Online luxury marketplace Farfetch (NYSE: FTCH) beat analyst expectations in Q1 FY2023 quarter, with revenue up 8.08% year on year to $556.4 million. Farfetch made a GAAP loss of $174.3 million, down on its profit of $728.8 million, in the same quarter last year.
Farfetch (FTCH) Q1 FY2023 Highlights:
- Revenue: $556.4 million vs analyst estimates of $515.4 million (7.96% beat)
- EPS (non-GAAP): -$0.16 vs analyst estimates of -$0.29
- Free cash flow was negative $162.7 million, compared to negative free cash flow of $19.4 million in previous quarter
- Gross Margin (GAAP): 43.2%, down from 44.8% same quarter last year
- Trailing 12 Months Active Consumers: 3.99 million, up 170 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).
Sales Growth
Farfetch's revenue growth over the last three years has been strong, averaging 29.5% annually. This quarter, Farfetch beat analyst estimates but reported a mediocre 8.08% year on year revenue growth.
Ahead of the earnings results the analysts covering the company were estimating sales to grow 21.7% over the next twelve months.
Usage Growth
As a online marketplace, Farfetch generates revenue growth both by growing the number of buyers on the platform and the average buyer size in dollars.
Over the last two years the number of Farfetch's active buyers, a key usage metric for the company, grew 17.1% annually to 3.99 million. This is a solid growth for a consumer internet company.
In Q1 the company added 170 thousand active buyers, translating to a 4.45% growth year on year.
Revenue Per Buyer
Average revenue per buyer (ARPB) is a critical metric to track for every consumer internet product and for Farfetch it is a function of the size of the average buyer on the platform and what is Farfetch's take rate (cut) from each.
Farfetch’s ARPB has declined over the last two years, averaging 1.98% annually. While the number of buyers has been still growing, it is not great to see the company losing pricing power. This quarter, ARPB grew 3.48% year on year, reaching $139.38 for each of the active buyers.
User Acquisition Efficiency
Unlike enterprise software that is typically sold by sales teams, consumer internet businesses like Farfetch grow by a combination of product virality, paid advertisement or incentives.
It is relatively expensive for Farfetch to acquire new users, with the company spending 45.1% of its gross profit on marketing over the last year. This level of sales and marketing spend efficiency indicates Farfetch has to compete for users and points to Farfetch likely having to continue to invest to maintain growth.
Pricing Power
Farfetch's gross profit margin, how much the company gets to keep after paying the costs of providing its service or product offering, came in at 43.2% in Q1, down 1.5 percentage points year on year.
We care about gross profit margin because it tells us how much is kept for every $1 of revenue after subtracting direct costs of providing products or services. In this case, Farfetch kept $0.43 for every dollar of revenue earned this quarter before deducting costs such as sales, R&D and administrative.
Within Consumer Internet, gross profit margin gives insight into a company's business type and pricing power. Online marketplace costs of revenue can include payment processing, hosting and bandwidth costs, as well as costs to onboard buyers and sellers such as verification.
Farfetch' gross margins have been trending down over the past year, averaging 43.9%. The weakness isn't great as Farfetch's margins are already below other consumer internet companies as is, reflective of weakening pricing and cost controls.
If you follow StockStory for a while, you know that we put an emphasis on cash flow. We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Farfetch burned through $162.7 million in Q1,
Farfetch has burned through $379.8 million in cash over the last twelve months, an uninspiring -16.1% free cash flow margin. This low FCF margin is a result of Farfetch's capital intensive business model.
Key Takeaways from Farfetch's Q1 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 $1.61 billion and more than $485.9 million in cash, the company has the capacity to continue to prioritise growth over profitability.
We were impressed by how strongly Farfetch outperformed analysts’ revenue and EPS expectations this quarter. Additionally, gross merchandise value or GMV also beat by nearly 4%. Additionally, GMV guidance for the full year was nearly 3% ahead of Consensus. While adjusted EBITDA in the quarter was relatively in line, full year guidance was ahead. Overall, this quarter's results seemed quite positive and shareholders can feel optimistic, especially after last quarter showed a worrisome year on year decline in revenue but this quarter broke that trend, showing positive growth. Management capped the solid quarter with comments about a commitment to "a return to profitability and positive free cash flow." The company is up 20.2% on the results and currently trades at $5.23 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. We cheer for everyone who is making the lives of others easier through technology, but in the case of Farfetch we will be cheering from the sidelines. Its revenue growth has been good, and that growth rate is even expected to increase in the short term. But while its user growth has been healthy, the downside is that its ARPU has been stagnating 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 24.5x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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