- already using air freight in the range of about 250 basis points. And at the same time, we have for this year a negative impact from the currency environment of 280 basis points. So, they offset each other and as such, our margin stayed where it was.

If we look ahead on the previous year, we had about CHF 37 million of additional air freight this year, which we don't foresee to use for next year. So, that's in the range of about 200 basis points and 300 basis points upside. And at the same time, we want to stay prudent also when it comes to guidance on our gross profit margin in order to factor in effects that we may see.

So at the moment, we have a very high inflow of product into our warehouses. There may be higher freight costs as a result of that. We still want to be in a position to react on air freight in case we see some of the products accelerating even beyond the demand that we currently see and then also with the new warehouses that we are building. There is a risk for high air freight. If you compare ‘23 versus ‘22 at the moment, we expect this to be FX neutral. So, there's no impact from that side.

So, I think we are clearly on path towards the long-term goal of 60%, but at the same time, we would try to be prudent and on the conservative side on the guidance. The 30% growth that we have for the low-to-mid 30s in our half year two guidance, that's what we currently see and assume if we look into our preorders they indicate that we could drive more growth, but we try to be prudent given all the macroeconomic environments that we currently see.

So, I think it's very important that you see. We continue to build for the future. So, we continue to build pillars for growth and this will be then defining the growth rate in the future.

[Michael Binetti, Credit Suisse]

Thank you very much.

[Operator]

The next question comes from Jonathan Komp from Baird. Please go ahead.

[Jonathan Komp, Baird]

Yes, hi. Thank you. I want to follow-up on the order book and the pre-book visibility that you're seeing. Could you maybe just talk more about the drivers of the growth that you're seeing? The second half of 2022, you had some very successful product launches and some big growth rates. So just, I'm curious what's driving the growth as you look ahead? And then maybe more broadly, could you talk about the pipeline and the roadmap you see in your performance running business especially into Olympics here next year?

[Marc Maurer, Co-Chief Executive Officer]

Yes. I'm going to talk a bit about preorders and then maybe, David can shed some light into our Lightning collection. But, because we're in a very upbeat mood today, so we're going to share some numbers that we usually wouldn't share. But basically, that the growth on the preorders is really coming from the core launch side.

So, we have to Cloudmonster the Cloudrunner and the CloudGo together, they have a 80% preorder increase year-over-year, so fall-winter ‘23 versus fall-winter ‘22, which is extremely strong and it's really coming from obviously what we expect to happen on our own D2C site and in our own retail stores, but also from the most important wholesale partners.

And then we are very much focused on reaching the right consumers to the right channels as you know. And so the Cloudnova, has 70% preorder increase fall-winter ‘23 over fall-winter ’22. And so this allows us to have a relative a pretty good perspective on which product, we will see -- where we will see a lot of growth and this also then leads back obviously to the whole inventory question that we also had, this is also then the products where we have a strong inventory position.

And I just want to highlight one more product, which is launching in a few days, which is the Cloudsurfer that is really reaching that elevated core runner that is looking at the cushion [ride] (ph) and will allow us to gain share also kind of more in the Marathon community. And I feel we're not seeing the full potential of that coming to life in the prior year, because it's only launching, but all the indications that we had from the pre-launches are extremely strong. So, we're very confident from a running product portfolio on the growth that we can see in fall-winter ‘23.

[David Allemann, Executive Co-Chairman and Co-Founder]

Jon, I just want to build on what Marc just said and just considering that if you think about Q4 last year, half of all the growth came from our all new running products. And now on top of that, the Cloudsurfer that Marc just mentioned. These are early, early days of growing blockbuster franchises. And so, you can just anticipate how much runway this will give us.

And then apart from that, we're also launching new iterations of our existing running blockbusters, which means of course for us that we're also going to innovate on them. So blockbusters that come all new in ‘23 and ‘24 you're going to see the Cloudboom Echo 3, which has been at the seat now of pro athletes winning races. And you're also going to see a lot of run apparel that is going to come along. And then you can bet that ‘24 for the Olympic Games, we're going to be ready with full range, and from very accessible running products to the absolute [Pinnacle] (ph) running products to go into the banner year for performance running.

[Jonathan Komp, Baird]

And just one follow-up, as you think about also building your lifestyle performance all day business. Just how are you thinking currently about the right pace and the right strategy to grow the lifestyle business and in certain accounts while not alienating the performance positioning? Thanks again.

[Marc Maurer, Co-Chief Executive Officer]

So, I think when you look at how our performance run category is growing and however performance all day is category growing, then we see a very, very balanced growth, that is important to us. And I think the other thing is when you look at performance all day, is what products do you see in there. And how does performance come to life in those products. So again, you have a lot of products that might sit there, but they're sometimes used for running or they’re used for exercise. And I think we want to lead with performance and no matter where we grow. And then we want to make sure that we achieve our goal to be the number one under our seat.

But at the same time, we are very, very aspirational and even on our brand today and we feel there's an opportunity ahead of us, that we're not penetrating yet, which is very much the fitness community and expect to see more products to come also targeting those consumers in a more elevated way.

[Jonathan Komp, Baird]

Thank you very much.

[Operator]

The next question comes from Jay Sole from UBS. Please go ahead.

