On Holding AG (ONON) Q2 2025 Earnings Report, Transcript and Summary

Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to On Holding AG Q2 2025 results. [Operator Instructions] I would now like to turn the call over to [indiscernible], Head of Investor Relations. Please go ahead.

Good afternoon, and good morning to our investor community. Thank you for joining On Holding's 2025 Second Quarter Earnings Conference Call and Webcast. With me today on the call are On's Executive Co-Chairman and Co-Founder, David Allemann, and CEO and CFO, Martin Hoffmann. Before we begin, I will briefly remind everyone that today's call will contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements reflect our current expectations and beliefs only and are subject to certain risks and uncertainties that could cause actual results to differ materially. Please refer to our annual report on Form 20-F for the 2024 fiscal year filed with the SEC on the fourth of March 2025 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 accounting standards. Please refer to today's release for a reconciliation to the most comparable IFRS measures. 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 the call over to David.

A very warm welcome to our second quarter 2025 results call. We hope you are having an enjoyable summer. This past quarter, our story of growth continued with incredible momentum. Our results show that what we are building is robust and truly transformative. We grew net sales by 38% on a constant currency basis to a record of CHF 749.2 million, beating our expectations. But this wasn't just about growth. It was about our premium positioning, which drove further expansion in our gross profit margin to 61.5% and our adjusted EBITDA margin to 18.2%. What I'm most proud of is that this momentum was broad-based. We saw strength across every region, channel and product category. This broad-based resilience is the very definition of the athlete spirit in our business, setting the stage for long-term growth. The strong numbers we just reported are a direct reflection of something deeper. Today, I want to talk about one of the core values at On, the athlete spirit. The spirit is all about resilience and balance. It's about waking up ready to train regardless of whether we won or lost yesterday. It's about playing the long game, not chasing a fast win. We're building resilience everywhere, in our product portfolio and our channel mix, in the strength of our global footprint and fan base and in our founder-led leadership. It's building our future for years to come. For me, everything starts with the product. What truly excites me is that we're not just creating footwear, we're building iconic franchises. Today, we have nine distinct footwear franchises, each contributing more than 5% to our top line. That kind of balance isn't an accident. It's the result of a years' long focused strategy to build resilience into our portfolio. We're building iconic franchises like the Cloudsurfer and Cloudmonster, and we're also seeing fresh momentum with the newly launched Cloud 6. These are product brands in their own right. But our vision goes far beyond footwear. Our apparel business is expanding very fast and with it, our relevance as a full sportswear brand. We recently previewed our Spring/Summer '26 collection during Paris Fashion Week and launched new apparel with Zendaya, which will further elevate awareness. What connects footwear and apparel is On's strive in technological innovation and our routes in Swiss engineering and design. This allows us to show up to have, connected with a broader audience and build a truly resilient portfolio. But our product resilience is about more than just footwear and apparel, it's our commitment to win in multiple sports. We started in running, but we successfully expanded to trail, outdoor tennis and training, moving us closer to our vision of being the most premium holistic sportswear brand. For example, fans saw Iga Swiatec win an incredible Wimbledon final a few weeks ago and Panchelton captured his first Masters 1000 title at the 2025 Canadian Open climbing to world #6. And now fans can wear the styles of these athletes, both on and off the Tennis Court or they can shine in the training capsule collection, we just launched with FCA Tick. While ON is fundamentally a sports brands, the cultural shift towards sport as the new uniform and fashion means they're also a lifestyle brand, unlocking a much larger addressable market. Our hugely successful collaboration with Levi's on the Cloudtilt, which sold out almost entirely within days, retailing at USD 590 perfectly illustrates this intersection. The feed for the most premium global multisports brand is planted. The result of all this is what we call consumer resilience. What we're seeing is that we are no longer just for early adopters, we are now resonating with a much wide audience from established traders to the very young. Our brand is overindexing with Gen Z consumers. In the U.S., we have previously shared that awareness has more than doubled in a single year, making On one of the top on Atlantic shoe brands among teens. The last the Soft Wins campaign with Elmo for the Cloudserver. We're also seeing this broad appeal powered by diverse boards and franchises like the Cloud, which has grown from a running shoe into an everyday essential. Profit feels like we've reached a tipping point. We are converting broad communities who are buying on premium sports product again and again. Our channel strategy is another dimension of resilience and balance. Wholesale remains a vital channel, and we're incredibly successful with over 11,000 stores globally from the biggest players to local running specialty. At the same time, our Direct-to-Consumer business, both online and in physical retail is a key highlight with a particularly strong performance. We now operate 54 owned stores worldwide, and these are just places to transact. There are special experiences where product, brand, community and storytelling come together. With robust productivity growth in existing own retail doors, we are confident to scale on retail to create further balance between on wholesale and DTC channels. Next up, our high-profile openings in Palo Alto, Stockholm and. This global footprint has been a priority for us since the very beginning. As founders of a young Swiss brand from a small home market, what do you do? We went to Europe in our first year, to the U.S. in our second and to Asia, to Japan in our third. That global mindset has led to a significant business in the world's most important sports market, the U.S., where we continue to see strong growth. At the same time, we are seeing rapid demand acceleration in Europe with France, Italy and Spain showing lots of untapped potential for On. And the continued triple-digit growth in Asia as a whole is nothing short of amazing, including new expansions for our brand into Singapore and Thailand. All of this is leading to a beautifully balanced global portfolio. We are bringing this global mindset to manufacturing and supply. And it's this focus that recently earned us a major recognition. Fast Company named On one of the world's 50 most innovative companies of 2025, thanks to our LightSpray technology. This ultralight operates not built in a one-step process automated by a robotic arm in just 3 minutes. A few weeks ago, we launched our first LightSpray factory in Zurich, with 4 robotic arms. It's a path to the future of manufacturing, faster, less labor-intensive, in various locations with a much simpler supply chain that's closer to consumer demand. It's all about the long game and a company that is innovating on product manufacturing, beyond the product itself. Our financial profile mirrors our vision to be the most premium global sportswear brand and enables us to build for the long term. Powerful top line growth and our premium positioning means we can consistently invest in important multiyear projects, striking a balance between near-term success and long-term growth drivers. Our ambition of constant innovation means we dedicate significant time and financial investment into projects like LightSpray, knowing they will only fully unfold over several years and require consistent focus and patience. As I noted earlier, it's long-term commitments that support and strengthen our resilience. It's a virtuous circle. Our leadership philosophy builds a company that is here to stay for the very long time. As a founder-led business, Caspar, Olivier and myself with Martin as CEO, operate together with our senior leadership team like athletes in a team sport. We sometimes lose together and we often win together. We have the bandwidth to play both defense and offense at the same time. And we give each other very direct feedback, once in the locker room after the game. Our deep bench of talent is the ultimate source of our resilience. We hire for an exceptional balance, the right mindset, aligned with the 5 spirit of On combined with a unique skill set. Our diverse team comprises over 100 different nationalities, operates from 15 global locations and attracts 200,000 job applications a year, all in pursuit of finding exceptional talent. This deep bench of talent and our global structure bring in critical perspectives from around the world, to ensure we build a global brand with local sensibility. Our mission Dream On speaks to the growth mindset at On. Between daring dreams that create resilience, balance and opportunity now and in the future because we firmly believe the best days are ahead of us. We could not be more excited that Time Magazine sees it the same way. And in June this year, named On one of the 100 most influential companies globally. You just heard me share my excitement for the long game vision of On, but the vision is only as strong as its execution. It's my great pleasure to now hand the baton over to my partner and our CEO, Martin, to walk you through the details of a quarter that proves our vision is becoming a reality. So Martin, please?

