Q2 2023 On Holding AG Earnings Call

Participants

David Allemann; Co-Founder & Executive Co-Chairman; On Holding AG

Jerrit Peter

Marc Maurer; Co-CEO; On Holding AG

Martin Hoffmann; Co-CEO & CFO; On Holding AG

Abigail Virginia Zvejnieks; VP & Senior Research Analyst; Piper Sandler & Co., Research Division

Alexandra Ann Straton; Research Associate; Morgan Stanley, Research Division

Ashley Anne Owens; Associate; KeyBanc Capital Markets Inc., Research Division

Aubrey Leland Tianello; Research Analyst; BNP Paribas Exane, Research Division

Cristina Fernández; MD & Senior Research Analyst; Telsey Advisory Group LLC

James Vincent Duffy; MD; Stifel, Nicolaus & Company, Incorporated, Research Division

Janine Stichter

Jay Daniel Sole; Executive Director and Equity Research Analyst of Softlines & Luxury; UBS Investment Bank, Research Division

Jonathan Robert Komp; Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division

Olivia Townsend; Research Analyst; JPMorgan Chase & Co, Research Division

Samuel Marc Poser; Senior Research Analyst; Williams Trading, LLC, Research Division

Tom Nikic; Research Analyst; Wedbush Securities Inc., Research Division

Presentation

Operator

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the ON Second Quarter 2023 Results Conference Call. (Operator Instructions) Thank you, Jerrit Peter, Head of Investor Relations. You may begin your conference.

Jerrit Peter

Good afternoon, good morning, and thank you for joining ON 2023 Second Quarter 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 Hoffmann; and Co-CEO, Marc Maurer. Before we begin, I would like to remind everyone today's call will contain certain 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 21 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 a reconciliation to the most comparable IFRS figures. We will begin with David, 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 David.

David Allemann

Thank you all, and a warm hello. It's a pleasure to reconnect today. I hope you have had a splendid summer and are now filled with renewed vitality as we approach the second half of the year. In my introduction, I would like to talk to the tremendous vitality of our real team, business and brand. It's this very energy that allows us to present such an outstanding set of results. Q2 '23 net sales of CHF 444 million are the highest in our history, reflecting a growth rate of over 52% versus the prior year period or over 60% on a constant currency basis. Our adjusted EBITDA grew to CHF 63 million, growing by nearly 100% year-over-year, supported by the highest gross profit margin since our IPO. These numbers are the evidence for the ongoing strength of the own brand and the exceptional demand we continue to see across all channels, which we will dive into further later in today's call.

Remember our recent conversation during the full year results call, we spoke with conviction about 2023, promising to be the best year yet for all. Well, halfway through, and it's all true on so many measures. We aren't just driving the numbers wave, but also reaping the rewards of being a bold community-focused brand that you can't ignore. Let's now direct our attention to the 3 crucial pillars that make on tick, the vitality of our product, our brand and our global outreach. Firstly, our product vitality is at an all-time high. As a founder, deeply involved with the product team, I'm thrilled by the achievements. One has launched 6 all new performance shoes within a short 24 months with 4 transforming into major franchises. They already contribute a substantial share to our product range of the recent launch and keep growing fast.

As you travel, keep an eye out for our Cloud Monsters, Cloud Runners, Cloud Go and Cloud Surfer on major running rules. You'll see that our shoes are loved by runners everywhere. And don't forget a recent trial, the Cloudboom Echo 3. The long distance running shoe worn by all athletes to win some of the biggest races around globe, including the Ironman Championship. The majority of our product sales stems from shoes exclusively made for runners with a lot of vitality from the already mentioned ON franchise. You will appreciate that ON's product success has a uniquely broad based with 7 franchises that have evolved from a single product into a major building block for the business. We never aspired to be a one trick pony. Obviously, I can't speak of Pony without mentioning the stellar reception that our new kids shoe business has experienced, an agent franchise and major building block for an in the making. #2, ON brand vitality resonates with a new generation of customers. You know that Dream On is our mantra.

As a community-driven brand, we challenged the status core igniting the human spirit through movement. A prime example is our latest retail store in Williamsburg, New York opened on June 30. If you have already visited it's a true community space. During the opening week, we hosted a 5K Run and Block Party, featuring local details and dancers attracting over 1,200 community members. Jerrit highlighted our social impact program right to run. It's aimed at supporting community organizations that break down barriers to movement, from existing individuals with disabilities in running races to encouraging cities to explore the countryside. Our goal is to amplify these efforts and uphold everyone's right to run and move.

The screening of the short film right to race was a very special moment. Premiering on Eurosport on world record today, it tells the inspiring story of ON Athlete Dominic Global. The Diamond League winner is on his journey of home from filing Sudan to this quest for Dominic. We are humbled to support Dominic and eager to see him at the starting line in Paris next year. In June, Paris joined a London and Vienna in hosting on track nights. Unlike typical track events, this night infuse festival culture, creating an unforgettable atmosphere for runners and spectators. There will continue to be a pillar in our ambition to engage the community, celebrate this port of running and build a loyal fan base for ON brand. This also brings me to my third point. ON is driving fast global expansion with a localized approach, and this is backed by global initiatives that drive the Vitality as a performance running brand.

