Online luxury marketplace Farfetch (NYSE: FTCH) reported results in line with analyst expectations in Q4 FY2022 quarter, with revenue down 5.48% year on year to $629.2 million. Farfetch made a GAAP loss of $176.7 million, down on its profit of $96.9 million, in the same quarter last year.
Farfetch (FTCH) Q4 FY2022 Highlights:
- Revenue: $629.2 million vs analyst estimates of $627 million (small beat)
- EPS (non-GAAP): -$0.25 vs analyst estimates of -$0.25
- Free cash flow was negative $19.4 million, compared to negative free cash flow of $130.7 million in previous quarter
- Trailing 12 Months Active Consumers: 3.92 million, up 231 thousand year on year
Inspired by the idea of allowing anyone to buy clothes from landmark boutiques of cities like Paris or Milan without having to leave their couch, Farfetch (NYSE: FTCH) is a global marketplace for luxury fashion, connecting boutiques, brands and consumers.
Farfetch operates a marketplace focused on multi-brand fashion boutiques listing inventory on its marketplace, with Farfetch charging a commission on sales made. Over time, the company has created network effects for its buyers and sellers, while providing a unique value proposition to each. For buyers, Farfetch aggregates a wide inventory of exclusive apparel that is often difficult to locate, while also reducing purchasing friction by offering free returns and localized multi-lingual customer service; an important feature as many are buying from vendors in different countries, notably China, which is Farfetch’s second largest market.
Fashion boutiques generally operate only from a few locations, and have little online presence; Farfetch enabled them access to a much wider audience. This provides dual benefits; it allows them to grow their business but also allows them to prove to their brand partners (e.g. Gucci) that their boutiques should have access to unique inventory. Finally, for the fashion brands themselves, Farfetch is a distribution platform through which to sell direct to consumers, while maintaining control of pricing, an important function in the fashion industry.
Marketplaces have existed for centuries. Where once it was a main street in a small town or a mall in the suburbs, sellers benefitted from proximity to one another because they could draw customers by offering convenience and selection. Today, a myriad of online marketplaces fulfill that same role, aggregating large customer bases, which attracts commission paying sellers, generating flywheel scale effects which feed back into further customer acquisition.
Farfetch (NYSE: FTCH) competes with privately held Lyst and Yoox-Net-a-Porter Group, along with Asos (AIM:ASC), boohoo group (AIM:BOO), LVMH’s 24Sevres.com (ENXTPA:MC), Poshmark (NASDAQ: POSH), and Revolve Group (NYSE: RVLV).
Farfetch's revenue growth over the last three years has been very strong, averaging 36.4% annually.
This quarter, Farfetch reported a rather lacklustre 5.48% year on year revenue decline, in line with analyst estimates.
As a online marketplace, Farfetch generates revenue growth both by growing the number of buyers using the platform and how much each of those buyers spends.
Over the last two years the number of Farfetch's active buyers, a key usage metric for the company, grew 23.1% annually to 3.92 million users. This is a strong growth for a consumer internet company.
In Q4 the company added 231 thousand active buyers, translating to a 6.27% growth year on year.
Revenue Per User
Average revenue per user (ARPU) is a critical metric to track for every consumer internet product and for Farfetch it a function of how much its users spend on the platform and what is Farfetch's take rate (cut) from each transaction.
Farfetch’s ARPU has declined over the last two years, averaging 2.9% annually. While it is not great to see the company losing pricing power, at least the strong user growth somewhat compensates for it. This quarter, ARPU shrank 11.1% year on year, settling in at $160.59 for each of the active buyers.
User Acquisition Efficiency
Consumer internet businesses like Farfetch grow by a combination of product virality, paid advertisement and occasional incentives, unlike enterprise products that are typically sold by sales teams.
Farfetch is very efficient at acquiring new users, spending only 21.9% of its gross profit on marketing over the last year. This level of sales and marketing spend efficiency is indicative of a combination of scale and a strong brand reputation, which gives Farfetch the freedom to invest its resources into new growth initiatives while still maintaining optionality in the business.
Earnings & Free Cash Flow
Investors typically look at a company’s operating income to get a sense of how profitable a core business is. Adjusted EBITDA is the most common profitability metric for consumer internet companies, similar to operating profit, but removes various one time or non-cash expenses to give a more normalized measure of profitability.
Farfetch's EBITDA came in at negative $34.6 million this quarter, which translated to a -5.5% margin. Over the last twelve months Farfetch has shown a rather mediocre profitability for a consumer internet business with LTM EBITDA margins of -4.33%.
If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Farfetch burned through $19.4 million in Q4, with cash flow turning negative year on year.
Farfetch has burned through $558.8 million in cash over the last twelve months, an uninspiring -24.1% free cash flow margin. This low FCF margin is a result of Farfetch's capital intensive business model.
Key Takeaways from Farfetch's Q4 Results
Since it has still been burning cash over the last twelve months it is worth keeping an eye on Farfetch’s balance sheet, but we note that with a market capitalization of $1.9 billion and more than $734.2 million in cash, the company has the capacity to continue to prioritise growth over profitability.
It was good to see Farfetch outperform analyst revenue estimates even if just slightly, and also show some user growth. On the other hand, it was less good to see that revenue declined in absolute terms. The company is up 7.89% on the results and currently trades at $5.33 per share.
Is Now The Time?
When considering Farfetch, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although Farfetch is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been impressive, and that growth rate is even expected to increase in the short term. But while its user acquisition efficiency is best in class, the downside is that its ARPU has been declining and its cash burn raises the question of whether it can sustainably maintain its growth.
At the moment Farfetch trades at next twelve months EV/EBITDA 48.6x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Farfetch doesn't trade at a completely unreasonable price point.
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