Thank you, David, and hello from my side as well. The athlete spirit is the core of our culture, and I'm incredibly proud of the passion and unwavering focus our team and partners have shown over the last 6 months. We are 1.5 years into our 3-year strategic plan, and we are running far ahead of our expectations. For the next 1.5 years, we have more confidence than ever in the impact of our growth pillars and our products, customer experiences and ultimately, our financial results. And at the same time, this strategic clarity allows us to dream on to dream even bigger and even further to lay the foundation to bring our mission and vision to life at an even bigger scale, to invest time and resources to work on new initiatives, products and exciting projects that will expand our addressable market in the future as well as our abilities to elevate the premium experience for our customers. The incredible work of our team is evident everywhere. But what truly stands out to me is our brand momentum across communities, the power of our distribution and the rapid growth of our apparel business. Running remains the foundation of our brand, and it's where our credibility is rooted. In recent months, our proprietary brand tracker has shown a significant increase in our connection with runners and our performance credibility. We also grew overall brand awareness faster than any other brand in our category. This momentum will carry forward with the launch of the Cloudboom MAX next week. It's our first super shoe builds for the everyday runner, and many On team members, including myself, will be wearing it in our fall marathons. This brand heat is spreading. We are seeing great traction in Tennis Apparel and the new Cloudultra Pro and Cloudultra 3 by strengthening our connection with dedicated trail runners. What's truly unique is how we are reinforcing our position at the intersection of sports and lifestyle. Our brand record shows we are the only brand growing our connection with both, performance and lifestyle simultaneously, a rare position to be in, that speaks to the strength and versatility of the On brand. This is also evident in our outsized growth with the 18 to 34-year-old second. Momentum in our products comes to life through our multichannel distribution strategy. Over the last few months, I've had the opportunity to spend time with many of our global key account partners. In every conversation, I felt the incredible motivation and commitment to grow the brand together, including an offering elevated even more premium customer experiences. Now where is our commitment to premium experience is more evident than in our retail network and its exceptional growth, driven by both improvements in productivity as well as base expansion demonstrates the strength and resonance of this position. Three weeks ago, I had the pleasure of joining the opening of our first retail store in Singapore, a large and beautifully designed store at the Jewel Changi Airport Mall. The store delivered close to the highest daily sales across our global retail fleet during its opening weekend. The largest transformation since our Investor Day has happened in our apparel business. The passion within our team to build On as a toe-to-head sportswear brand is leaving visible marks across the whole organization. In the first half of this year, we sold more apparel items and one of our most successful footwear franchises, the Cloudtilt. Our retail momentum and the growing number of dedicated shop-in-shop executions are supporting our significant growth in apparel across all our regions, and we remain focused on taking our offer to the next level. Overall, we are building a foundation that is stronger than ever. We achieved close to CHF 1.5 billion in net sales in the first half of 2025, which is a 39% increase year-over-year on a constant currency basis. In fact, both Q1 and Q2 of 2025 at higher absolute net sales than the entirety of our first year as a public company. A reminder of just how far we have come in incredibly short period of time. As David and I have both said, our team and our culture are the ultimate source of our success and resilience. We are thrilled to have our new Chief Human Resource Officer, Caterina Berg, join us to continue building that culture. With that, let's have a look at Q2. It was another record quarter in both net sales and adjusted EBITDA. Net sales reached CHF 749.2 million up 32% year-over-year on a reported basis and 38.2% on a constant currency basis. Our DTC channel delivered another exceptional quarter, demonstrating incredible momentum. Net sales reached CHF 308.3 million, up an outstanding 54.3% year-over-year at constant currency and 47.2% on a reported basis. This very strong growth elevated our DTC mix to a new second quarter high of 41.1% of sales. Crucially, this reflects strength in both, e-commerce and retail, which are continuing to work together to boost our global brand awareness and customer engagement. The strength in e-commerce was particularly evident with accelerated growth in both EMEA and the Americas. While our APAC region continued to deliver results that significantly exceeded expectations. In retail, our flagship stores remain key in driving the success. Our Paris Shams LC store continues its strong growth a year after opening. And our L.A. Abertis store saw the highest year-over-year growth in the Americas, powered