I’ve been following this board since July this year. While my YTD return was only 7.5% at the end of July, my current YTD return is 98.6% thanks to all the knowledge I learned from this board. I’m so grateful for all the posts here and would like to share my thoughts about FTCH (Farfetch) which I think was not discussed here yet.
About the company:
Farfetch, based in London, is a leading global platform for the luxury fashion industry, founded by the current CEO in 2007. The primary business of Farfetch is an online marketplace, where both first party and third party sellers sell luxury fashion goods.
The additional businesses include Farfetch Platform Solutions, which services enterprise clients with e-commerce and technology capabilities; Browns and Stadium Goods, which offer luxury products to consumers; and New Guards, which was a new acquisition in August 2019 and develops its own fashion brands. New Guards currently has 9 brands and one of the most famous brands is Off-White.
Farfetch’s primary business is online, while they also have offline businesses like wholesale and retails. As in 2020Q3, about 84% of GMV (Gross Merchandise Value) and 68% of Farfetch’s adjusted revenue come from its online business.
Definition of financial metrics:
Digital Platform: Refers to the online business.
Brand Platform: Refers to the offline business, excluding in-store sales.
GMV vs Revenue: For 3P sellers on the marketplace, Farfetch takes certain portion of service fees from each order. The current take rate as in 2020Q3 is 30.4%. Revenue is the portion taken by Farfetch while GMV represents the total value of the orders. For other business, GMV and revenue is the same.
Adjusted Revenue: Revenue less Digital Platform Fulfilment Revenue, which is the pass-through of delivery and duties charges incurred by our global logistics solutions, net of any Farfetch-funded consumer promotions and incentives.
Digital Platform Order Contribution: Refers to Digital Platform Gross Profit after deducting demand generation expense, which includes fees that Farfetch pays for its various marketing channels.
Financial and business metric highlights:
In Q3,
GMV: $798M, +62%
Digital Platform GMV: $674M, +60%
Revenue: $438M, +71%
Adjusted Revenue: $386.6M, +69.5%
Gross Profit: $209M, +81.6%
Gross Margin: 48%, up from 45% in Q3 2019
Digital Platform Order Contribution: $97.1M, +98%
Digital Platform Order Contribution Margin: 37%, up from 31% in Q3 2019
Adjusted EBITDA: improved to $(10)M from $(36)M in Q3 2019
Adjusted EBITDA Margin: -2.7%, improved from -15.6% in Q3 2019
Active consumers of Digital Platform: 2.7M, +45%
Average Order Value (AOV): $574, slightly down from $582 in Q3 2019
In addition, Farfetch announced partnership with Alibaba, who will launch Farfetch shopping channels on its Tmall platform, which will make it accessible to Alibaba’s overall 757 million annual active consumers. Alibaba, Richemont and Artemis invested a total of $1.15B in Farfetch and its new China joint venture.
Historical growth:
20Q3 20Q2 20Q1 19Q4 19Q3 19Q2 19Q1
GMV Growth 62% 48% 46% 59% 59% 44% 43%
Revenue Growth 71% 74% 90% 100% 90% 43% 39%
Adjusted Revenue Growth 70% 70% 106% 99% 102% 52% 42%
Adjusted Digital Platform Revenue Growth 68% 35% 31% 37% 47% 49% 38%
Gross Margin 48% 44% 46% 46% 45% 41% 48%
Adjusted EBITDA Margin -3% -8% -7% -5% -16% -21% -21%
Digital Platform Order Contribution Margin 37% 35% 32% 31% 31% 28% 35%
Digital Active Consumers (in thousand) 2742 2524 2149 2068 1889 1773 1699
Digital Platform AOV 574 493 571 636 582 600 601
The total GMV and revenue in 19Q3-20Q3 was a little inflated due to the acquisition of New Guards in Aug 2019.
Q4 Guidance:
$880-910M GMV in Digital Platform (+40-45% YoY)
$85-90M GMV in Brand Platform (-10% YoY)
Positive EBITDA.
