Farfetch Earnings: Helped by New Guards Brands and Physical Retail as Marketplace Is Sluggish

We are maintaining our fair value estimate for no-moat Farfetch FTCH at USD 12.20 after the company reported improved revenue growth in the first quarter. Shares still look cheap, in our view.

Growth was not driven by the core digital platform, where performance remains sluggish (digital platform gross merchandize value, or GMV up 1.9% at constant exchange rates), but by the brand platform (that includes the acquired New Guards group business), which was up 15.4% at constant currencies, and in-store revenue, which was up by 10% at constant currencies, partly thanks to store openings. Sluggish trends in online business reported by Farfetch come after weakness in online peers Zalando (GMV up 2.8% in the quarter) and ASOS (revenue down 10% in the first half). That said, the platform’s performance improved sequentially from declines in the fourth quarter. Altogether, revenue improved by 12% at constant exchange rates. The first quarter was still affected by discontinued business in Russia, (comparison gets easier from March 2022), continued but improving declines in China, and declines in the U.S. as the company reduced marketing investment in a promotional market. Demand in EMEA was solid with low-double-digit improvement if business in Russia is excluded from the comparison base.

Profitability was supported by a decline in spending on demand generation, which could have a detrimental effect on the company’s long-term growth. Demand generation expense was down 15.7%, to 16.9% of revenue, and technology expense was down 14.2%, partly as a result of efficiencies but partly due to repositioned spend toward capitalizable projects (possibly a benign change but still one that makes accounting earnings look better). Total technology investments were 14% of adjusted revenue (13.4% in the first quarter of 2022). An increase in general and administrative expenses due to investments to support the Reebok business still weighed, limiting improvements in EBITDA losses.