by strong community engagement. As LA prepares to host the 2028 Olympics, we are strategically increasing our brand exposure to capture the city's rising buzz and excitement. Meanwhile, our wholesale channel also saw strong growth in Q2, reflecting the strong demand across all regions while we maintain our focus on a slow and controlled store rollout. Net sales were up 28.8% year-over-year at constant exchange rates and up 23.1% on a reported basis, reaching CHF 441 million. We continue to build and scale relationships with premium distributor partners in select markets. The store we opened in Singapore, with one of these partners marks a significant milestone, and we are excited to explore new markets in Southeast Asia and in the Middle East through this channel in the coming quarters. Now let me take you through development by region, demonstrating our global momentum. Starting with EMEA, which delivered a very strong quarter with net sales growing by an outstanding 46.1% year-over-year on a constant currency basis and by 42.9% on a reported basis to CHF 197.8 million. This is the strongest growth rate we have seen in the region in the past two years, confirming the strategic decisions we took to elevate our brand perception. We're seeing this accelerated growth across both newer markets like France and Italy and established ones, with the U.K. being a particular highlight, delivering extremely strong growth rates on an increasingly large sales base. Moving on to the Americas. Net sales grew strongly by 23.6% on a constant currency basis and by 16.8% on a reported basis to CHF 432.3 million. As a result of the ongoing strong demand for the brand and our significantly improved operational capabilities, our DTC channel materially outperformed in Q2. Sell-in into our wholesale partners were at a lower base given timing of product launches. But sellout rates with our key account partners reflected the same strong demand we saw in our DTC channel. At last, but absolutely no means least, the APAC region, which continues to materially outpace our expectations delivering the third successive fifth quarter of triple-digit growth, and now accounting for a mid-teens percentage of our net sales. On a constant currency basis, net sales were up 110.9% year-over-year in Q2, translating to 101.3% reported growth and absolute net sales of CHF 119.2 million. In all markets, the demand for our products is outpacing supply. In Greater China, net sales more than doubled, driven by more than 50% same-store growth in our own retail stores, even higher growth rates in our e-comm channels and the addition of powerful new retail stores. Our flagship store in Chengdu outperformed our expectations on all key retail metrics and will serve as a blueprint for our future retail expansion in this market. Turning to our product categories. Our growth is strong and broad-based. Net sales from Shoes grew 36% at constant exchange rates. On a reported basis, net sales were up 29.9% year-over-year, reaching CHF 704.9 million. This growth is a direct result of our ability to build a portfolio of strong franchise. In Q2, we saw strong demand across both our performance and lifestyle portfolios. In performance running, tennis and outdoor grew strongly, with the strongest growth in the Cloudserver and Cloudmonster. Our key lifestyle franchises, particularly the Cloudtilt and Cloudzone are resonating deeply with consumers, additionally amplified by our campaigns with Zendaya. Our apparel business delivered an outstanding quarter with net sales growing an aggressive 75.5% at constant exchange rates and 67.5% on a reported basis to CHF 36.7 million. We're particularly encouraged by the deepening consumer engagement in this category. We are seeing a healthy year-over-year increase in repeat transactions. And importantly, also first and second time buyers are increasingly adding apparel to their basket. This is a key indicator of our success in building a full sportswear brand and driving apparel adoption earlier in the customer journey. Moving down to P&L. Our gross profit margin increased by 160 basis points year-over-year to 61.5%, validating again the strength of the premium position of the brand. The year-over-year increase was primarily driven by the high DTC share, lower freight expenses as well as a net foreign exchange tailwind from the further depreciation of the U.S. dollar during the quarter. We implemented selective price increases in the U.S. in early July, so these did not have any effect on our Q2 profitability. SG&A expenses, excluding share-based compensation, were very well controlled, accounting for 47.7% of net sales in Q2, down from 48.6% in the same period last year. We continue to invest heavily in key growth areas, including our stores, LightSpray and strengthening our IT and tech capabilities. At the same time, we saw ongoing benefits from operational efficiencies, particularly in distribution costs, which we now expect to continue throughout the rest of the year. As a result of our very strong top line, gross profit margin expansion and controlled investments into growth, we are thrilled to report an adjusted EBITDA of CHF 136.1 million, translating to an 18.2% adjusted EBITDA margin, up 220 basis points year-over-year. While our very strong operational performance drove substantial adjusted EBITDA growth, the continuous weakness of the U.S. dollar versus