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Farfetch is an online luxury e-commerce platform.NYSE:FTCH) has seen its share price sink over the past year; Farfetch is down nearly 70% over the past year, and more than 50% year to date. The stock has been falling over the past year.Past several months seem to have been driven by a combination factorsThis includes rising interest rates, Russia’s-Ukraine war and rising inflation.
Looking for Alpha
Despite these systemic challenges, Farfetch’s underlying business is still going strong. Farfetch’s active customers grew from 3.024million to 3.024million at the end 2020. 3.687 millionUp 21% in customers at the close of 2021 GMV grew 32% from USD 3.0 billion in 2020, to USD 4.22 billion by 2021. Revenues grew 34.8% from USD 1.67 million in 2020 to USD 2.25 Billion in 2021.
Farfetch could be impacted by systemic risks in the near future, but there are several structural uptrends that could have a positive impact on Farfetch’s long-term business conditions.
Online luxury is a market that is growing.
Online luxury purchases are increasing, a trend that has been accelerated by the Covid pandemic. Bain’s 2021 Luxury Report revealed that online luxury jumped 50%Between 2019 and 2020, and rose 27% between 2020-2021.
Despite the growth, online luxury penetration is still low lags far behindIt is expected to be in single digits. This indicates that there is plenty of room for growth. The vast majority of online luxury shoppers, who are between 21 and 34 years old, are younger millennials. 25-34Online luxury shoppers make up the lowest proportion of the population, with the exception of the over-65s. This generation was born in the ‘e-commerce’These people are used to shopping online in this day and age. As they move up the income ladder, this group could be a key driver in the online luxury sector. Farfetch could benefit from this trend, as its target customers are millennials (who account for nearly 80% of the population). 60% of the platform’s customers).
Significant China exposure
China’s share of the global luxury market rose in 2021, with sales rising 36% in 2021 to CNY 471 billion, pushing China’s share of the global luxury market to about 21%In 2021, the rate will rise to 20% from 2020. Many of the growth was due to well-off Chinese who spent a lot on luxury goods at their home, as international border closures and lockdowns prevented them from traveling abroad. Online luxury sales grew faster then offline, and online luxury penetration in China reached 19% without including duty-free. Bain expects China to emerge as the world’s biggest luxury market by 2025, and with China being Farfetch’s second-biggestThe company is poised to profit from the market’s gross merchandise value (GMV).
Expansion to other luxury segments (such beauty and hard luxe)
Farfetch is expanding its presence in the luxury market by moving beyond apparel and accessory and into other areas like beauty and luxury retail.
Farfetch was launched in January of this year. acquiredViolet Grey is a luxury beauty platform that offers luxury products. This is part of the company’s attempt to break into the luxury beauty sector which is expected reach $1 trillion. USD 69 billion by 2025According to the Bain-Altagamma luxury study, it is. Farfetch beauty products will be available on the Farfetch Marketplace later this year.
The luxury resale market will reach approximately USD 68.5 billionBy 2026, the company will have grown to USD 16.2 billion from 2018, a CAGR close to 20%. Farfetch appears poised to capitalize on this opportunity, with the acquisition of a company. LUXCLUSIF, a luxury resale marketplace that allows the acquisition, authentication, and sale of secondhand luxury goods to and fro auctions, retailers and e-commerce platforms as well as stores around the world.
Farfetch is more than an online luxury marketplace. Farfetch aims to be more than that. “Netflix of Fashion”
Farfetch, like Netflix, started by compiling lists of brands and products owned third parties. However, both are now available. increasingly movingto create their own content. In addition to peddling other people’s brands, Farfetch has evolved to include its own portfolio of brands which are being supported by Farfetch’s expanding brand development infrastructure which includes its own marketplace (Farfetch Marketplace), a network of boutiques, a brand accelerator, and luxury production and distribution arm (New Guards Group which Farfetch acquired in 2019). The ideaIt is to identify and invest early in disruptive talent and provide support services such marketing, sourcing and other resources to help them blossom into profitable brands.