The U.K.'s growth more than doubling in Q2, exemplifies this strategy. Initially, a distributor market, taking it in-house has allowed us to make even more customer informed decisions on focused locations. We are partnering with retailers like JD, Foot locker and Premium Department stores. Our long-term Region Street store or introduced earlier this year is a huge success, exceeding our expectations in driving brand awareness. Additionally, a targeted Cloud Monster pop-up in Liverpool in May, tailored to local demographics, provided opportunities to engage with fans, 3 vans and run clubs. These trends well true across our global markets, and we are building a strong playbook of specific initiatives that make tangible impacts on brand awareness and sales. You can bet that we are not just tracking the metrics. We're actively monitoring how the own brand is perceived by consumers.

Our commitment to performance running and continuous innovation is hitting the mark, and we are pleased with the results. The observant in the U.S. where the outstanding results of our athletes in recent months has significantly elevated the performance credibility of our branded products. We have already spoken about Hellen Obiri's Boston Marathon win. Recent successes with our cloud spike on shorter distances have further propelled all reputation. At the U.S. track and field championships in early July ON Athletic Club members, Yared Nuguse, Joe Klecker and Alicia Monson reached a combined 4 protein finishes in the 1,500, the 5,000 and 10,000 meter race. So you can expect only to be ready for Budapest or Atlantic championships this coming weekend. As you see, the strategy of integrating local community outreach with a global approach is proving highly effective, particularly in new or emerging markets.

Regions such as the U.K., Northern and Southern Europe, the Middle East, China, Japan and Latam are now vital parts of our growth, contributing 1/4 of our overall business. The success in these areas underscores the tremendous potential for further expansion. So in conclusion, on is full opticality, striving in product innovation, brand resonance and global expansion like never before. Now let's take a pause and look back. We're approaching our 2-year anniversary post IPO is coming mid-September. Our life as a public company has been marked by a remarkable progress and significant achievements, exceeding nearly all expectations we set 2 years ago. We view this milestone as an opportunity to update all our investors on our plans and trajectory for the future. Therefore, we are thrilled to announce that we will host an Analyst and Investor Day on October 4, 2023. We look forward to many of you joining the on team as we continue to dream on. Now it's my pleasure to hand over to Martin for the detailed Q2 financial review and the updated outlook for the year. Martin?

Martin Hoffmann

Thank you, David, and hello to everyone on the call. It has been another outstanding quarter, driven by the strength of the own brand across all channels, regions and product categories. Since the very founding of the company, one has been an innovation-driven brand. It is happening across all departments, from finance to talent, from operations to retail and marketing but ultimately culminates in the amazing products, our world-class teams develop for our fans. David mentioned the broader launch of the Cloudboom Echo 3. It's a huge step in enabling the most ambitious runners all over the globe to lease up with races in our highest performing chose. And we are extremely pleased with the waves of positive feedback and coverage it has received. We are convinced that Pinnacle products like this one will continue to increase the share of top runners and OMS and further fuel the adoption of our brands with the everyday running community.

If we look beyond running in Q2, there was, of course, one more huge win that led to significant publicity and promotion of the on brand. In early June, Iga ÅšwiÄ…tek clearly elevated our presence on the grand slam courts, a win of the French Open at Roland Garros marked a huge step in building our credibility in the tennis space and clearly created massive excitement inside and outside of all. Iga from country Poland offers a small proof point of the additional reach and awareness the presence on the (inaudible) stages brings. Interim in Paris, Google brand searches in Poland increased by over 7 times. What stands out for me when it comes to tenders is how it is the perfect representation of ON. The highest level of performance, combined with the ability for a highly premium execution. A big congratulations goes to ECA and also to our team that in a very short amount of time, has innovated these unique pieces that have created so much excitement.

Now moving on to the numbers. As David mentioned, we are extremely proud of posting on 6 consecutive record quarter, achieving net sales of CHF 444.3 million, up by 52.3% year-over-year and clearly exceeding our expectations. Our last 12 months trailing net sales have now reached CHF 1.56 billion. The strength of the brand and the momentum become even more evident when considering the current FX environment. Over the last months, we have seen a persistent strength of the Swiss franc versus nearly every other currency around the globe. Absent those negative currency effects on a constant currency basis, our net sales growth was approximately 60% in Q2, with negative FX impact of around CHF 23 million on top line. Importantly, as a result of the high-end consumer demand, our fastest-growing channel in Q2 was our direct-to-consumer business, growing at 54.7% versus the prior year period.

This strong D2C performance resulted in a D2C share of 36.8% compared to 32.6% in Q1 and 36.2% in Q2 last year. With CHF 163.5 million. Q2 D2C net sales was a quarterly record and even significantly exceeded the very strong results during the holiday season in Q4 2022. Encouragingly, we have also observed an all-time record in traffic to our e-com channel, growing over 75% year-over-year. We see the strength of the D2C channel as a validation of our ability to bring consistent innovations to the market to balance our wholesale and direct distribution and to build a strong direct bond with our fans around the globe. We put pride in being an innovator, not only in the products we offer, but also in the way we operate our channels.

A year ago, we launched Onward, our resale platform were circularities at the core. Since then, more than 30,000 items have been given in new life through the program. In a couple of weeks, we'll publish our third ever impact progress report, where we will share more about our sustainability mission and progress. Finally, on D2C, we continue to see a small but increasing contribution from our own retail store business, again, quadrupling net sales year-over-year. This does not yet include a material contribution from our new Williamsburg store given the late June launch. But the store serves as another prime example of how retail is able to showcase on as a full head-to-toe brand. Our wholesale channel also grew rapidly in Q2, up by 51% versus last year to CHF 280.8 million.