Swiss franc in the second quarter, closing near multi-decade lows at 0.79 led to a meaningful unrealized foreign exchange impact in our net financial results, which resulted in a net loss of CHF 40.9 million. As highlighted in the past, this effect is mainly driven by the valuation of our U.S. dollar-based assets, especially cash and cash equivalents at quarter end exchange rates and does not impact or reflect the financial health of our business. Moving on to our balance sheet. Capital expenditures were CHF 17.4 million in the quarter. This equates to 2.3% of net sales, down from 3% in Q2 last year. During the last 1.5 years, we made significant investments into the strength of our operational backbone and into inventory management. As a result, we continue to see ongoing improvements of our net working capital position, our cash conversion cycle and the health of our inventory without limiting our ability to fulfill the strong demand from our customers. Our overall inventory balance stood at CHF 360.4 million at the end of the quarter. We ended the quarter with a cash balance of CHF 846.6 million, down from CHF 871.8 million in the prior quarter. Over 70% of this position was held in U.S. dollar, which was impacted by the before-mentioned valuation at quarter end exchange rates, leading to this reduction despite the positive operational cash flow. As we enter into the second half of 2025, we do so with exceptional brand momentum, deep confidence in our strategy and conviction in our ability to perform at the highest level. The results we achieved in the first half are not only ahead of plan, they are a clear reflection of the strength of our brand, the quality of our execution and the scale of the opportunity ahead. The products we have launched over the past couple of weeks and the pipeline ahead is strong, from performance running to trail, training, tennis, lifestyle and apparel, we're bringing bold innovation and a lot of brand energy in every vertical and category. These launches will be supported by integrated campaigns and high-impact retail moments designed to amplify our presence and drive strong growth across all markets. Over the next couple of weeks, we look forward to exciting LightSpray activations at the World Athletic Championships in Tokyo, building further on our collaborations with Zendaya FKA Twiks and taking our training and tennis visibility to the next level. We will continue to drive momentum with the running community and elevate our position and raises around the world powered by our recent launches. Considering our strong performance in Q2, continued powerful momentum in the first weeks of Q3, a strong order book for the fall/winter season and the continued efficiency tailwinds driven by our focus and commitment to operational excellence, we are increasing our 2025 guidance across all line items with high expectations for net sales growth, gross profit margin and adjusted EBITDA margin. We expect net sales at constant currency rates to be up at least 31% year-over-year, ahead of our previous guidance of at least 28%. Importantly, this reflects our strong performance in Q2 as well as our increased second half expectations, given increased confidence in the outlook and the ongoing powerful momentum n Q3. Within this guidance, we still embed prudence to reflect the uncertain macroeconomic outlook in the second half of the year. Given the ongoing devaluation of the U.S. dollar against the Swiss franc, the second half of the year is expected to face ongoing foreign exchange headwinds. Current spot rates or constant currency growth guidance implies reported net sales reached at least CHF 2.91 billion, higher than our previous guidance of CHF 2.86 billion. Alongside the increased net sales outlook, we now expect the gross profit margin of 60.5% to 61%, ahead of our previous guidance of 60% to 6.5%. With strong momentum in the first half of 2025, we expect that continued strength of our DTC channel, combined with a focus on full price sales, continued operational efficiencies driven by our focus on excellence, favorable freight cost evolution and positive foreign exchange rates are expected to substantiate a gross profit margin 60% plus for the second half of the year, in line with our longer-term gross profit margin target. This increased outlook already includes the impact of a 20% incremental tariff on imports to the U.S. from Vietnam and the 10% assumed in our previous guidance. As we had outlined in May, we are focused on what we can control and continue to build our company towards our vision to be the most premium global sportswear brand. This means delivering on our brand promise to our fans while ensuring we continuously invest into what differentiates us in the long term, high quality standards [Audio Gap] at the moment, we won't forget anytime soon. Watching Iga Swiatek's historic Wimbledon win. Her performance, a master class focus, consistency and resilience as a true reflection of the Athlete Spirit. With this victory, she now holds Gran Slam titles on all 3 surfaces, a testament to her versatility and grid. In many ways, her journey and what is the very spirit that also is the driving force for us. Relentless focus and courage to push boundaries without compromising our identity, allowing us to compete and win at the highest level. With that, David and I would like to open up the session to your questions.

