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Premium footwear maker On (ONON +6%) stumbled out of the gate today following a Q2 earnings miss and a modestly lowered FY24 net sales outlook, as shares rapidly descended to lows of around -2.8%. However, On quickly refound its footing as shares climb back toward initial highs. Today's volatility stemmed from the ongoing transition of On's Atlanta warehouse to a fully automated facility, which is producing capacity constraints and leading to unreliable deliveries and inventory shortages. These headwinds impacted On's DTC and wholesale customers, leading to missed market share opportunities and top-line growth underperforming the company's previous FY24 forecast.

On has already installed several measures to counteract the adverse effects of its warehouse transition, driving a reacceleration of its D2C growth rate during the back half of the quarter and continuing into Q3. While management conceded that the damage had already been done, leading to its trimmed FY24 reported net sales of at least CHF 2.26 bln from CHF 2.29 bln, it reiterated the transition is essential to scale its distribution capacity across the U.S., resulting in long-term gains in the region.

• On's Q2 numbers make it tough to argue with its long-term plan. Demand has consistently remained robust, leading to consolidated net sales growth of 27.8% to CHF 567.7 mln. Despite the warehouse woes, On's Americas wholesale and DTC net sales growth stayed buoyant, expanding by 27.6% and 28.1%, respectively. In the EMEA, net sales jumped by 21.8% yr/yr, bolstered by exceptional momentum across the U.K. Meanwhile, in the APAC region, net sales exploded, surging by 73.7%, underpinned by sustained momentum in China.
• On's top-line performance is reminiscent of that registered by Deckers Outdoor (DECK) last month. It is also consistent with Adidas AG's (ADDYY) recently raised FY24 sales outlook. With NIKE's (NKE) problems persisting, its rivals are constantly taking advantage, supported by a relatively sound demand environment.
• EPS of CHF 0.14 was a hair shy of analyst forecasts, as the issues in Atlanta trickled down to On's bottom line. However, On did increase its gross profit and adjusted EBITDA margins in the quarter, benefiting from lower freight rates and a more stable FX rate. Furthermore, On remains on track to reach its previously outlined profitability goals for the year, including gross margins of around 60% and adjusted EBITDA margins of 16.0-16.5%.

The problem at hand for On is insufficient and sub-optimized inventory rather than any demand woes, like what NKE is currently enduring. Despite weighing on Q2 results, On's headwinds can be more easily reversed than a structural demand problem. Investors agree, keeping On's upward trend going after a brief pullback today. With the company already taking the necessary moves to overcome its warehouse issue while maintaining focus on fortifying its higher-margin DTC channel as it adds fewer wholesale doors than in past years, its future remains bright.