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Here’s What Stands Out in Farfetch’s Q4 Report

Farfetch Ltd. notched its second consecutive quarter of improving profitability, aided in large part by reduced promotional activity. But a spike in gross merchandise value (GMV) could be the most positive signal yet of what lies ahead for the luxury fashion marketplace platform.

While Farfetch substantially widened its losses in the quarter ended Dec. 31 to $110.1 million, or 34 cents a share, from a loss of $9.9 million, or 3 cents, a year ago, it was still narrower than expected and the adjusted loss was just 8 cents a share in the quarter, better than loss of 28 cents on sales of $341 million that Wall Street estimated. The company reported revenues of $382 million, representing a 95.9 percent spike from $195 million a year ago.

More important, gross merchandise value jumped 58.6 percent to $739.9 million, with the GMV from its digital platform rising 36 percent to $628.6 million. Gross merchandise value is the total value of merchandise sold on the Farfetch site and is a common metric to measure growth. Farfetch ended 2019 with a GMV for the year of $2.14 billion, a 52 percent jump from 2018’s GMV of $1.41 billion. Of that, GMV derived from the digital platform was $1.95 billion, representing a 40 percent growth rate. The balance of GMV revenue is from its brand platform operation, which includes its New Guards Group acquisition.

Farfetch’s GMV growth was above Wall Street’s expectations of 33 percent, driven by a strong collection of brands and localized customer experience, according to Cowen & Co. retail and luxury analyst Oliver Chen, who has an “Outperform” rating on Farfetch shares, and a target share price of $16.00.

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“We are encouraged by the lowest promotional level in six quarters,” said Chen, who believes that “GMV will accelerate in the back half as more brands choose to be on Farfetch as the platform is committed to higher full-price selling.”

Looking ahead, “We believe Farfetch is on the right path to achieve positive adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) in 2021 as it improves first party gross margin levels, optimizes demand generation expense and leverages fixed costs, and critically maintains customer lifetime value characteristics through engagement and rational customer acquisition strategies,” Chen said.

The improved fourth quarter report is a change from some of Farfetch‘s rockier earnings reports in the recent past, according to Ike Boruchow, retail analyst at Wells Fargo, who has an “Overweight” rating on shares of Farfetch and a price target of $17 a share.

“With Farfetch pulling back on promo activity, the intense margin pressure from mid-2019 is alleviating,” Boruchow said, noting the GMV upside of 37 percent, versus guidance of 30 percent to 35 percent.

Boruchow took note of Farfetch’s “plan to breakeven in fiscal year 2022.”

Despite fears that the coronavirus will impact luxury demand in China, Farfetch’s management said the world’s second-largest economy “actually continues to outperform the company average quarter-to-date” as digital sales insulate the marketplace platform from the foot-traffic declines that other retailers have been experiencing, Boruchow noted.

And while there’s concern over “core” profitability, Boruchow expects the New Guards Group acquisition will contribute an incremental $70 million to $80 million in revenues. Wells Fargo remains bullish on the secular e-commerce narrative that luxury is under-penetrated online now but will catch up as younger generations accumulate wealth, Boruchow said, “which we think provides a long-term tailwind for Farfetch.”

Farfetch acquired New Guards, the exclusive licensee of streetwear brand Off-White, last August in a cash-and-stock deal valued at $675 million. In January, New Guards acquired Opening Ceremony and planned to take production of the line in-house. While the terms of the Opening Ceremony deal were not disclosed, founders Humberto Leon and Carol Lim remain co-creative directors.

Jose Neves, Farfetch’s founder, co-chair and CEO, told analysts during the company’s conference call that the digital platform 40 percent GMV growth rate means “we grew almost twice as fast as the online luxury industry.” As of Wednesday, is now live on the Farfetch platform and the companies inked a deal last year, Neves said.