My thoughts:
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From 20Q2 to 20Q3, the revenue and GMV growth was a huge acceleration, especially if we look at the trend of Adjusted Digital Platform Revenue Growth, it was from the 30s to 68%!
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In the last three quarters (20Q3, 20Q2 and 20Q1), the active consumers increase sequentially by 8.6%, 17.4% and 3.9% accordingly.
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IMO, these trends clearly indicate that Farfetch is benefiting from the pandemic. According to the CEO in their Q3 earning call, “We believe we are witnessing a paradigm shift in the way people buying luxury”, “In a recent survey of our newer customers, 45% said they will continue to do more of their shopping online now that they are used to it. And 23% said, they would do most of their shopping online from now on. This clearly indicates that the luxury industry will not go back to the same normal as we did with pre-COVID-19.” Since Q2, Farfetch’s active consumers have increased significantly. The reason why the revenue growth in Q2 was not as significant as Q3 seems to be the lower than normal AOV. They explained the low AOV in their Q2 earning call as “due to the high mix of first time orders, which tend to have lower average order values, the COVID-19 related mix effect towards lower price point categories and currency headwinds. My feeling is that Farfetch initially had headwinds at the beginning of pandemic (they missed their guidance to Digital Platform GMV for Q1), while the demand to luxury rebounded later in Q2 and the demand shifted from offline to online due to the pandemic, which eventually became a tailwind to Farfetch. In addition, Farfetch has a good presence in China (they were partnering with $JD), where people recovered from the pandemic sooner than the rest of the world. This might have helped Farfetch to recover its high growth as well. I believe this demand shift will permanently increase the adoption of online luxury, which will continue to benefit Farfetch’s future growth.
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While Farfetch is still far away from being profitable, it has committed to achieve positive EBITDA for the 2021 fiscal year. Farfetch is currently on track to hit this goal. To achieve this, Farfetch has reduced promotional costs to 2018 level for the past few quarters.
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Farfetch’s offline business is still facing headwinds in the pandemic, but I feel their guidance to Brand Platform GMV of Q4 may be too conservative. I’d expect it to be at least close to Q3 results. To list the history of Farfetch’s beat on guidance, in Q1, it missed digital platform guidance while it met the total GMV guidance; they did not give Q2 guidance due to pandemic uncertainty; in Q3 results, they beated the upper bound of Digital Platform GMV by 10.7% and beated the upper bound of Brand Platform GMV by 18.2%. During Q3 earning call, when analysts asked why their Q4 guidance was only 40-45% compared to 60% achieved in Q3, the CFO emphasized that they would like to maintain a sustainable growth rate with achieving the EBIDTA profitability and they thought the 40-45% was still a good number. I personally think they’ll still beat the upper bound of the guidance, since Q4 should be usually a stronger season for e-commerce.
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Farfetch has been partnering with $JD since 2018, while they just started the partnership with Alibaba as well. In Q3, they also launched their localized Android and iOS App in China. I really like their strategy of developing business depth in the Chinese market. Based on data provided by Farfetch during a past earning call, Chinese market represents 35% of global spending in the luxury industry. The deep partnership with Chinese e-commerce giants will accelerate their market penetration moving forward. Besides Chinese market, Farfetch serves customers from over 190 countries and has been growing fast in all the different regions.
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I live in the US and I’m personally an active user of Farfetch’s online marketplace, with an average annual spending of $3000-$4000 on Farfetch in the past three years. Farfetch is so far the best website I’ve found to shop luxury fashion goods. Although some high-end brands are still not available on Farfetch, it has so fast the best availability of a large selection of luxury brands. The App and website also feels way better than Nordstrom, Neiman Marcus or Bloomingdales. I think Farfetch is in a very good position to be a leader in the growing industry.
Hope this helps. I’m currently long $FTCH with a mid size position (7%).
Happy holidays!
Luffy