Online luxury marketplace Farfetch (NYSE: FTCH) fell short of analysts' expectations in Q2 FY2023, with revenue down 1.25% year on year to $572.1 million. Farfetch made a GAAP loss of $281.3 million, down from its profit of $67.7 million in the same quarter last year.
Farfetch (FTCH) Q2 FY2023 Highlights:
- Revenue: $572.1 million vs analyst estimates of $650.7 million (12.1% miss)
- EPS (non-GAAP): -$0.21 vs analyst estimates of -$0.23
- Free Cash Flow of $42 million is up from -$163 million in the previous quarter
- Gross Margin (GAAP): 42.5%, down from 46.2% in the same quarter last year
- Trailing 12 Months Active Consumers: 4.13 million, up 288 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 strong, averaging 23.2% annually. This quarter, Farfetch reported a year on year revenue decline of 1.25%, missing analysts' expectations.
Ahead of the earnings results, analysts covering the company were projecting sales to grow 31.1% over the next 12 months.
As an online marketplace, Farfetch generates revenue growth by increasing both the number of buyers on its platform and the average order size in dollars.
Over the last two years, Farfetch's active buyers, a key performance metric for the company, grew 13.7% annually to 4.13 million. This is solid growth for a consumer internet company.
In Q2, Farfetch added 288 thousand active buyers, translating into 7.49% year-on-year growth.
Revenue Per Buyer
Average revenue per buyer (ARPB) is a critical metric to track for consumer internet businesses like Farfetch because it measures how much the company earns in transaction fees from each buyer. Furthermore, ARPB gives us unique insights as it's a function of a user's average order size and Farfetch's take rate, or "cut", on each order.
Farfetch's ARPB has declined over the last two years, averaging 3.84%. Although the company's buyers have continued to grow, it's lost its pricing power and will have to make improvements soon. This quarter, ARPB declined 8.14% year on year to $138.45 per buyer.
A company's gross profit margin has a major impact on its ability to extert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Farfetch's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 42.5% this quarter, down 3.7 percentage points year on year.
For online marketplaces like Farfetch, these aforementioned costs typically include payment processing, hosting, and bandwidth fees in addition to the costs necessary to onboard buyers and sellers, such as identity verification. After paying for these expenses, Farfetch had $0.42 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.
Farfetch's gross margins have been trending down over the last 12 months, averaging 42.9%. This weakness isn't great as Farfetch's margins are already far below other consumer internet companies and suggest shrinking pricing power and loose cost controls.
User Acquisition Efficiency
Consumer internet businesses like Farfetch grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).
It's relatively expensive for Farfetch to acquire new users as the company has spent 45.4% of its gross profit on sales and marketing expenses over the last year. This level of efficiency indicates that Farfetch has to compete for its users and continue investing to maintain its growth trajectory.
Profitability & Free Cash Flow
Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.
This quarter, Farfetch's EBITDA came in at negative $30.6 million, resulting in a -5.34% margin. The company has also shown rather mediocre profitability for a consumer internet business over the last four quarters, with average EBITDA margins of -4.44%.
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Farfetch's free cash flow came in at $42 million in Q2, turning positive year on year.
Farfetch has burned through $270.7 million of cash over the last 12 months, resulting in an uninspiring negative 11.7% free cash flow margin. This low FCF margin stems from Farfetch's capital intensive business model and desire to stay competitive.
Key Takeaways from Farfetch's Q2 Results
Although Farfetch, which has a market capitalization of $1.91 billion, has been burning cash over the last 12 months, its more than $671.3 million in cash on hand gives it the flexibility to continue prioritizing growth over profitability.
We struggled to find many strong positives in these results. The company missed on key metrics such as gross merchandise value (GMV), active consumers, revenue, and adjusted EBITDA. Its revenue missed by a significant margin and growth also slowed. Looking ahead, the company lowered its full year GMV guidance meaningfully and also cut adjusted EBITDA guidance for the same period. Overall, the results were quite bad, with little to no major positives. The company is down 33.5% on the results and currently trades at $3.17 per share.
Is Now The Time?
Farfetch may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity. We cheer for everyone who's making the lives of others easier through technology but in the case of Farfetch, we'll be cheering from the sidelines. Its revenue growth has been solid, and that growth rate is even expected to increase in the short term. But while its growth in active buyers has been healthy, the downside is that its ARPU has been declining and its operations are burning a modest amount of cash.
At the moment Farfetch trades at 20.2x next 12 months EV/EBITDA. 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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