What happened

Shares of online luxury brand marketplace Farfetch (FTCH) are tumbling 23.5% this morning from where they closed last Friday, according to data from S&P Global Market Intelligence, as the fallout from a business update it filed with the SEC to kick off December continues to take a toll on the stock.

While the numbers initially appeared encouraging, showing growth in gross merchandise value and adjusted EBITDA margins, the growth trajectory Farfetch was on has flattened dramatically, and partnerships it has undertaken aren't paying off as predicted.

Woman in car looking at phone.

Image source: Getty Images.

So what

Part of the problem is that Farfetch's losses continue to widen. Its third-quarter earnings report in November showed adjusted losses growing to $0.24 per share from $0.14 per share, which likely had investors thinking the platform's guidance for adjusted EBITDA margins of 1% to 3% was indicative of sluggish growth, even if the anticipated margins were higher than the negative margins predicted for this year.

Yet management indicated profitability is the goal now, as Farfetch would prioritize "margin profitability over growth." CFO Jose Neves said the luxury e-commerce platform expected to "return to solid growth while also delivering adjusted EBITDA profitability and positive free cash flow" in 2023. 

Certainly a wild card in this is the reopening of China from the zero-tolerance COVID policy that continues to lock down major cities. Although Beijing has hinted it may relax the most restrictive aspects of its policies, the market continues to discount the impact that may have. With many predicting a recession in the U.S. early next year, China's decision to ease up on travel and commerce restrictions may just be too little, too late.

China is a key part of Farfetch's growth thesis. The company's investor day presentation often pointed to Chinese markets as the inflection point it needs for growth. It predicts China will account for 40% of the global luxury goods market by 2030, when that market will be worth $240 billion.

Now what

China has become Farfetch's second-largest marketplace region, meaning its closure due to the pandemic has been especially hard on the business. November was the worst month for China trade in two and a half years amid what Reuters calls "feeble global and domestic demand."

That might not change anytime soon if the U.S. and the rest of the world slide into recession next year, which could push out any hope for a recovery for Farfetch further into the future.