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Farfetch (NYSE:FTCH) Misses Q3 Sales Targets, Stock Drops


Full Report / November 17, 2022
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Online luxury marketplace Farfetch (NYSE: FTCH) missed analyst expectations in Q3 FY2022 quarter, with revenue up 1.85% year on year to $593.3 million. Farfetch made a GAAP loss of $274.9 million, down on its profit of $769.1 million, in the same quarter last year.

Farfetch (FTCH) Q3 FY2022 Highlights:

  • Revenue: $593.3 million vs analyst estimates of $596.5 million (0.53% miss)
  • EPS (non-GAAP): -$0.24 vs analyst estimates of -$0.20
  • Free cash flow was negative $130.6 million, compared to negative free cash flow of $67 million in previous quarter
  • Trailing 12 Months Active Consumers: 3.9 million, up 310 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 impressive, averaging 44.8% annually. Unfortunately, the pandemic had a negative impact on Farfetch's revenue growth.

Farfetch Total Revenue

This quarter, Farfetch reported a rather lacklustre 1.85% year on year revenue growth, falling short of Wall St expectations.

Ahead of the earnings results the analysts covering the company were estimating sales to grow 13.5% over the next twelve months.

Usage Growth

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 28% annually to 3.9 million users. This is among the fastest growth of any consumer internet company, indicating that users are excited about the offering.

Farfetch Trailing 12 Months Active Consumers

In Q3 the company added 310 thousand active buyers, translating to a 8.62% 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 ARPU

Farfetch’s ARPU has declined over the last two years, averaging 1.93% 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 6.23% year on year, settling in at $152.02 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.

Farfetch is efficient at acquiring new users, spending 39.3% of its gross profit on marketing over the last year. This level of sales and marketing spend efficiency is indicative of a relatively solid competitive positioning, which gives Farfetch the freedom to invest its resources into new growth initiatives.

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 reported negative EBITDA of $4.11 million this quarter, which was a -0.7% margin. Over the last twelve months Farfetch has shown a rather mediocre profitability for a consumer internet business with LTM EBITDA margins of -3.95%.

Farfetch Adjusted EBITDA Margin

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 $130.6 million in Q3, increasing the cash burn by 66.1% year on year.

Farfetch Free Cash Flow

Farfetch has burned through $419.8 million in cash over the last twelve months, an uninspiring -17.9% free cash flow margin. This low FCF margin is a result of Farfetch's capital intensive business model.

Key Takeaways from Farfetch's Q3 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 $3.55 billion and more than $487.3 million in cash, the company has the capacity to continue to prioritise growth over profitability.

It was good to see that Farfetch’s added new users. That feature of these results really stood out as a positive. On the other hand, it was less good to see that the revenue growth was quite weak and it missed analysts' revenue expectations. Overall, it seems to us that this was a complicated quarter for Farfetch. The company is down 9.29% on the results and currently trades at $8.29 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 exceptional, and that growth rate is even expected to increase in the short term. But while its user growth has been strong, 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 36.6x. 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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