Importantly, the demand for our product is also reflected in strong sellout numbers at our wholesale partners, which ultimately drove strong reorders in Q2. For example, our top 5 key account partners in the U.S. combined grew 92% in the first half of 2023. This does not yet even include the new established business with Dick Sport ingots. Importantly, this quarter includes only a very limited number of incremental doors versus Q1 '23. We're incredibly grateful for all the long-standing and close partnerships we have built globally with all our retail partners. One of those key partners for many years is REI. We're extremely honored to have been named their vendor partner of the year 2023 and can only return to brace and sense what this outstanding collaboration.

Looking ahead, and as communicated previously, we plan to selectively expand on our key wholesale partnerships by only adding doors with meaningful additive customer bases. While we expand selectively, we expect the net additional door number in the coming quarters to be lower than it has been in the past as we expect to see offsetting strategic door closures in some of our more established markets. The strong performance of our multichannel strategy is also reflected in strong growth rates across all regions. CHF 13.6 million net sales in the quarter, growing by 28.9% year-over-year, equivalent to around 35% growth on a constant currency basis. We continue to expand our market share in a very meaningful way, even as we see a more promotion-driven environment, off-line and online from other brands.

During the first half year, our D2C sales grew stronger than our wholesale sales in the region despite the covered lockdowns that expanded into the first months of 2022. David mentioned the ongoing strength in the U.K. Another market that is seeing significant growth and momentum is the Middle East. At the moment, our presence in this region is very limited, highlighting the significant growth opportunity that we have. Americas grew 59.8% in the second quarter, reaching CHF 26.6 million. We're happy to see that this growth continues to be supported by a very healthy full price sell-through at our key wholesale partners. In particular, we also continue to take market share in the specialty run channel despite a more promotion-driven environment by our competitors. At Fleet Feet, we are currently the fastest-growing brand, while at the same time, having the highest average selling price by a good margin, a great showcase of the incredible strong underlying demand for our innovative, differentiated and premium products.

Moving on to the Asia specific region, which grew by 9.2% in Q2 to reach CHF 34.1 million, strongly supported by significant momentum in China and Japan. A few months ago, Marc and I, together with members of our senior leadership team, had a privilege of traveling to China and meeting the team in person for the first time since the pandemic. We visited several of our own stores in Shanghai, Chengdu and Shenzhen, which are 3 of the 5 key cities that are currently in the focus of rolling out our own retail formats. In total, we currently have 17 owned retail locations. Beyond this, 13 additional cities are now home to an on-store operated by local franchise partners. Again, a great example of how we are focused and selective but at the same time, our planting seeds for future opportunities and growth.

It was hugely energizing to see all the fantastic work the team has been doing on the ground, and we are now even more excited about the opportunity within China and the Asia Pacific region more broadly. Leveling around the world in the last weeks, we are clearly able to experience the variety and diversity of on products on the feed and bodies along the core running routes, the trails are in the streets of global cities. This visible observation is also strongly supported by our numbers. The strong growth of the brand is driven by all product groups, product franchises and ultimately by all customer communities we are aiming to reach. Net sales in shoes grew by 52.6%, reaching CHF 48.2 million.

Apparel grew by 45.9% in Q2 to reach CHF 13.4 million. Q2 was the second consecutive quarter in which apparel growth exceeded 45%, resulting in CHF 57 million net sales in the last 12 months. The momentum in B2C and in particular, our owned retail stores, but even more our exciting product pipeline provides strong confidence about the opportunity we have ahead of us. Supported by the strong B2C share, a continued high share of full price sales and then again, more normalized supply environment on achieved a gross profit of CHF 264.5 million, representing a 64.4% increase year-over-year and a gross profit margin of 59.5%. This is the highest quarterly gross profit margin since our IPO and a strong validation of our strategy and our progress towards our stated midterm targets. Compared to Q2 '22, our gross profit margin increased by 440 basis points from 55.1% to 59.5%.

Largely as a result of the discontinuation of extraordinary airfreight usage, partially offset by slight headwinds from the current foreign exchange dynamics. We continue to consciously manage our SG&A expenses alongside our net sales development. In Q2, SG&A expenses, excluding share-based compensation, were CHF 216 million and 48.6% of net sales in Q2, up slightly from 48% in the same period last year. But we achieved economies of scale in general and admin expenses, distribution expenses were, as expected, slightly elevated as a result of the ramp-up of our warehouse automation project, alongside some temporary expenses for additional warehouse space needed in the quarter. As a result of the elevated net sales, combined with the strong gross profit and our conscious cost management, we have achieved an adjusted EBITDA of CHF 62.7 million in the quarter, nearly doubled from the EUR 31.4 million in the prior year period. This corresponds to an adjusted EBITDA margin of 14.1%, increasing from 10.8% in Q2 2022.

Moving to our balance sheet. Capital expenditures were CHF 11.2 million in Q2, equivalent to 2.5% of net sales. This represents a relative reduction in CapEx compared to Q2 '22, during which we incurred expenses in relation to our office build-outs in Zurich and Portland and invested CHF 11 million or 3.8% of net sales overall. As anticipated and communicated in our 2 previous results calls, our inventory carrying value came down sequentially versus Q1. While achieving higher net sales, our absolute inventory position reduced to CHF 435.9 million at the end of Q2 versus CHF 465.2 million at the end of the first quarter. By actively managing our production plans and more focused efforts across our teams, we continue to be well on track for even more normalized inventory levels in relation to sales by year-end.