[Operator Instructions] Your first question comes from the line of Jay Sole with UBS.

Obviously, really outstanding results today. Just curious what gives you the confidence to raise your constant currency sales growth guidance for the year given the potential impact of tariffs in the U.S. and also at the same time, what gives you the confidence to raise your adjusted EBITDA margin guidance given the impact of tariffs?

This is Martin. Thanks for the question. I mean you have seen it in our first half year numbers. The brand has incredible momentum all around the world, very strong growth in all the regions, in all product categories, in all channels. If we look into Q3, we had a very strong start as well. Actually, it's very similar to what we've said on the call last time. Again, in July, we had the strongest month in the history of the brand from an absolute numbers perspective. So that momentum continues. We have a very strong order book and at the same time, we are aware of the macroeconomic environment that is there. We want to factor that in. We know that we had a very strong second half of the year last year, which we need to factor in. So it's a bit of a tougher comparison compared to the first half of the year. But still, we are very confident in our ability, in our product pipeline and in the momentum that we are having and I think it's always important to take a step back and then also look at where we want to be from a growth pattern perspective. We want to grow in a durable way. We want to focus on high-quality growth. And so that growth corridor that we are now going into is basically exactly where we want to be in order to drive healthy growth for the future. We had 33% growth last year, 39% growth in the first half of this year. And so this reflects the strong momentum. I think if we look at EBITDA and tariffs, also here, maybe a bit longer answer. First, I think it's very important to now have clarity about the new tariffs and to have that executive order out there. Of course, we're not happy about the additional tariffs, but I think it's super important that this is nothing new for our industry. So ever since On exist, we have been paying around 20% import duty on the majority of our products imported into the U.S. from our Southeast Asian manufacturing places. And so now this number is changing. It's changing to 40% for imports from Vietnam and to 39% from imports from Indonesia. But as a premium brand and as a fast-growing brand, we have multiple opportunities to compensate for these impacts of our cost sold. And with that, you've seen we are confident in increasing our gross profit margin outlook for the year. And we're also confident that we can maintain our gross profit margin in line with the long-term aspiration that we communicated at our Investor Day, which is 60% plus. And it's really in moments like this where, it's just super important to be clear what the brand stands for, and we want to be the most premium global sportswear brand, which means to deliver on our promise to our fans, to invest into what differentiates us. And that's what we continue to do, and that will be not compromise, no compromise on innovation, on quality, on customer experience. But over the last years, we have done so many investments and upscaling of our abilities to drive more gross profit margin, which means innovation products that come at higher price points. It's increasing our DTC mix, it's economies of scale on our product cost, it's supply chain optimization. We have done price increases as of first of July in the U.S. And we said we are well positioned. And we have not even yet spoken to our retail partners, our factory partners about mitigation efforts, which is still something we can do, but we haven't needed it yet. So this gives us the confidence to raise basically all our financial numbers.

