Hot off the news of a $1.15 billion joint venture with Alibaba and luxury goods conglomerate Richemont that accelerates its push into China, online luxury marketplace Farfetch had even more positive updates to share as it released its third-quarter earnings. In the quarter, Farfetch saw total gross merchandise value (GMV) and digital platform GMV growth rates jump 62 percent and 60 percent year over year, respectively, to record highs of $798 million and $674 million, respectively.
The digital platform GMV growth is the highest rate for Farfetch in 10 quarters, founder, CEO and chairman José Neves said in an earnings call.
In a Nutshell: Neves highlighted how Farfetch now has 550 brands on its luxury platform, having expanded its marketplace in the quarter with signings of new e-concession partners Moncler, Dolce & Gabbana, Ralph Lauren and watch maker Swatch Group’s Rado.
Active customers jumped 45 percent from 1.9 million to 2.7 million year over year, while average order value dropped 1 percent from $582 to $574, the result of more units sold in lower price-point categories.
“New customers continued to drive a stronger mix of GMV than in previous years and we added 400,000 new customers in Q3, following the 500,000 new customers acquired in Q2. This is while achieving lower customer acquisition cost year on year,” Neves said on the call. “Overall traffic grew at approximately 50 percent year on year on a lower cost per visit and higher conversion rate. App installs grew more than 70 percent year on year with app now driving over 50 percent of GMV with higher engagement than desktop users. Our app and mobile web represented more than 75 percent of transactions within the quarter.
Alongside the launch of Farfetch China, the luxury marketplace quietly terminated its consumer-facing partnership with one of China’s largest e-commerce players, JD.com. The two marketplaces reached a strategic partnership in 2017 that saw JD.com invest $397 million in Farfetch ahead of its IPO. JD.com will remain a shareholder in Farfetch.
Last year, Farfetch merged its China sales platform with JD.com’s upon acquiring the Chinese company’s luxury marketplace, Toplife, for $50 million. As part of this agreement, Farfetch gained “Level 1” Access on the JD.com mobile app, which included a prominent entry-point button on the app’s home screen.
In the call, Neves said that the JD.com partnership was “taking more time to ramp up than what we expected. It wasn’t performing to the level that both companies expected.”
As part of the expansion into China, Farfetch launched new iOS and Android apps to localize the shopper experience, and initiated the rollout of improved delivery features in select markets. The expanded shipping capabilities are designed to enable multi-leg logistics, which incorporate services from multiple providers and can increase flexibility of the company’ fulfillment operations.
Gross profit increased by $93.9 million to $209 million in the third quarter of 2020, or 81.6 percent year-over-year, from $115.1 million in the 2019 quarter, primarily due to growth in the company’s digital platform services revenue and the addition of New Guards gross profit starting from August of last year. That month, Farfetch acquired New Guards Group, which included the brands Off-White, Palm Angels and Heron Preston among others, for $675 million.
Gross margin increased from 45.1 percent to 47.8 percent year-over-year. An increase in first-party gross profit margin also reflects an increased mix of full-price sales, and higher margin first-party revenues from sales of New Guards brands’ owned-products sold directly to consumers through the platform.
The New Guards brands have continued to be a major boost for Farfetch. For the sixth consecutive quarter, GMV from New Guards brands, in aggregate, exceeded GMV for any other single brand on the Farfetch Marketplace in third quarter 2020.
Farfetch provided an outlook for the fourth quarter, expecting a more leveled out year-over-year digital platform GMV growth between 40 percent and 45 percent to $880 million to $910 million. The company anticipates brand platform GMV to end up in a range of $85 million to $90 million. The company also projects a positive adjusted EBITDA for the final quarter, which would be a first for Farfetch.
In the call, Neves maintained that Farfetch still has the goal to break even in adjusted EBITDA for the full 2021 fiscal year.
As of Sept. 30, cash and cash equivalents were $756.7 million, an increase of $434.3 million compared to $322.4 million as of Dec. 31.
Net sales: Third-quarter revenue increased 71.3 percent year over year to $437.7 million from $255.5 million. The increase was driven by 68.1 percent revenue growth in its digital platform services segment to $263 million, plus the impact of the New Guards acquisition during third quarter 2019. The segment is driven by the digital platform GMV, including commissions from third-party sales and revenue from first-party sales.
In-store revenue increased by 25.8 percent to $11.4 million, primarily driven by the acquisition of New Guards retail stores in August 2019, as well as the opening of new stores throughout the year. Revenue in this category is generated in Farfetch’s retail stores, including Browns, Stadium Goods and New Guards’ directly operated stores.
Revenue from Farfetch’s digital platform fulfillment segment, which includes proceeds from shipping and customs clearing services, increased 86.8 percent year over year to $50.9 million.
Net earnings: Farfetch’s net losses have been lost in the shuffle amid some of the more positive numbers listed in the earnings report, with the loss after tax totaling $537 million. These losses well exceed the $90.5 million lost in the third quarter of 2019. Earnings came in at a loss of $1.53 per share.
On the other hand, adjusted EBITDA improved to a loss of $10.3 million in the quarter from $35.6 million in the prior year-ago period. The low adjusted EBITDA compared to the actual net losses was primarily due to $373 million in losses on items held at “fair value,” as well as remeasurement losses largely unrelated to company expenses. The adjusted losses amount to earnings losses of 17 cents per share.
CEO’s Take: Neves lauded Farfetch’s ability to lower customer acquisition costs and ultimately drive efficient growth of its luxury consumer base.
“Conversion rates for our data-driven personalized communications are 1.5 times higher than non-personalized messages on average. Our implementation of machine learning technology, such as our proprietary Inspire algorithm are also driving engagement with these consumer communications, which is on average five times higher,” Neves said, noting Farfetch’s consistent month-over-month improvement in customer retention rates from March through the end of Q3.