On Running: Federer-Like
- For On Running, revenue increased +81% in North America for its December-end quarter, bringing the year to $775M, which for the year represents a +$345M increase (mainly wholesale dollars). For comparison, HOKA’s 2022 annual revenue increased +$513M to $1.3B.
- Recall that On Running has now reached a level of scale that it is seeking to open its own retail locations, in addition to expanding into more wholesale doors. For its U.S. openings, it is starting with Miami and Williamsburg, New York. Co-CEO Martin Hoffman stated, “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 that's an inspiration point as well.” On wholesale, Hoffman said, “In Foot Locker, Q4 2022 was by far our strongest sellout quarter in history. With the same number of stores as in Q3 2022, units sold increased by over 50% quarter-over-quarter, supported by the continued demand amongst younger consumers for products such as the Cloudnova. For the full year 2022, we achieved 73% growth in wholesale. We were able to drive significant same-store growth with new and existing products by being disciplined about expanding our door network in our own markets from around 8,000 to 9,200 doors over the past year…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.”
- Co-CEO David Allemann stated, “It's clear to see that 2022 was a huge year for us, with the introduction of the CloudRunner, Cloudco, and Cloudmonster, we added three major silhouettes that have been strongly supporting our ongoing market share increase on runners feet…Back in February, we kicked off our spring/summer 2023 season with a focus on our full head-to-toe offering by introducing our latest apparel collection. yesterday, we made our ambitions clear for tennis when we announced the signings of two of the sport's most exciting talents to our roaster of top-ranked tennis professionals. The women's world #1 ranked player, Poland's Iga Swiatek; and Americas newest men's sensation, Ben Shelton, for whom On is the 20-year-old's first-ever multiyear sponsor. Going forward, both players will be wearing the company's newly developed On collection for professional competition and customer additions of The Roger Pro. The competition Tennis shoe has been engineered and designed individually for and in close collaboration with both players…We're working towards the goal of being a global sportswear brand and this means they will be spending even more time on apparel in '23 to further drive this business.”
adidas: Refocusing on Sport
- In addition to the inventory glut in sportswear and athleisure, adidas has the challenge of getting through the hole created by the departure of Yeezy. The company's Q4 2022 release reads, “Underlying operating profit to be around break-even level reflecting sales loss of around EUR 1.2B and corresponding negative operating profit impact of around EUR 500M from potentially not selling Yeezy stock.” The North American segment profit margins for Q4 declined from 18% to 3%. Profits for the region are expected to be one-third the level of 2021. Also of note, China is a big market for the company (20% of 2021 revenue) and revenue declined -50% in the region during Q4 and is expected to decline at a mid-teens rate for 2023. Additionally, they pulled out of Russia (EUR 100M of revenue). Lastly, overall Inventories remain too high with turns of only 2.4X versus Nike at 3.1X (still too high) and healthy levels at 4.0X.
- Incoming CEO Bjørn Gulden (recruited from Puma) is quoted saying that the company needs to, “reduce inventories and lower discounts. We can then start to build a profitable business again in 2024. Adidas has all the ingredients to be successful. But we need to put our focus back on our core: product, consumers, retail partners, and athlete.” And part of Gulden’s plan is to refocus on sport, not only soccer and running, but on smaller sports as well. As such, one should expect a lot more storytelling/merchandising around the thrill of sports, teams, and its sports celebrities at Adidas’ and partner’s retail locations.
- In regards to North America (61% of the business is wholesale), Gulden said, "to be successful globally, you need to be successful in the U.S. And I think it's fair to say that it's the most difficult market for non-American brands. Inventory level in the industry, even higher there, not only with the retailer, but also with the brands. And you know that in the U.S., discount is a drug. I would say, 1.5 years ago, we almost had no discounting and both the brands and the retailers were making their best results ever. Now we're back to over inventory. And here we go again. And of course, it's hurting both retailers and us. And again, it's something we need to work through in 2023. The combination of these two things is a very, I would say, challenging order book for the second half. Retailers our very careful committing to orders in the volumes that we would hope for. That's why, of course, we are now doing everything we can to convince the retailers that we are the brand of choice going into 2024 and that we have changed or trying to change our attitude very, very much to be a service-oriented brand also for the retailers and then especially in the U.S.” Recall that one of our big themes for 2022 & beyond was brands turning their gunsights on the U.S. consumer to de-risk their businesses.
Allbirds: Pausing Retail Expansion
- A smaller and more challenged brand is Allbirds. After a very difficult 2022, it has made the decision to pause its retail expansion in the U.S. and transition its international business from DTC to some form of wholesale or licensed model. Q4 2022 revenue was down 13% and Q1 2023 revenue is expected to be down mid-twenties. Allbirds has $170M in cash on the balance sheet, but EBITDA losses are $25M per quarter. Management doesn’t expect the business to reach profitability until 2025. Lastly, high inventory levels have been problematic over the past 18 months and levels remain a challenge with turns of only 1.6X.
- Allbirds ended 2022 with 42 locations in the U.S. and only three more locations are expected (leases signed in early-2022). 2023 is to be about driving customer acquisition; boosting traffic and conversion rate are also objectives, which implies that management is not pleased with where things stand on either metric. In a mark that it’s trying a new approach for its stores, a new leader (from Athleta and Under Armour) has been hired as Head of Stores. Allbirds made other leadership changes, including appointment of a new CFO Annie Mitchell and they appointed a Chief Transformation Officer Jared Fix.