Farfetch made $80 million in 2019 USD 675 millionTo acquire luxury brand development platform and distribution platform New Guards Group, and its portfolio of brands including Off-White and Palm Angels, Marcelo Burlon Country of Milan, Heron Preston and Alanui, Unravel Project, Kirin Peggy Gou. Farfetch had hoped to develop and with the acquisition introduce new brandsto improve customer engagement. This could not only increase customer engagement but also be a great way to get your message out. build brand equityThese new brands are generating revenues and enhancing sales. margin accretive.
While margins at Farfetch’s Digital Platform business (which includes Farfetch’s online sales channels such as Farfetch Marketplace, BrownsFashion.com, StadiumGoods.com, and Farfetch New Retail, and online websites for New Guards brands) have been flat over the past few years, margins at Farfetch’s Brand Platform (which includes the production and wholesale distribution of New Guards brands’ merchandise to selected third-party distributors) has steadily increased.
Brand Platform accounts are for just 20.7% of Farfetch’s total revenues and as this business segment grows, it could help support margin expansion. Farfetch, in collaboration with New Guards Group, launched its first private label brand, There Was One, late last year. The company claims it has additional brands under development with New Guards Group. Margins are likely be considerably higher than Farfetch’s take rate from third party retailers and brands.
Luxury brands more likely to go mono-brand online channels
Because luxury brands are afraid of losing their status online, they have been slow to adopt e-commerce. To meet this demand, luxury brands are expanding their digital presence. Instead of focusing on a multi-brand marketplace platform they might opt to go directly to the consumer, much like Nike (NKE), which captures the advantages associated with the monobrand model such a better control over presentation, customer services, pricing consistency, etc. This allows them to offer a unique luxury brand experience. that reflects their brand storyYou can build a loyal and engaged community. Kering is an example. withdrew from YNAPIn 2018, they will be able to manage their online selling operations in-house. Bain’s Luxury Report 2021 noted that online luxury nearly doubled during the past two years, a surge led by mono-brand stores which gained ground on other types of online platforms and now make up an estimated 40%Up to 30% of the online segment in 2019,
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Bain & Company
Source: Bain & Company
Luxury giants like LVMH (OTCPK :LVMHF), Kering (OTCPK :PPRUF), may not have the resources and scale to operate luxury online retail websites. boutique luxury brandsFarfetch and YNAP are more likely to partner with them. The trend could be a boon for Farfetch Platform Solutions – Farfetch’s white-label e-commerce platform service that offers luxury brands an array of e-commerce services from powering mono-brand online retail sites and fulfillment operations, to providing first party data to identify marketing opportunities on the Farfetch Marketplace. China is a prime location for this opportunity. Gen-Z luxury consumers in China are increasingly looking to niche luxury brands. struggle to crack the Chinese market due to resource constraints and limited experience in navigating China’s vast and complex market. Farfetch, through its tie-upAlibaba (BABA), a Chinese e-commerce giant, was last year well placed to capitalize on this opportunity and offer boutique luxury brands the necessary technology platformExpertise, and sales channels to access China’s fiercely competitive and lucrative market, and in turn satisfying Chinese Gen-Z shopper demand for niche brands from Farfetch’s growing selection of niche luxury brands from around the world.
There are risks
Negative operating cash flow and heavy debt burden
Farfetch has been producing since 2017. negative operating cash flowsIn all, except for one year.
Reuters
This means the company will have to keep turning to outside sources to plug the shortfall, as well as to fund capital expenditures and acquisitions, which could either mean increasing debt, or raising cash from equity sales such as private placements (which could dilute existing shareholders’ stake in the company) or if Farfetch fails to do any of those, the company could run into liquidity problems. With a total debt-to-equity ratio greater than 8 times, Farfetch is quite heavily leveraged and with the company on an aggressive growth path, Farfetch’s debt burden could potentially continue increasing if negative operating cash flows continue.