Our cash balance at the end of the quarter was CHF 337.1 million. Importantly, as you will have seen from our 6-K on July 10, we entered into a CHF 700 million multicurrency credit facility agreement, which replaced our existing CHF 160 million credit lines. We do not expect to draw cash from the facility in the near term. Rather, we see the availability of funding as a fulfillment of our philosophy to plan prudently and to create future financial flexibility that aligns with the current size and maturity of our company and as a basis to drive our future growth out of a position of strength. With that, I would like to move to our updated outlook for the full year.

We have achieved record first and second quarter results and also had a strong start into the third quarter. We are receiving continued positive feedback from all our retail partners and have a pipeline of some very exciting new product launches in the second half of the year, both in apparel and in footwear. All together, this provides us with confidence that we have the opportunity to exceed our expectations that we had communicated in May. As you have seen in our release this morning, we are, therefore, again raising our outlook for the full year 2023 and now expect to reach at least CHF 1.76 billion, an implied year-over-year growth rate of 44%. It's important to point out that at current rates and compared to our previous guidance, this outlook includes an additional negative FX impact on our U.S. dollar sales of around 3% for the second half of the year around CHF 20 million.

For the second half of the year, our guidance implies a reported currency growth rate of close to 30%. This is equivalent to a constant currency growth rate of around 44% for the second half of the year and reflects our continued confidence based on the strong momentum and demand across channels, regions and products that we are seeing for the on-trend globally. We are well on track to reach our outlook of 58.5% gross profit margin. Throughout the rest of the year, we expect a continued high share of full price sales and continued normalized supply chain environment. Unlike on top line, an isolated U.S. dollar weakness has the potential to be somewhat beneficial in the second half of the year when it comes to margin. Together with the strong first half year gross profit margin of 58.9%, we do even see potential upside to the 58.5% in the case of an ongoing U.S. dollar weakness and no significant offset from other currencies.

We're also retaining our adjusted EBITDA margin target of 15%, which we continue to view as the right trade-off between profitable expansion and selective additional investments into the business while driving significantly higher absolute EBITDA at a higher top line outlook. This full year outlook implies an adjusted EBITDA margin of around 15.7% for the second half of the year compared to the 14.3% in the first 6 months. This reflects our aspiration to achieve further economies of scale at the higher expected net sales in half year too. Overall, our updated outlook for 2023 confirms our continued path of Durba growth by combining strong net sales growth while increasing profitability.

In sum, ON's momentum continues at a very high rate. During the first half year, we have again achieved many new heights across products, geographies and channels, and we continue to dream on. The very strong growth of the first 6 months, resulting in 6 consecutive record quarters was powered by the incredible teamwork of our dedicated teams and partners and required all of them at their best. With optics for granted and are extremely grateful for all the focus and hard work, but also positive spirit that we have experienced across all our offices, factories and warehouses. With that, David, Marc and I would like to open up to your questions. Operator, we are ready to begin the Q&A session.

Question and Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Cristina Fernandez from Telsey Advisory Group.

Cristina Fernández

Congratulations on a good quarter. I wanted to see if you could expand a little bit on the second half outlook. How are -- how is the order book for the second half from your wholesale partners relative to 3 months ago? And looking at it on a constant currency basis, the 44% growth that you have embedded, how has that changed?

Martin Hoffmann

Cristina, it's Martin. Thanks for your question. Let me reiterate on our statement on our guidance. So we increased our guidance from CHF 1.7 billion to CHF 1.76 billion. If the U.S. dollar would have stayed in relation to the Swiss francs, where it was at the back of last May, where we basically gave the last guidance, we would have increased our guidance to CHF 1.78 billion. But the recent weakness of the U.S. dollar is expected to have that additional negative impact of about CHF 20 million for the second half of the year. Just to put things in a bit in perspective, if you talk about the CHF 1.76 billion and would convert this into U.S. dollar today, we would talk about USD 2 billion sales. So we continue to see very strong growth. And this is reflected in the currency-neutral growth that we have for the second half of the year in our guidance, and we expect strong growth in both channels.

Of course, there will be a strong focus on the holiday season as also in the past, our second half of the year is driving a higher D2C share compared to the first half of the year. Important is also to remember that we are compounding against a stronger second half of the year, last year compared to the first half year last year that was more impacted by the supply shortages. And so, we see continued very strong demand also at the beginning of the third quarter or in the first weeks. We're in a good position when it comes to our inventory. So if we see stronger demand, then we will be able to fulfill that strong demand. And as we have shared in the past, our aspiration is always to exceed our expectations. And the order book is strong. The D2C engine is strong, and so we're going with a lot of confidence into the same.

Cristina Fernández

And then as a follow-up, can you provide more color as far as the product launches, just remind us what's coming out for the back half of the year, both in footwear and apparel.

David Allemann

Christina, this is David. Very happy to do so. So as you know, at on running remains core, and you have heard from Martin, that we are the fastest-growing brand right now at Fleet Feet. And so we're very excited that we continue with new products. And you have seen that reached our success recently with new franchises in running. And of course, we're doubling down on that. So for example, when you look at the Cloud Monster, expect to see products that are even more cushioned than the recent Cloud Monster extending that franchise. So making sure that our recently added franchises remain and continue to grow a substantial building blocks for the business.

