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Why Tmall Could Be a Major Win for Farfetch’s China Push

Luxury goods sales may have hit a snag during the Covid-19 pandemic, but Farfetch has had no problem inundating the masses with top designer fashion brands and attracting shoppers to its online marketplace in droves throughout.

Fourth-quarter revenue at Farfetch increased 41.3 percent year-over-year to $540 million, driving total gross merchandise value (GMV) up 43 percent and past the $1 billion mark for the first time. The company reached more major milestones in the quarter, achieving adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) profitability for the first time and bringing on more than 500,000 new customers—a new record.

In a Nutshell: Farfetch’s digital platform GMV, which doesn’t include in-store GMV or GMV related to the company’s New Guards brands, takes up the majority of GMV sold at $939 million, a 49 percent year-over year-increase. Average order value (AOV) across the marketplace slightly decreased from $636 to $626 due to a higher mix of sales with fewer items per basket, partially offset by a higher full-price mix.

With the company still getting its feet wet in its $1.1 billion joint venture with Alibaba and Richemont, China remains the center of attention for Farfetch.

In a fourth-quarter earnings call, José Neves, founder, chairman and CEO of Farfetch, talked extensively about the opportunities in the market via the Alibaba partnership. The company soft launched a dedicated store on Tmall’s Luxury Pavilion on Feb. 5, ahead of schedule. Of the 2,412 brands Farfetch made available on Tmall with the launch, more than 90 percent previously did not have a presence on the channel.

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The Farfetch store will officially launch on March 3, and will include all 3,500+ of its brands—95 percent of which don’t already have a presence on Tmall.

“It’s a channel where, as in any other channel, we have to learn. We have to learn how to utilize the platform and through demand generation these platforms are extremely sophisticated as you would imagine,” Neves said in the call. “So we have to apply our data capabilities, our mass impact capabilities to these platform the same way we apply them on Google or Instagram or WeChat that will take some time to fine tune, but we’re very confident that over the longer term this will be a very, very meaningful opportunity.”

The move certainly opens up a realm of possibilities for the online marketplace, especially in a market that is so luxury-obsessed, young and willing to spend. In total, Tmall has 779 million consumers, and complements the Farfetch mobile app, which drives “the vast majority” of its sales in China.

Mainland China is Farfetch’s second-largest market and has grown GMV faster than the overall marketplace in 2020, according to Neves.

Within Farfetch’s digital platform segment, third-party GMV grew 40 percent year-on-year, led by growth in Farfetch Platform Solutions and a more than doubling of brand “e-concession” sales on the marketplace.

Farfetch Platform Solutions (FPS) services enterprise clients with e-commerce and technology capabilities and powers the online sites of Off-White, Palm Angels and Harrods, among others.

But the e-concessions may be FPS’s biggest offering yet, enabling brands to integrate their stock systems within department stores and other online retailers. Farfetch now powers 550 e-concessions, including its most prominent implementation, a Burberry store on Harrods.com. These e-concessions have access to “over half of the supply available on Farfetch,” Neves said.

“When we connected the Burberry e-concession on Harrods, that gave Harrods access to thousands and thousands of Burberry products, drop shipped directly from numerous Burberry integrations,” whether it’s from the more than 20 Burberry flagship stores or its global distribution and fulfillment centers,” he added.

“It’s coming directly from multiple integrations, sometimes dozens of integrations with every single brand,” Neves said. “And what happens is that we switch this on and suddenly you see a meaningful bridge because the range is expanded right. So brands like Burberry today, for example, can go to all their department stores, all their retailers and say ‘Use this integration because this integration gives you access to 7,000 SKUs with one single integration.’”

For the first quarter of 2021, Farfetch anticipates digital platform GMV of $740 million to $770 million, representing 50 percent to 55 percent year-over-year growth. The marketplace expects brand platform GMV of $95 million to $105 million, and projects adjusted EBITDA to swing back to a loss of $19 million to $21 million.

Farfetch anticipates the full year to see more of a leveling out on both the top and bottom lines. Digital platform GMV is expected to reach $3.6 billion to $3.7 billion, representing growth of 30 percent to 35 percent year over year, while adjusted EBITDA margin projects to be between 1 percent and 2 percent.

The company ended the year with cash and cash equivalents of $1.6 billion.

Net sales: Farfetch’s fourth-quarter revenue increased 41.3 percent year-over-year to $540.1 million, while adjusted revenue, which doesn’t account for revenue from the company’s digital platform fulfillment service, which offers shipping and customs clearing services it provides clients, increased 37.6 percent to $464.9 million.

Revenue through its digital platform, which combines sales from first- and third-parties made on the Farfetch marketplace, and the revenue from the fulfillment services, grew 56 percent in the quarter to $422.6 million. Brand platform revenue, which accounts for revenue from the New Guards Group aside from the brands’ own direct-to-consumer channels, jumped 2.3 percent to $103.9 million. In-store revenue increased by 39.6 percent to $13.7 million and was primarily driven by the opening of New Guards stores throughout the year.

For the full year, revenue jumped 63.9 percent from $1.02 billion in 2019 to $1.67 billion in 2020, while adjusted revenue increased 63.6 percent from $893 million to $1.46 billion.

Net earnings: Adjusted EBITDA improved to $10.4 million in the quarter from a loss of $17.9 million the year prior, marking the first time Farfetch achieved profitability in this metric. In late 2019, before the pandemic spread worldwide, Farfetch established a goal to break even in adjusted EBITDA by 2021. This change primarily reflected lower demand generation expenses, lower general and administrative expenses and the decline in technology expense as percentages of adjusted revenue.

Admittedly, true profitability is still a long way away for Farfetch, with the marketplace seeing after-tax net losses of $2.3 billion in the period, significantly more than the $110.1 million losses.

But $2.1 billion of those losses are a result of a non-cash “fair value loss” on its debt load, which is primarily driven by the company’s combined $1.25 billion in financing obtained through convertible bonds. Ironically, as the company’s market valuation increases (stock price jumped $38.65 per share in the quarter), so does the value of bonds and thus the overall cost associated with them.

Loss per share for the quarter amounted to $6.53, significantly more than the 34 cents per share loss of the prior-year quarter.

CEO’s Take: While Farfetch will continue to lean into customer acquisition, particularly through app downloads, 2021 will focus on retention through CRM efforts, increased personalization and its Access loyalty program.

I think this new paradigm shift that we’ve seen with consumers is really here to stay. We now have cohort data from Q2 and it’s incredible data,” Neves said. “So the retention is very strong. We have lifetime value for those customers that is higher than the previous 10 quarters. The cost of acquisition of those Q2 customers has been paid back in less than six months. The Q3 cohort of customers is, as I said, showing very strong repurchase behavior and spend per customer.”