Farfetch (FTCH -1.02%) stock hit its all-time high of $73.35 last February. But since then, shares of the London-based luxury e-tailer have plummeted in value by nearly 80% to about $8 a share -- or less than half its IPO price of $20.
Farfetch disappointed investors with its slowing growth and ongoing losses, while the post-pandemic slowdown of the e-commerce market, inflation, rising interest rates, and other macro headwinds made it even less attractive. But at 1.4 times this year's sales, has Farfetch finally become a turnaround play for value-seeking investors?
Image source: Getty Images.
How Farfetch makes money
Farfetch's online marketplace, which features nearly 1,300 luxury brands, connects sellers in over 50 countries to customers in more than 190 countries. Its Farfetch Platform Solutions service also provides e-commerce and analytics tools to enterprise customers. Farfetch also owns Browns, a brick-and-mortar and online store based in London; Stadium Goods, a New York-based sneaker and streetwear reseller; and New Guards Group, a Milan-based company that owns luxury streetwear brands like Heron Preston, Off-White, and Palm Angels.
Two of Farfetch's top investors are Alibaba (BABA 0.28%) and JD.com (JD 0.20%), the two largest e-commerce companies in China. Farfetch initially sold its products on JD, but it ended that partnership in late 2020 and launched a new flagship store on Alibaba's Tmall Luxury Pavillion in early 2021.
Farfetch generated 21% of its revenue in the United States, another 10% in the United Kingdom, and the remaining 69% from "other countries" last year. Its business in China, which is operated as a joint venture with Alibaba and Richemont (CFRH.F -0.75%), accounts for a large -- albeit not fully disclosed -- portion of those sales from "other countries."
How ugly was Farfetch's slowdown?
Farfetch generated 61% of its revenue from its digital platform services last year. The rest came from its digital platform fulfillment services (15%), brand platform services (21%), and in-store sales (3%).
The growth of Farfetch's digital businesses accelerated significantly in 2020 as pandemic-induced shutdowns of brick-and-mortar stores drove consumers to buy more luxury products online. But that momentum faded in 2021 as the lockdown measures ended, and its growth slowed to a crawl in the first nine months of 2022 as inflation, the rising dollar, the Russo-Ukrainian war, and unpredictable COVID-19 lockdowns in China curbed consumer spending.
|
Segment |
2019 |
2020 |
2021 |
First 9 Months |
|---|---|---|---|---|
|
Digital platform services revenue growth (YOY) |
43% |
47% |
34% |
5% |
|
Digital platform fulfillment revenue growth (YOY) |
31% |
67% |
56% |
0% |
|
Brand platform revenue growth (YOY) |
N/A* |
138% |
20% |
8% |
|
In-store revenue growth (YOY) |
77% |
36% |
89% |
52% |
|
Total revenue growth (YOY) |
70% |
64% |
35% |
6% |
Data source: Farfetch. YOY = Year over year. *Brand platform business was launched in 2019.
Farfetch's digital platform gross merchandise volume (GMV), or the value of all goods sold on its marketplace, decreased year over year in the second and third quarters of 2022. Management expects that pressure to persist with a 5%-7% decline in GMV for the full year -- which dashes all hopes for a quick recovery during the holiday quarter.
Farfetch's slowdown is even more troubling when we consider that top-tier luxury brands like LVMH (LVMUY -0.23%) and Hermès (HESAY -0.12%) have generated robust growth over the past year. Therefore, Farfetch's problems seem more specific to the company -- with its heavy exposure to China and its unfavorable mix of lower-end "affordable luxury" brands which are less resistant to inflation than top-tier brands -- instead of the broader luxury goods market.
Farfetch's customer base is also small, growing slowly, and gradually spending less money on its platform. In the third quarter of 2022, its number of active consumers grew less than 2% sequentially to 3.9 million, while the average order value on its marketplace fell 11% sequentially to $530.
Will Farfetch ever generate a profit?
As Farfetch's growth cools off, it's struggling to prove that its business model is sustainable. Its operating loss narrowed from $620 million in 2020 to $476 million in 2021, but widened year over year from $375 million to $547 million in the first nine months of 2022. After finally turning positive for the full year in 2021, Farfetch's adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margins turned red again in the first three quarters of 2022. It expects to post a negative adjusted EBITDA margin of 3%-5% for the full year.
During its latest conference call, CFO Jose Neves said Farfetch would prioritize "margin profitability over growth," and that it expected to "return to solid growth while also delivering adjusted EBITDA profitability and positive free cash flow" in 2023.
Farfetch's turnaround plan seems far-fetched
Farfetch seems optimistic about its future, but I don't see how it can return to meaningful growth by next year. It was unable to generate consistent profits during its pandemic-induced growth spurt in 2020, and its exposure to macro-sensitive affordable luxury brands and the volatile Chinese market now make it even tougher to generate stable growth in 2023.
Therefore, I believe Farfetch will likely disappoint investors again in 2023. Investors who want some exposure to the inflation-resistant luxury market could simply buy stocks like LVMH and Hermès instead of betting on tiny e-tailers like Farfetch.