You can also expect the new apparel in running. I'm especially proud about new running collection and energy collection that is fully made out of cling cloud material and a run culture, combining running and unique aesthetics. So we even punch the holes for your start number at the marathon in these pieces and engineered them. When it comes to -- when it comes to outdoor, we are continuing with a focus on trail and adding a lot of lightweight models. And then when we come to tennis, you can expect that our collaboration with Roche, but then also with eager we spend, we learn a lot about shoes and apparel, and we are adding updates to our performance ranges. So as well in tennis, we built from the very performance core, and you will see in the field also the second generation of the Roche Pro, the pinnacle of our performance tennises.

Operator

And your next question comes from the line of Alex Straton from Morgan Stanley.

Alexandra Ann Straton

Great. Congrats on another wonderful quarter. I've got 2 for you both. Maybe first, just on the market share gains that you mentioned, can you just elaborate on where you're getting those by geography and channel, maybe with what types of partners? And then how you think about who you're maybe taking share from? And secondly, it sounds like you view the 150 basis points of adjusted EBITDA margin expansion as the right balance of driving the top line while also growing profitability. So just looking ahead, is that kind of what you're targeting on a forward basis? Or how should we think about kind of expansion from here?

Marc Maurer

Alex, this is Marc. Welcome also to everyone from my side. So I think we're very, very proud that we are taking market share across the board in a heavy promotional environment. So what we observed in Q2 is that quite a few retailers have levels, and that will also continue into Q3. So that has led other brands to need to discount the product. And we have paid very, very premium and at full price, which is then in the end reflected in our gross margin. So we're really gaining share in all geographies, including EMEA, including Germany, Austria, Switzerland. And we're doing that in different channels.

So obviously, just started at exporting goods, for example. And we're seeing very, very strong sell-through, for example, on is the #2 running brand in the house of sports stores out of the gate, which surprised us very positively. And we're also, as Martin already mentioned, for example, Fleet Feet on is the strongest growing brand. So really happy to see that. And this -- even though wholesale grew so strongly, D2C was able to outpace wholesale growth, which shows the strength of the consumer demand.

Martin Hoffmann

Alex then, let me take the EBITDA question. So as you have seen, we had a very strong first half year. We generated 2.5x more EBITDA than last year. In there, there is a lot of operational leverage. In addition, we compensated for around 50 to 100 basis points of FX headwind. But we always said that we are very consciously managing towards the 15% EBITDA. And in a situation like the first quarter, but also now where we are exceeding our expectation on top line. This gives us additional opportunities to invest into the business and as such into the growth into the future. So at the moment, those investment areas are clearly around our commercial capabilities into our D2C and customer data engine. We are building a retail organization within the organization and then also investments into our tech back end. So our commitment is towards the 15%. And if we achieve higher net sales, then this gives us more opportunities to invest. But it's very clear also to add this. For the long term, we are committed to further increase EBITDA. So the long-term guidance that we gave of high teens, that's still our aspiration.

Operator

And your next question comes from the line of Jay Sole from UBS.

Jay Daniel Sole

I want to ask about the stores. Given the performance of the stores that you've opened in the last couple of quarters, how has it changed your confidence about opening more stores? And what are your plans for store openings over the rest of this fiscal year and into next year, if you can share that with us?

David Allemann

Thank you for the question, Jay. Yes. So we are very -- we already spoke about in Q1, and we continue to be very pleased on the retail performance, the own store performance. We're able to attract and ignite and inspire new consumers, bring them into our own environment, which really helps, for example, the apparel share because they can experience the brand in the full debt. We, right now, basically globally on has 7 stores, the next ones without China, so outside of China. The next openings are planned for Miami, Paris, and we're relocating Portland, Austin should come pretty soon. So we're really gaining confidence in the model. We're seeing the impact that it has on the consumer, and we will provide a more detailed update on the store outlook and the retail outlook at the Investor Day and how we continue to build on own spaces.

Jay Daniel Sole

Great. And maybe if I could follow up with one more, just on inventory. If you can elaborate a little bit more about the inventory because the growth rate really improved a lot sequentially from last quarter to this quarter. Can you just talk about your comfortable with the inventory level? And when do you see the inventory level getting back in line with the sales growth rate or at least to a level that you feel like is appropriate?

Martin Hoffmann

Yes. So we are really impressed with the work that the team is doing also in collaboration with our factory partners who show a lot of flexibility, and we were able to decrease our inventory level compared to the last quarter. You have seen the numbers. So as communicated in the past, towards the year-end, we are aspiring to foresee that our inventory levels will be somewhere between our year-end '22 and our Q1 number. We also shared that our aspiration at the current growth rate is to land at around 30% of net sales when it comes to our working capital. And now that we increased our guidance further, that would be equivalent to around CHF 460 million of inventory. So basically, right in line with the expectation that we gave. Very importantly, we are very happy with our in-channel inventory. So the inventory that is our wholesale partners. In the U.S., we are generally between 3 to 4 months of inventory in Europe even below 3 months. So we have a very healthy channel. Our inventory in our own warehouse is still fresh and is in line and will allow us to continue selling at a high full price share also in the remaining part of the year.

Operator

And your next question comes from the line of Olivia Townsend from JPMorgan.

Olivia Townsend

My first one is just on current trading. David alluded that trends have been quite encouraging as you've headed into Q3. I'm just wondering if you could put any numbers around that as to how you see the new guidance for H2 sitting between Q3 and Q4? And then just secondly, on the inventory point, could you just give us an idea as well about how the aging looks versus what you would normally expect? And what kind of FX or ASP impact you're seeing in those numbers as well? That would be very helpful.