Margin-strengthening promotional activity
Competitors are just one example of the many “click away”Farfetch has seen a rise in heavy promotions in the online luxury market. notingThe “industry experienced a trend toward promotional activity over the last few years”. This trend leaves Farfetch in a relatively unpalatable situation – cut demand generation expenses to focus on profit at the expense of market share and revenue growth, or match competitors’ promotional activity to retain market share and revenue growth at the expense of profit. Heavy promotions are weighing on Farfetch’s margins; the company’s gross margins have remained unchanged over the past three years, and if Farfetch is compelled to spend heavily to match competitor marketing spend, the company’s path to profitability could be an uphill climb.
Farfetch Ltd. gross margins
Luxury shoppers shift to offline retail stores as lockdown measures are eased, borders open, and international travel resumes
Because luxury products are expensive, many shoppers prefer to try and hold them before purchasing. This is something that online luxury platforms cannot offer. Additionally, customers must wait for their goods to arrive and may have to deal with the inconvenience of goods getting damaged or lost during transit. Luxury shoppers may choose to gradually shop for luxury goods online, rather than relying on online marketplaces or mono-brand websites after being forced to buy luxury goods online because of pandemic-induced lockdowns. visit brick-and-mortar stores againOnline luxury sales growth will be limited as lockdown restrictions are eased.
Chinese luxury shoppers are still buying luxury goods. growth engineGlobal luxury sales – They are expected to drive two thirds of the growth in luxury spending up to 2025 73%Prior to the pandemic, they had made purchases abroad. That trend reversedDuring the pandemic this key group luxury consumers may have reverted to in-store luxury buying when borders reopen. While international tourism increased by 4% in 2021 but international arrivals were not yet at their peak, they did increase by 4%. 72% belowThe 2019 pre-pandemic year
Rising competition
Farfetch sells through Tmall in ChinaNow, smaller competitors are also entering the market. MyTheresa is quietly launching an online platform that aims to tap into the Chinese luxury market. JD.com (JD). Richemont (OTCPK.CFRHF) is under pressure from activist investors and is making YNAP a hybrid marketplace model. This means that shoppers will be able to shop on the internet. have accessto offer a wider range brands. Amazon (AMZN) is the bigger competitor. They launched Amazon Luxury Stores in 2012. 2020This was the original construction. similar to Alibaba’s widely successful Tmall Luxury Pavilion. Amazon is late to the party, but their luxury brand selection is underwhelmingThe company has many advantages, including large pockets that could allow them to make the necessary investment to build or buy a business if they so choose.
Summary
Farfetch’s financials are not exciting with debt increasing, operating cash flows persistently negative, and gross margins flat, however, this is not uncommon for young companies (Farfetch was founded in 2007 compared with Alibaba which was founded in 1999 and Amazon which was founded in 1994) operating in very early-stage industries.
There is plenty of room for growth in online luxury, and the market is still in its early stages. Farfetch is not the only online luxury retailer competing for a share in the market. Farfetch has a proprietary technology platform that provides ecommerce services to third-party luxury brands. It also offers brand development platforms to identify fashion trends and quickly build and develop private label luxury brands with higher margins to capitalize on them. YNAP, arguably Farfetch’s closest competitor in the online luxury space has been strugglingRichemont, a luxury powerhouse Richemont, is YNAP’s parent company. cozying upFarfetch reports that the two are currently in talks for a potential partnership. Richemont Maisons is a part of this potential partnership. joiningFarfetch Marketplace. Farfetch may be able to win this deal, as other luxury marketplaces are likely to struggle to reach similar deals with high-end brands. These brands are notoriously selective and e-commerce-averse. Farfetch already secured an investment of USD 1.15 million from Richemont as well as Alibaba. more to come.
With Farfetch appearing to be a likely winner in an early-stage industry that has ample room for growth, there is reason to be optimistic on Farfetch’s prospects of reaching critical mass as the market grows, the company matures, and industry consolidates to just a few players (Morgan Stanley believes Farfetch is at the early innings of a winner-takes-most marketplace model). As with any early stage business, there is the risk Farfetch’s ambitions may never realize, but if it does, the upside could be significant.
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