Your next question comes from the line of John Kernan with TD Cowen.

Congrats on just tremendous results. Martin, maybe you could talk about the second half constant currency revenue growth, tremendous 39% growth in the first half. Obviously, with the guidance you are conservatively planning for a bit of a deceleration. Can you talk to trends you're planning in wholesale and DTC and maybe give a little bit more color regionally in terms of how we should think about the phasing of that revenue growth in the second half?

Yes, very, very happy to do so. So as I just said, the momentum is very strong. It continues to be very strong to go in to the quarter. At the same time, we want to grow in a durable way and in a premium way in the long term. And this has always been #1 strategy for us, and this is the growth rate where we want to grow it at and the first half of the year was super strong. And this actually puts us into a position to be even more meaningful about the additional levers that we are pulling to grow, to be more meaningful with adding additional doors, to be more focused on full price sales, to really put a focus on high-quality growth. And I think this is an amazing position to be in. And this is guiding our decision-making and how much additional brand momentum we're driving and how we invest and at the same time, as I said on the call, we can now already focus on what comes after '26 and what are we building for the long term. And how can we invest into new things to drive the growth because we have so much confidence into the building blocks that we have at the moment. And at the same time, there are amazing products coming. There are many more new amazing retail stores in great locations coming. So there's a momentum that substantiates the outlook.

Got it. And then maybe a longer-term question. You're running at well above the targets you put out at the 2023 Investor Day. You talked long term about the adjusted EBITDA margin north of 20%. What are the levers for additional margin expansion given you're already running pretty far above the targets you put out for 2026?

I think we continue to prove almost with every quarter that we are on the right track and even ahead of the track to substantiate the targets that we have given. And I think we are very transparent where that additional profitability comes from in the future. So we believe there is continued opportunity to increase our gross profit margin with a higher DTC mix. Our own retail stores are continuing to gain share, and we will continue to expand in that channel, and we see a strong spillover then also into our DTC channel. Our apparel business will be growing and we said it will drive higher margin in the future as well, not only because it's a very strong DTC business, but also because we will be benefiting from economies of scale in there. You see that we are driving also economies of scale in our distribution costs. And at the same time, we want to take it step by step. And so we keep on investing in what is building the brand for the future. We keep on investing in marketing. We keep on investing in exciting projects that build a future like LightSpray or many technology projects. And so we are -- we will -- we want to grow in a meaningful way towards the 20% number. But I think we have a very clear picture on where that additional profitability will come from in the future.

And if I -- this is David, if I can expand from here, just kind of zooming out even more, our vision is to build the most premium global sports brand. And I think you've been following On for a long time. And you've seen us going from footwear to apparel, going from sports also into fashion, so you see how kind of we are developing the potential to be -- to have a very high margin profile as a business, somewhere between a sports brand and the fashion brand, probably the most extreme vision of that is what we're currently doing with [indiscernible] very, very high price points. And that's not where we're going in general, but it points to a future where On is playing at the intersection of performance, innovation and fashion. And so that it increases, of course, the margin profile potential as well.