David Allemann

Thank you for the questions, Oliver. quickly going to elaborate on July and the first days of August, and then Martin will give you or try to give you an answer on the inventory question. So July and the first day of August have been very positive for us. I think what seems important is not just a number. It's how we get to the numbers. So which consumers are we reaching, what's the product mix that we're selling? Is it selling at full price? What's D2C share and so on? And how balanced is it across the regions? It also comps to a strong second half of 2022, where we're still comping now in the first half of '23 versus a relatively weak first half of '22. That was very much supply constrained. So kind of keeping all of that in mind, we're very, very happy with how the first few weeks in Q3 have unfolded and how consumers are continuing to adopt on and products that are all more rooted in performance.

Martin Hoffmann

And then to the inventory question, so as said, we have a very high share of in-line inventory in line with what we have seen in the past. For us, it was always important since the beginning to build the company also from a product life cycle perspective, that can maintain full price sales for a long time and such protect the premium position of the brand. So our products have a relatively long life cycle and therefore, the share of out of expected out-of-line inventory is relatively low. When it comes to FX, there is no FX impact in the inventory in itself. So it's based on the historical values. But of course, then when it comes into our cost of goods sold, that's where you see the impact.

Olivia Townsend

And maybe if I could just ask a quick follow-up, just how many stores are you in now both for JD Sports and Foot Locker, please?

David Allemann

Yes. So Foot Locker by the end of Q2, we were in 175 stores in the U.S. and 46 in EMEA. We're expecting to add an additional 50 in fall/winter '23. With JD, we were in 166 doors in the U.S., 60 in EMEA. We're also expecting to add 15 fall into '23. Those are mainly conversions from Finish Line into JD. So most of it is in the U.S.

Operator

And your next question comes from the line of Aubrey Tianello from BNP Paribas.

Aubrey Leland Tianello

I wanted to ask on gross margin. And within the 59.5% gross margin in the second quarter, maybe you could break that down a bit in terms of some of the components like storage cost, mix, FX. I think last quarter, there were several transitory headwinds. Just curious how that looked in the second quarter.

Martin Hoffmann

Happy to do so. So I think as we also said on the call earlier, the 59.5% gross profit margin in the second quarter is the strongest since the IPO. So it really shows that our -- the business that we have built is able to deliver the long-term margin that we always communicated of 60%. So we have seen, again, a more normalization of the supply chain environment. So clearly, shipping rates came down at the same time. We were using a very low share of air freight since we basically had the inventory in our warehouses already. Last year, we spent about CHF 13 million on air freight in comparison. So this is the key driver for the increase compared to last year. And we have a bit of a headwind from the currency environment, but not significant.

So for the second half of the year, as we said, we continue to expect a similar environment. And if the U.S. dollar in relation to the Swiss franc stays at a low level, we expect that we can for the full year, drive an EBITDA -- gross profit margin above the 58.5% that we communicated. And so we currently -- there's a lot of confidence that we can shout it.

Operator

And your next question comes from the line of Jim Duffy from Stifel.

James Vincent Duffy

We're hoping you can give us an update on some of the metrics you're seeing in your D2C business. Specifically, we're interested in how you're seeing the mix of new customers versus repeat customers and the mix of new products versus legacy products.

Martin Hoffmann

Jim, thanks for the question. So you have seen that the D2C engine continues to be extremely strong and really the power of our multichannel distribution has proven to be very strong again in the numbers. For us, it's a long-term strategy to grow D2C stronger than wholesale. And so the Q2 numbers are further validation of that. If we look into the numbers, we continue to see a very healthy and comparable mix when it comes to repeat customers and add new customers. So the growth is really driven by both customer groups. It's driven by a very balanced mix of products along the different customer groups that we are trying to reach. So from running, of course, with the products that David mentioned earlier, but then also into tennis, into apparel, into outdoor.

So this gives us a lot of confidence going into the holiday season. We were able to invest more in upper funnel marketing and in brand building compared to last year where we were reducing our marketing spending to compensate for some of the air freight. So we have built a strong funnel. We laid it out on the call that we have seen a record in terms of visitors to our website, which clearly shows the heat of the brand. And so as said, this gives us the confidence for the second half of the year.

James Vincent Duffy

Great. And then it sounds as though the management team has recently returned from marketplaces visits in Asia. Can you speak about those visits and the inspiration to the strategy and capital allocation, if there's any difference in your view after visiting the marketplaces?

David Allemann

Yes. Thank you, Jim, for the question. Yes. Actually, there was a picture on the call as well for the ones of you who saw it. So quite a sizable group from the management team visited especially China. And we're constantly visiting markets, right? So we spend a lot of time with our consumers. It's very, very important for us to understand where the consumers are moving and what's important to our fans. So this is what we're always doing. Unfortunately, we were very limited in traveling to China over the last year. So this was the first time since Kuwait broke out that we could actually go to China. So we spent time with the team. And what we learned is, a, that ON has a very, very strong or kind of reaches a very, very strong demand and consumer segment in China, but it's still very unknown, right?

So we are at the very, very beginning of our journey in China. The local team has been amazingly entrepreneurial in how they've built on and how they have responded to the Chinese consumer through a very, very difficult time. So we're seeing huge potential in China, and we're also seeing that retail works for on. It works for in China, and it's -- it will be an important pillar for our future growth. So we feel it's very much an opportunity. We have the problem that most stores are too small, which is a great problem to have. So we're looking into what's the right size of the stores within China, but also outside of China.