[Jay Sole, UBS]

Great. Thanks for all the commentary on what the company intends to drive product innovation and its position in the performance categories. I want to ask you about tennis. Can you just tell us about your ambitions in the category, maybe how you see the market in terms of size and growth potential, both in terms of footwear and apparel?

And then maybe secondly, given the early reads on the new store on which I think in London, how confident are you guys going to have a store format is to be rolled out broadly across the world?

[Marc Maurer, Co-Chief Executive Officer]

Yes. So, let me start with tennis and David is going to elaborate a bit on Regent Street. So, look, I think we've been waiting for yesterday for a long time and we're super excited to have -- eager and spend now being part of our journey that really started with Roger some time ago.

And the most important thing for us is to basically being able to bring our innovation and our authenticity into the tennis world. And this is what's true [Indiscernible] 51:07 and together we want to continue to elevate the product that we can bring towards to the tennis consumers.

When you look at the tennis market, the tennis market in itself is sizable, but it's relatively small compared to the running market or the outdoor market. But we feel, but clearly see is really in bringing tennis to a more all day use, and from a footwear, but also from an apparel perspective. So, we expect tennis to have quite influence on how you address and how -- what kind of sneakers you wear. And we're already seeing that is the Roger franchise that is doing extremely well and it's resonating with the consumers.

So, you can find this will really help us and our presence in tennis will help us to drive products and authenticity that comes from tennis also in the all day space. And then we spoke about we spoke about apparels and we're very excited to have athletes now head-to-toe that are reaching millions of viewers when they're playing Roland Garros, or Wimbledon, and the first thing you see is an On logo on their chest and we feel that's very much going to strengthen our apparel category and it's in above the line trend that we didn't really have On to that extent so far. And we're very excited for what's to come for the brand from this investment.

[David Allemann, Executive Co-Chairman and Co-Founder]

Jay, just jumping to retail. For us, our own retail is not primarily about transaction, but it's about the inspiration. And if you just see how our store formats have expanded. Now, Regent Street does four times the revenues of our first store in New York. So, we're really seeing a lot of progress. We're also seeing lines in front of Regent Street.

And so, we’re really seeing that we're running towards a model that is very sustainable for us in the sense how the entire customer. Now remember, we don't plan to open hundreds of stores across the world, but we're going to be very focused on the most important locations where we have that role of own retail as a media channel and as an inspiration point as well.

In China, we have a little bit faster pace and there we're definitely running towards the blueprint then also for accelerating even expansion of retail.

[Jay Sole, UBS]

Great. Thank you so much.

[Operator]

The next question is from Sam Poser from Williams Trading. Please go ahead.

[Sam Poser, Williams Trading]

Thank you for taking my questions. I just have two. One is, in 2023, how do we want to think about the wholesale growth versus the direct-to-consumer revenue growth? And then secondly, what is sort of an optimum inventory turn that you see going forward?

[Marc Maurer, Co-Chief Executive Officer]

Yes. Hi, Sam. I'm going to quickly start with the growth and then Martin will elaborate a bit on the inventory and net working capital side. So, I think we should think about it in the same way that we thought about it for ‘22 or ‘21 without COVID. I think we're really trying to reach the right consumers through the right channels. And this is again why we're also a bit cautious in giving you exact numbers of doors.

I think we're really focused on managing sales through very closely. We’re very focused on managing inventory positions with our key wholesale partners as well, knowing that there's a bit of uncertainty around consumer demand in second half of this year.

And what we saw in Q4, what we're also seeing right now is that were able to reach many new consumers through our own D2C channel. We're able to reach them at great margins all at full price. And we're also able to drive quite a bit of apparel sales through that. And this is the strategy that we're going to continue. And we've communicated that we want to increase our own D2C share overtime. You've heard how Regent Street is performing. So, we see own retail also gaining speed.

So, expect that journey to continue. But as always, we're not giving an exact number on the split.

[Martin Hoffman]

And, then talking to inventory. So, this is very much a function of the future growth that we are expecting. But a good number to think about it that in the past we have seen our working capital to be in the range of 30% of net sales at the growth rates that we had.

So, at year end, we were at 37%. So slightly above that and the 30% this is how we would look into the future and have a better reference point.

[Sam Poser, Williams Trading]

Thanks. Can I just follow-up, I'm not looking for specifics on the breakout of wholesale. I just want to know are you expecting in 2023, are you expecting wholesale to grow faster than D2C or D2C to grow faster than wholesale? That's not a specific. It's just general.

[Martin Hoffman]

Yes. The good thing is that with 2022, we have the first year that actually has a clean balance again and a clean starting point because there's no COVID impact. So, so far wholesale growth was basically stronger because of the weakest last year. And D2C on the opposite.

So, there's an opportunity for us to grow our D2C share this year. But again, as Marc said, it all depends on the sellout and the continued success of our retail partners and how they position themselves in the market.

So we don't -- we will not manage the share, but midterm, we clearly have the aspiration to over proportionate to grow our D2C share.

[Sam Poser, Williams Trading]

Thank you very much.

[Operator]

Ladies and gentlemen, that was our last question for today. The conference is now concluded and you may disconnect your telephone. Thank you very much for joining and have a pleasant day. Goodbye.