Your next question comes from the line of Aubrey Tianello with BNP Paribas Asset Management.

Wanted to ask on new products and any more color you can give on the impact of launches like the Cloud 6, the Cloudsurfer 2 this year? And then as we look ahead to next year, how we should be thinking about lapping some of these launches and how you can keep the momentum going into 2026 with new products?

Thank you very much for the question. Yes, happy to talk about product and product in the future. First of all, let me say, we're incredibly excited about how we're building franchises. And as you heard me say before, you now have 9 franchises that deliver more than 5% of top line. And that wasn't always the case. When we had our IPO, it was 7, now the runner came into the 8, now kind of a lifestyle shoe, the Cloudtilt kind of became the 9th. So we're constantly expanding franchises. And of course, that creates broad-based momentum where we reach very, very different communities. And what I'm currently most excited about is how we reenergized the Cloudsurfer franchise, so you've seen the launch of the new Cloudsurfer 2 with Elmo. But now we also launched the Cloudsurfer Max and we are continuing that momentum in the running space. The Cloudboomex will launch in the future, the first super shoe for the everyday runner. So there's an incredible momentum in our core, core space of running. But then on the other side, we're really kind of growing incredibly in apparel and so we do exactly what we want going from toe to head. And so the apparel momentum is driving the brand to a much more broader audience as well. And then I think on a third dimension, we're really also able to build product energy through the new sports that we're doing. So if you've seen what's happening in tennis, and how our tennis stars are outperforming on court. That, of course, builds a lot of momentum for tennis products, but then also beyond tennis, just a lot of awareness for the brand.

And then maybe just adding for '26, there's no reason to believe that our level of newness slows down. We are planning to have exciting new launches of the next generation of the Cloudmonster and the Cloudrunner, two very key franchises for us. So then compounding against the launch of the Cloud and the Surfer this year.

Your next question comes from the line of Anna Andreeva with Piper Sandler.

Congrats. We wanted to ask about the working capital improvement, margin on inventories really tight at down 10%. How do you feel about the positioning there, especially in the U.S.? Did that constrain sales growth at all during the quarter? And then secondly, you mentioned selective growth with wholesale partners a few times. Should we expect similar mid-single-digit growth and wholesale doors globally to continue into next year as well? And what are you hearing from your partners as it relates to spring orders, especially here in the U.S.?

Yes. So starting with working capital, we have done a lot of work and really strengthened our teams and our internal processes to fulfill the customer demand with a lower level of inventory in our warehouses because we significantly improved our capabilities of demand and supply planning. Merchandising is a function that basically didn't exist for a long time now. We have -- this has a very strong capability within On. So we feel very confident to run our company at a lower working capital level going forward, and this is an aspiration that we outlined in the past as well. And so at the moment, we feel very good about the inventory position, and we have seen it in the second quarter that we were able to fulfill the consumer demand all around the world to the level that we also wanted to fulfill it. As you know, we like to be in a position where demand is a bit above supply. If we look into our wholesale partners and our key account partners what they are experiencing, especially in the U.S. the momentum for the brand continues to be very strong. And I think it's important to basically dive a little bit deeper into the second quarter. The region was growing 23.6% on a constant currency basis. If we look at our DTC business, this was actually growing at close to 40% in that region. And this shows the momentum that we are having, and this is also a momentum that many of our key account partners are experiencing. And this puts us exactly in the position that we described that we need less incremental door openings in order to have enough growth to be in the growth corridor where we want to be. So the mid-single-digit number is still the one that we are aiming to. And again, the good thing is we were in full control here, and we can really focus on premium same-store growth, but at the same time on a very selective expansion of more doors.

Your next question comes from the line of Cristina Fernández with Telsey Advisory Group.

Congratulations on the great results. I wanted to see if you can expand on the gross margin outlook for the year. Maybe on PAC, how much is FX helping the pricing benefits in -- if you look at tariff mitigation, do you think more price increases are needed? Or with the one you took in July, you are covered for the foreseeable future?