So really a lot of insights that we can also take from China to the rest of the world. And we also spent some time talking about Japan and Australia. And I just want to highlight here that Japan as a market is a very big running and sportswear market. It's an important market, and we're doing very, very well in Japan. We're super happy about the growth rates. We're very happy with the performance of the owned stores and our e-com engine in China. And we couldn't be more thankful to the work that the team has done over the last couple of years in Asia Pacific.

Operator

And your next question comes from the line of Jonathan Komp from Baird.

Jonathan Robert Komp

Martin, I wanted to follow up with a clarification that the distribution expense, I believe, in the first half of the year deleveraged by about 130 basis points. Could you just maybe quantify the extra storage fees that were included in that? And then when would you expect those to start to wind down here?

Martin Hoffmann

John, there are 2 effects in that increased number. So the first effect comes from -- we communicated this in the past from our projects to build additional warehouses, which are fully automated. So at the moment, we basically started to rent those warehouses, and they are currently being built out with the automation solution. And this is already driving some additional costs. And the second element really comes from the fact that we had those high inventory positions. We had the inventory flowing in earlier than expected.

So we had to rent some additional warehouses to unload the products from the containers, and that's also reflected in the numbers. Now the root cause for the second one is gone for the rest of the year. So we are not having those temporary solutions anymore, but we are still expecting to see the additional cost for basically the double warehouses until they go live. And in some cases that go live date is not before early '25. So we will expect to see a bit increased distribution expenses compared to where we were in 2022 before we then see the operation leverage coming from the automation.

Jonathan Robert Komp

Okay. That's very helpful. And then one follow-up, longer-term question. When I look back 2 years ago, roughly to the IPO, you achieved many of your financial targets set at the time more than a year earlier or even better in some cases. So as we think forward, just wondering how you're thinking today about the right pace for growth for the brand? And would you expect top line to eventually settle closer to something like 20% or 25% growth as you slow the door growth rate in wholesale? And just how should we think about performance versus lifestyle if you're targeting one of those to grow faster than the other?

Martin Hoffmann

Yes, as you said, we have exceeded all the targets or most of the targets that we have given at the IPO, which is also the last time that we gave a longer-term update. So we feel that ON clearly is a very different company today. They stayed a different state of our growth curve, a different level of maturity. And that's the reason why we decided to do the Investor Day on October 4, where we really want to highlight and talk about the points that you mentioned around our growth strategy, about our innovation, sustainability, but also give everyone the opportunity to experience the culture that we see in our offices around the world. So let us put a lot of that information into the Investor Day.

Operator

Your next question comes from the line of Tom Nikic from Wedbush.

Tom Nikic

So your growth in all the regions has been quite strong. Though the EMEA region has been slower than North America and Asia and the EMEA region did slow quite a bit from the first quarter, which I guess is somewhat surprising given your home market, and I would think that you'd have good brand awareness there and stuff like that. Just can you talk about the trends in EMEA that you're seeing? And is there anything that's kind of restraining your growth in EMEA and preventing you from seeing the kind of growth that you're experiencing in North America and Asia?

Marc Maurer

Yes. Thank you for the question, Tom. So let me elaborate a little bit on what we're doing in EMEA and how we're looking at the numbers. So I think, first of all, we want to say on grew in the first half year in EMEA with 40%. So we feel that's a strong growth rate, and that's very much also in line with our expectations. In Q2, we grew by 29%, as I already stated in the prepared remarks. We see a very strong demand coming from U.K. We're very happy with the consumer mix. We already elaborated on the London store that is doing really well. We had pop-up spaces in Liverpool, kind of tapping into an even younger consumer segment. So very, very happy there. then we see we're really building markets like France, like Spain, like Italy, that's why we, for example, are accelerating the retail store in Paris, which will be a very important one to tap into the French market in an even more advanced way. And then we're very much refocusing on around performance, distribution and running distribution in Germany, Austria and Switzerland.

Even though we're doing that, the strongest absolute growth contribution comes from those 3 markets to the European number. So that's very, very important. One is still gaining market share in those 3 markets. They're growing and they're contributing most of the growth to the EMEA region. What you can expect is that in the second half of the year, we will have an impact from roughly 5% to 10% on the European wholesale number from door closures. So we're closing roughly 200 stores that are not focused around performance and run distribution and that are not reaching on core consumer segments. So this is how we're looking at it. We're very happy how kind of that effort is unfolding. One example, the Cloudboom Eco 3, which is our fastest performance product sold out in Switzerland within 24 hours, which shows that on is really being perceived at that performance running brand and the efforts are working out.

Operator

And your next question comes from the line of Abbie Zvejnieks from Piper Sandler.

Abigail Virginia Zvejnieks

Just in terms of wholesale, a really challenging environment in the U.S. I mean, you've outperformed, obviously, but is there any difference you're seeing between Performance Products and lifestyle products? And then is there any guidelines or how you're thinking about what your future opportunity is for market share in the specialty run channel?

Marc Maurer

Thank you. So again, here, I think as I already stated, we're seeing a very promotional environment, and we're very much focused around bringing premium products to life with our channel partners in our own D2C environment at the full price. So what this results in is in our running range growing even stronger than our all-day range, which is a great sign that basically, the performance of the product is being appreciated. And we're winning with the new launches that we just had that David spoke about. So Cloud Monster, CloudGo and so on. The second thing is on is really playing at this intersection of performance and all day. So when we take a product like the Cloud Monster, that is hugely gaining share on the running route. It's already the #2 on product if we count right now on running routes. That's also resonating really, really well with the younger consumer in channels like JD. So that leads us then to a product like, for example, the Cloud Nova that is a running silhouette, is an all-day product but still shows very, very strong growth rate. So from a product mix, including apparel, we're very, very happy with what we're seeing despite that environment. And there's really nothing where we would need to say, hey, this is clearly lagging versus other products or where we would have expected to see different growth rates.

