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Travel Restrictions Play Big Role in Farfetch’s 25% Q1 GMV Boost

Although Farfetch doesn’t officially report earnings until August, the online luxury fashion marketplace gave a preview of things to come with a refreshingly positive guidance update that expects the company’s digital platform gross merchandise volume (GMV) to jump between 25 percent and 30 percent, ahead of last quarter’s 19 percent increase.

At the Wells Fargo 2020 “Bricks to Clicks” Digital Conference, Elliot Jordan, chief financial officer of Farfetch, said the company “successfully navigated the challenges of supply and demand across the marketplace” amid COVID-19-related lockdowns, travel restrictions, rapidly changing consumer behavior and a highly promotional online market.

Despite all the virus-driven changes in spending, Farfetch still has the goal to break even in adjusted EBITDA by 2021. Its “order contribution margin,” which is the company’s gross profit after deducting marketing and customer acquisition costs, is expected to stay around 30 percent in the second quarter, but the metric’s growth will be a key to long-term profitability.

“When you think further out though, the opportunity for much stronger margins is there, largely within our order contribution position,” Jordan said. “We’ve got a long-term target that the 30 percent order contribution will reach 60 percent.”

Though that number might sound like an “ambitious goal,” he added, “we already have some more mature customer cohorts already at 55 percent contribution. Those customers are part of our Access loyalty program at high levels, they use the website or the app on a low-cost engagement approach in terms of spend, and therefore overnight you’ve got a big step up between one customer and the next.”

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Jordan said there are five levers that will drive the order contribution goal, and in turn long-term profitability: decreased demand generation costs, decreased shipping and fulfillment costs, reduced promotional activity, increased gross margins on products directly bought by Farfetch and the addition of more higher-margin services like its Farfetch Platform Solutions back-end infrastructure.

While Farfetch anticipates average order value (AOV) to dip year over year due to significant markdowns from its retailers, the total GMV will “more than compensate” due to a higher mix of new customers (first-time buyers have lower-than-average AOVs) and a higher mix of sales of lower-price products and categories. Jordan noted that Farfetch has eight times as many products as the next online luxury competitor and carries 3,400 brands.

Even if shoppers haven’t yet made a purchase with a Farfetch seller, it’s clear the marketplace is getting more attention. Second-quarter traffic to Farfetch’s apps and websites increased more than 60 percent year over year, while mobile app installations more than doubled year-over-year.

Jordan cited a Bain and Co. report saying that online share of luxury is anticipated to jump from 12 percent in 2019 to 30 percent by 2025 as one of the top reasons Farfetch is positioned well for the future. Additionally, Jordan highlighted the repatriation of spending back to domestic markets due to global travel restrictions, specifically pointing out that shoppers from China and Brazil often bought luxury goods on trips in Europe or North America.

“With the shutdown of international travel almost overnight, that demand has had to shift back to the home market of that customer,” Jordan said. “Bain had talked about something like $50 billion of consumption that overnight has switched back to Mainland China in terms of where that demand right now sits. This is where Farfetch has built an infrastructure in China to allow that trade to move via our platform back to a boutique in Italy that might suffer from the slowdown of tourism, or the brands themselves that have stores in more established markets. We can now take sellers’ product and make sure it gets into the hands of consumers where they might be.”

Europe, the Middle East and Africa all have bounced back in demand, similarly to how China did in the back end of the first quarter. North America and South America, which collectively make up approximately one-third of global demand, have been slower to recover, according to Jordan.

Neither Jordan nor the company’s release touched on estimates for total revenue or net income.

Farfetch’s New Guards Group properties, which the marketplace acquired in 2019 for $675 million, have begun shipping new season collections and are expected to deliver $60 million to $70 million overall platform GMV in the second quarter. The collections reflect some delays in fall/winter 2020 shipments as retailers scramble to sell through current spring/summer 2020 inventory ahead of receiving new seasonal product.

Ike Boruchow, a senior retail analyst at Wells Fargo who interviewed Jordan through the session, previously said the acquisition would contribute an incremental $70 million to $80 million in quarterly revenues.

“The Off-White brand has been one of the strongest-growing brands in the marketplace in the last quarter,” Jordan said. “It’s consistently been in our top five in terms of brands. Since the product is coming directly from factories and production facilities the New Guards Group is partnering with, we’re seeing strong product margins coming through. That’s helping drive up our order contribution over the longer term.”

Jordan highlighted that the New Guards acquisition is about much more than the Off-White brand, complimenting the group’s production facilities, design facilities, sourcing networks and creative directors as pivotal to building more brands, engaging new customers and driving further growth.

The conversation came a week after Farfetch launched a fashion footprint tool to help shoppers understand the environmental impact of their pre-owned choices. The tool shows consumers the impact of specific materials in their purchases and calculates savings made if they choose to buy secondhand merchandise.

Alongside the launch, the luxury platform published a survey in collaboration with Icaro Consulting, QSA Partners and the London Waste and Recycling Board, which highlighted that 57 percent of consumers across the U.S., the U.K. and China said that buying a pre-owned fashion item prevented the purchase of brand-new merchandise. On average, the study said, one pre-owned purchase saves one kilogram of waste, 3,040 liters of water and 22 kilograms of carbon dioxide.

The footprint tool is part of the company’s Positively Farfetch sustainability initiative, which launched last year and includes a resale program with a handbag trade-in component.