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Farfetch Sees Big Year Ahead After ‘Carefully Engineered’ Deals

Farfetch is gearing up for a big 2023.

In a Nutshell:Luxury is an amazing industry, cemented in the pillars of creativity, craftsmanship and culture, and from a financial point of view, very profitable and resilient, even in very adverse macro environment,” Farfetch founder, chairman and CEO José Neves told investors in a call on Thursday. “We are navigating a volatile macro environment adeptly, continuing to post growth compounding on what has been a tremendous three-year run for Farfetch, a period that saw our business double as measured by our GMV.”

Neves sees big things ahead for 2023 after Farfetch inked a significant deal this year with Reebok, invested $200 million to grow Neiman Marcus Group’s digital chops, and forged strategic ties with Salvatore Ferragamo, all of which should “reaccelerate growth” into the year ahead.

Despite industry-wide troubles in China, Neves said Farfetch is “very bullish” about the world’s second-largest economy “over the medium and in the longer term.”

“We think this is an incredible market,” he said. “It will be the largest luxury goods market in the world by 2025.”

Farfetch on Wednesday announced an agreement with Yoox-Net-A-Porter (YNAP) that sees Compagnie Financière selling a 50.7 percent controlling stake in the money-losing business, with Neves’ firm acquiring a 47.5 percent stake and Symphony Global, an investment arm of Mohamed Alabbar, taking 3.2 percent. Farfetch has the option to take over Richemont’s 49.30 percent within five years.

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Neves founded Farfetch to bring luxury into the era of tech, he told investors. That’s the genesis behind the company’s Luxury New Retail platform enabling for seamless conversion across different shopping modes and connecting in-demand players with customers demanding a top-notch experience.

Farfetch laid the groundwork when it acquired luxury boutique Browns in 2015 and built out online flagship stores for Gucci, Chanel, Harrods and more, before looking to China in a tie-up with Alibaba, Richemont and Kering. The deal for YNAP “represents the culmination of these carefully engineered deals,” he told investors, adding that not only does luxury need an agile tech platform, “but also that Farfetch is perfectly positioned to answer that goal.” Despite the collaborators’ synergies, the partners still “represent only 3 percent” of global luxury. “There is plenty of growth to go for, and [a] strong cycle of tailwinds that we aim to continue to capitalize on,” he said.

During the call, Stephanie Phair, the new group president for Farfetch’s marketplace business and former chief customer officer, pointed to the launch of Farfetch Beat, a new series of ad hoc collaborations and product experiences that offer rare story-driven luxury pieces. The first drop was Opening Ceremony x Peter Do, which sold out in two hours, generated over 2 million social media impressions, and helped Farfetch push social commerce with its digital marketing strategy and the new social media platform BeReal, Phair said. Brand and boutique partners appreciate Farfetch’s heavily millennial and Gen Z customer base, split 70-30 female to male, she added.

Farfetch is still building its presence in the $70 billion beauty market after it launched the category earlier this year following its deal for Violet Grey.

Edward Sabbagh is now Farfetch’s chief marketplace officer and the company expects to end the with more staff than it had a year. In addition, chief marketing officer Gareth Jones and chief commercial and sustainability officer Giorgio Belloli are leaving their posts, with Belloli succeeded by Stephen Eggleston, currently senior vice president, commercial.

Net Sales: Total revenue for the quarter ended June 30 grew 10.7 percent to $579.3 million from $523.3 million, while gross merchandise value (GMV)—the total volume of merchandise sales on the Farfetch platform —rose 1.3 percent to $1.02 billion from $1.01 billion. GMV excludes certain items such as discounts and delivery fees and product returns.

Farfetch said its digital platform GMV, excluding brand platform GMV, for the quarter fell 3.3 percent year-on-year to $883.1 million, while its brand platform GMV, its New Guards Group business that’s not part of its other business units, spiked 47.3 percent to $107.1 million. The remaining revenue was attributed to in-store GMV.

The Farfetch marketplace offered customers an “extensive selection of in-season luxury fashion on a global platform from over 1,400 sellers,” while supply from both multi-brand retailers and e-concession partners increased year-over-year to total stock units of nearly 12 million in the quarter, the company said.

Neves said full-price marketplace GMV excluding Russia and Mainland China grew 20 percent year-on-year for the second consecutive quarter, before accounting for foreign exchange volatility. Russia remains closed and GMV from China was down due to Covid restrictions.

Chief financial officer Elliot Jordan said Farfetch will likely mark down product through December because it ordered product prior to geopolitical disruption in Russia and elsewhere. It tried to cancel what it could, honored contracts and is accepting shipments, despite markdowns impacting gross margins. The company had 3.8 million active customers in the quarter, reflecting slight growth across all categories. Fashion was a strong growth category, and the U.S. and China each saw more active customers in the quarter versus the first quarter. And even though Farfetch lost 50,000 active customers from the shutdown of operations in Russia, it also acquired over 500,000 new customers in the quarter, Jordan said.

Earnings: After-tax profit fell 23 percent to $67. 7 million from $87.9 million. Second quarter earnings per share was 18 cents, while the diluted loss per share was 50 cents, including certain liabilities.

For the second half, the company said it expects digital platform GMV growth of 0 percent to 5 percent from prior year levels, and brand platform GMV growth of between 0 percent to 10 percent. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was forecasted to be flat for the year. While guidance was revised downward, Jordan said on the call that the reason was due to the “stronger U.S. dollar.”

CEO’s Take: “In 2023, we will lap the impact of Russia. And I believe China will return to growth. Additionally, we will start to see the impact of large deals such as Reebok, Neiman Marcus Group and Ferragamo,” Neves said. “These multiple factors of growth, combined with the strong underlying performance of our business outside macro-affected regions, and the rationalization we took the opportunity to take action this year, make me very bullish for 2023 and beyond in terms of growth, profitability and cash generation.”