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What Toppled Farfetch into the Red for Q3

Farfetch continued to prove that luxury can thrive against just about any headwind, delivering strong third-quarter revenue results to stockholders on Friday, in spite of closing operations in Russia and limited sales in China due to Covid restrictions.

Despite those revenue successes, the luxury retail platform finished the third quarter in the red and expense tightening was no small part of its conversation with Wall Street.

In a nutshell: Economic headwinds affect a business as much as they impact its customers. That was more or less the lesson of the luxury e-tailer’s glowing third-quarter earnings report on Friday.

Stephanie Phair. WWD Photo

“While global macro pressures of inflation and rising interest rates, we can grow consumer sentiment,” said group president Stephanie Phair. “In practice, luxury tends to be less impacted than the overall retail sector as we cater to an affluent consumer who is less reacted to these pressures.”

Founder and CEO José Neves said that luxury retail is expected to grow from a $350 billion market in 2022 to over $500 billion by the end of the decade.

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Phair said she and Neves continue to build relationships with their peers in the industry, among which has grown a consensus to “move away from wholesale and believe in the power of multi-brand e-concessions, a model which we pioneered in luxury…”

Net Sales: Farfetch is enjoying that rising wave now, delivering third quarter year-over-year revenue growth of 14 percent and gross merchandise value growth of 4 percent.

It reported third quarter revenues of $593.4 million, an increase of 1.9 percent year-over-year

Success on the digital platform also contributed to the strong numbers with third party transactions generating 80 percent of third quarter digital revenue, while first party sales grew by 4 percent year-over-year to hit 4 percent total.

All this contributed to give Fartech a gross profit margin of 51.4 percent on the digital side, up from 48.9 percent a year ago.

Phair pointed to the success of private client sales, which had better than 90 percent retention whose average order was $1,100 topped by a recent sale of a $930,000 emerald Burberry ring.

The number of Farfetch customers went up as well, with more than 500,000, up more than 9 percent year over year despite losing about 100,000 customers in the Russian market.

Losing the Russian market hurt Farfetch sales considerably. excluding Russia, all other orders went up by 13 percent, year over year, Neves said.

Net Earnings: Despite solid growth in sales, Farfetch still finished the quarter narrowly in the red on the EBITDA line at -$4 million after finishing $5 million in the black a year ago.

Chief financial officer Elliott Jordan said a strong U.S. dollar, and having to pull out of Russia, which accounted for 7 percent of gross merchandise alue, were most to blame for bottom-line shortcomings.

“In terms of our cost reduction initiatives, I’m pleased to report that we are starting to see that our efforts are taking effect,” Jordan said. “As we embed the new leaner and simpler operating structure and we expect to achieve operating cost leverage in 2023.”

Farfetch CFO Elliott Jordan. Farfetch

Looking into the fourth quarter, Farfetch predicts it will finish the year further in the red than initially forecast, albeit before the Russian invasion of Ukraine.

The cash on hand forecast has between $750-$850 million on Dec. 31.

Jordan said a stronger U.S. dollar has caused the company to pull back on a major promotional push for the holidays keeping an eye on the bottom line. “[We have made a] deliberate decision to step away from what we will be a heightened promotional environment across key markets during Q4,” Jordan said. “This decision follows our previously stated strategy to drive a higher full price mix and maintain order contribution margin above 30 percent and the expense of GMV growth.”

Some other luxury names have relied on promotions to the detriment of their gross margins but “not Farfetch,” Jordan said. “Our gross margin is up significantly year-on-year because we’re not following this heavy promotional activity. What we’re seeing and would expect now is that Q4 is going to get worse. There’s a lot of stock out there at the moment in terms of inventory and product.”

On supply, Jordan reported a 25 percent increase to reach an all time high of $5.5 billion.

With that, Jordan predicts Farfetch will finish 2023 in the black, albeit in single digit margins.

Farfetch Founder & CEO José Neves. ROBB REPORT PHOTO

CEO’s Take: “And with all of that and the cost rationalization that we’re doing this year, we are very, very confident that we will go back to EBITDA profitability, which we achieved last year,” Neves said.