After an epic 517% run in 2020, Farfetch (FTCH +0.00%) stock has come back down to reality in 2021. Shares of the e-commerce firm are down 33% year to date, in spite of a rock-solid second-quarter earnings update that shows business is still booming.
Luxury and high fashion have produced the world's richest person: Bernard Arnault, founder and chair of LVMH Moët Hennessy-Louis Vuitton. But can investing in Farfetch's digital-forward take on luxury goods get you a cut of the spoils? If you have the patience for a volatile growth stock, it certainly might.
Image source: Getty Images.
First half of 2021 is in the books
Farfetch had a solid second quarter, the first full-quarter period lapping the initial effects of the pandemic in spring 2020. The company reported a 40% year-over-year increase in gross merchandise value (the value of all goods sold through its system) to just over $1 billion. That GMV figure was over double what it was in the same quarter of 2019. Resulting revenue was up 43% to $523 million.
The bottom line also swung positive too. Net income was $87.9 million, compared to a loss of $435.9 million in the same period last year. Don't get used to the profitability just yet, though. The positive net income was due to a $246 million non-cash re-measurement of items held on the company's balance sheet. Adjusted EBITDA, which backs out the effects of non-cash items on the bottom line, was negative $20.6 million, compared to negative $25.2 million last year.
|
Metric |
First Half 2021 |
First Half 2020 |
YOY Change |
|---|---|---|---|
|
Revenue |
$1.01 billion |
$696.1 million |
45% |
|
Gross profit margin |
44.7% |
44.9% |
(20 bps) |
|
Net income |
$604.6 million |
($515.3 million) |
N/A |
|
Adjusted EBITDA |
($39.8 million) |
($47.5 million) |
N/A |
Bps = basis points. Data source: Farfetch.
Not every investor will be comfortable enduring these kinds of losses, but Farfetch is spending heavily to promote maximum expansion now, while profitability will be a bigger concern later on. Nevertheless, for those wondering if the company can endure such bleeding, Farfetch had $1.15 billion in cash and short-term investments offset by debt of $612.9 million as of the end of June. With the company making steady progress toward break-even, it can afford to keep strutting to its own fast-and-steady beat for now.
Online luxury retail still has some catching up to do
E-commerce has slowly but steadily moved its way up the retail pecking order and disrupted every aspect of the shopping experience. The revolution Amazon helped start with low-value items like books moved on to household basics, and groceries, consumer electronics, everyday clothing, and other higher value merchandise have rapidly moved to digital outlets over the last decade as well.
But high fashion has long been a holdout. It's not that luxury brands haven't dabbled with online stores and direct-to-consumer order fulfillment in the past, but a physical presence has always been a priority. After all, high-end purchases are about the experience as much as the objects of consumers' desire.
Farfetch knows this, and that's why this is a hybrid digital commerce technologist. It's a software firm, sure. But it also has a foot planted in physical retail to help the brands it works with bridge the gap between a highly sought-after in-person shopping experience and a top-notch virtual experience -- and a direct-to-consumer order fulfillment platform to boot.
And even as the company starts to lap the boom in activity it got last year when consumers of all types (even those in the market for high fashion) were in lockdown, it isn't expecting too bad a slowdown. Management is calling for respective 30% and 45% year-over-year increases in its digital platform GMV and brand platform GMV in the current quarter. For reference, digital platform GMV was up 60% in the third quarter last year, and brand platform GMV was up 79%. Talk about compounding growth! Farfetch is quickly becoming a titan in the fashion industry.
So is its stock a buy? For the right type of investor, I think so. Though the stock has fallen this year, Farfetch's business is still expanding at a rapid pace as high-end fashion brands look for the best way to interact with their patrons in a digital format. The company is on a path to reaching consistent profitability, but growth is the name of the game here, so a volatile stock price is par for the course. If you're comfortable with wild swings in valuation and can purchase small batches of the stock over time (assuming the thesis for growth doesn't change), put Farfetch on your radar.
Currently trading at about 8.7 times trailing 12-month sales, Farfetch stock looks like a long-term value considering the long runway this firm still has ahead of it.