Yes. Thank you. I think I shared this a few times in the past. Our view on the gross profit margin is that we always need to expect that some impacts are on our cost of goods sold. And I think over the past 5 years, we have gone through different impacts from basically too much inventory or not enough inventory to elevated freight costs and now to tariffs. And our focus is to put ourselves in a position to have enough power and enough strength in the brand and in the measures that we are taking to compensate for those effects. And this is also how we are looking now at the additional tariffs. And as I said, we have done a lot of work to put ourselves in a strong position for exactly moments like the one that we are experiencing now. Of course, the price increase that we initiated for July 1 is supporting the gross margin outlook. We feel very confident that we don't need additional price increase to reach the margin targets that we now communicated. Because we have the ongoing benefits from economies of scale on the production cost side, we have the impact of the foreign exchange rate, but again, this can always change and then other things become more favorable and maybe we see other disruptions in the future. And this is why the message that I gave earlier is so important that we feel very confident that we can maintain the gross profit margin on the level where we said we expect it to be in the long term of 60% plus. And that factors in basically that there is always something that disrupts that position.

And then as a follow-up, on the apparel, you've seen good acceleration in the last 2 quarters. Can you -- if you look at what's driving that, any feedback you're getting from customers or your stores? Is it say it's having it in DTC, the marketing? And I guess what's mix for apparel to build on that momentum?

Yes. Thank you for the question. I mean, we're seeing an incredible energy in apparel and that's driven by wider scale adoption of apparel in addition to footwear. So what we're currently seeing is that also first and second time buyers of the brand are very aware of apparel and they're adding kind of apparel to their basket. So it's really kind of going from first adopters to a broader audience. And that's, of course, fueled by our direct-to-consumer channel. So I think retail. Retail, of course, is the classic channel where you build the entirety of an apparel brand, where you get the full look and feel and the full range. And as an extension of that, our e-com channel. And so as we're expanding retail, as we're expanding the reach out of our e-com channel, of course, that drives a lot of energy for apparel as well. We also selectively work with premium wholesale partners in really showcasing apparel. We, for example, did a pop-up shop in shop in self-regs and so this is driving the overall momentum. And then, of course, we're doubling down on some of the most exciting collections, like the one that we have done with FKA Twiks in our training category, the whole lifestyle apparel in collaboration with Zendaya.And so the awareness of these huge influencers helps apparel as well on the marketing side. And probably last, we invest a lot of innovation into the technicity of apparel, so for example, now for winter Gartec, protecting you against the elements will be an important fabric innovation that continues to roll out. So we really drive on all levels.

Your next question comes from the line of Michael Binetti with Evercore.

Can you just help us think about the cadence of revenues in the third quarter and fourth quarter and then speak to how some of the drivers that you talked to us today about second half on revenues wrap around into the first half of 2026 as we think about the different regions and channels, particularly given the different growth rates across the regions that you guys reported in the second quarter? And then I guess I'll just last on to the last question about apparel and we'll see that strategy evolve. You mentioned Zendaya and Selfridges. I mean should we think about that category -- how should we think about that category evolving in -- with performance customers? Or is the bigger opportunity for this brand and to attack some of the big market dollars in the athleisure categories?

Yes. I'll take the phasing, and then David will take your product question. I mean you know we are guiding on the full year. And -- but I think what is implied in our guidance for the second half of the year is very much also indicated for where we see the regions and the growth in the regions. As we have said, we have a tougher comparison because beginning of the second half of last year, we really significantly improved our operational capabilities. We had a very strong holiday season last year, but that picture is very similar for Q3 and Q4. We continue to expect very strong growth in Asia Pacific. Also there, we want to grow in a premium way. So we will very much control the growth there as well. The U.S. is in a very strong position, but this is probably where we apply the strongest level of caution also in our outlook given the macro environment. And then yes, Europe basically is a similar picture. So expected quite consistent growth rate in the 2 quarters. This is substantiated by the order book that we have. And as said, if the environment remains favorable as we have seen it in the last 2, 3 months, then there is an opportunity to also outgrow our expectations. But at the moment, we want to approach the second half in a very reasonable way.

So probably to the second part of your question, currently, you see on apparel on the best running athletes, you see them on the highest mountains. You see it on the tennis court becoming very, very visible in a spectator sport. You see it in the leading gyms. So apparel really comes from core performance, but of course, sports is the new fashion. And so what we're building from core performance goes out to far more than core sports. And you're alluding to that. Of course, we venture out. We venture out, for example, with the capital that we have done with FKA Twiks, highly technical, but a unique aesthetic. And we're building a building a sports fashion brand as well. And so that, of course, kind of gives apparel a much wider audience. Don't expect us to swim in a sea of sameness. We're going to do it highly elevated as a premium brand and very distinctively.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.