Operator

And your next question comes from the line of Sam Poser from Williams Trading.

Samuel Marc Poser

Just a couple people have asked a lot of good ones. One, what is your forecasted -- like what is an optimum inventory turn? And then secondly, how many stock colorways do you have sort of within like the entire assortment of product? And three, what is your wholesale door count now versus -- globally versus last year? And what does that look like for the balance of the year?

Martin Hoffmann

Thanks for the question. So as I said, our near-term goal for managing our inventory is to finish in that range of year-end and Q1 number. So with the perspective of maintaining 30% working capital in percent of sales. We see many levers for improving that number going forward. So from more -- better integrated business planning to managing our product life cycles even in a better way, working with more direct shipments towards our biggest retail partners. So a lot of opportunities to bring that number further down. And we have started to work on those, and we expect then over the course of the next years to improve our inventory situation. But at the moment, we need to balance basically our production commitments that we gave to our factory partners with the sales that we are having. And as I said, we have the right inventory on hand, which is important for us. And of course, managing the number of SKUs and having that -- seeing economies of scale there as well is a super impotent factor when we are planning our future product assortment.

Marc Maurer

Just add to continue with the SKUs and the color options, I think for us, we're not looking at an individual level. We're really looking, can we increase efficiency in our inventory? And are we reaching the right consumer in the right channel with the right variability, right? So basically, we would do certain color options with specific wholesale partners. And we've had a product that was only available on e-commerce on. And so how we are able to react to consumers and shape consumer perception is really what's guiding us here, keeping overall efficiency in mind. And then apparel is growing strongly. It's growing very strong in our own channel, as I already mentioned. And with that comes more color options on the apparel side as well, apparel very naturally for those different cycles. You want to have more variability when it comes to your T-shirts and so on. So expect that also to drive some of the color options that you'll see going forward.

And then very quickly on wholesale. So by the end of Q2, we had roughly 9,800 wholesale doors by the end of Q2 2022, it was 8,600 doors. Historically, we added roughly 400 to 500 doors basically quarter-over-quarter. We're expecting this to drop a bit as we continue to work with larger partners that are reaching broader consumer segments as well. So we expect the additional door openings to go down to probably around plus/minus 200 till net new doors that's important until year-end 2023.

Operator

Our next question comes from the line of Ashley Owens from KeyBanc Capital Markets.

Ashley Anne Owens

Just looking at APAC, still a high single-digit percentage of the business, but this is another quarter where it grew over 90%. Just curious on your thoughts for the sustainability of this moment in near term? And then if there's anything you do as being low-hanging fruit you could capitalize on that help maintain the current strength in the region?

Martin Hoffmann

Yes. So on APAC, really, I think it's -- I mean, the future will be dominated by the growth of China. And this is really -- right now, it's about how fast can we capture consumer demand. This is about our capability to open new doors because a lot will be owned and franchise distribution. It's about our capability and how we can expand with some of our e-com partners like Tmall. So we don't see any kind of major constraints in terms of market size and definitely, when it comes to China for a very long time to come. What's important, we're building a premium performance sport for a company. And that's how we're winning in China. We're not going to win our price. We're not going to win in a promotional environment. So this is dictating and shaping our pace.

In Japan, we're a bit further ahead. So super happy what we're seeing right now. Japan definitely is still far away as well from reaching maximum potential, but it's clear that we don't have as many growth ahead of us in Japan and Australia to that versus China. What's almost untapped is the rest of Asia Pacific. We're talking about huge countries like Indonesia, for example. So this is very much distributor led, and that's definitely a more long-term opportunity for us to focus on when we're ready for that market.

Operator

And your next question comes from the line of Janine Stichter from BTIG.

Janine Stichter

Congratulations on the strong quarter. On the slower wholesale door growth over the next several quarters and the selective closures you mentioned, is that solely related to the repositioning on the European wholesaler? Is there anything else in there? And then more broadly, I would just love your thoughts on what parameters you think about when you choose to exit a door. And then as a follow-up, as you look at your door base, would you expect there to be any more meaningful closures beyond H2 of this year?

Martin Hoffmann

Yes. So as Marc said, we expect to close around 200 stores in Europe. And that's basically what's also incorporated in the number that Marc just gave where we expect a net addition of doors of 200. So we expect the impact on sales a bit distributed across the second half of this year, especially Q4 and then also Q1 and Q2 next year as really the doors are closing or we stopped the supplying at the beginning of next year. But of course, the reorders from those stores will already be significant visible in the -- towards the end of this year.

Marc Maurer

In general, I think you can look at -- from the wholesale growth, usually 60% is coming from new doors and 40% is coming from existing doors. So that's still relatively consistent. And we're constantly looking at what is our optimal environment in which we can reach our consumers in the best possible way. This is how we're working with our partners, how we're working with our e-com engine, our own stores. And right now, we feel very comfortable with where we are with the partner landscape, including the disclosures, and we're not foreseeing any significant impact in, for example, 24. So this is really an effort that we're doing now, and we're very happy with our other partners and how we are able to tap into the consumer segment.

Operator

And this is the end of our question-and-answer session and also concludes today's conference call. Thank you for your participation. You may now disconnect.