Farfetch Limited
Q3 2020 Earnings Call Transcript

Published: 12 Nov 2020

[Operator:]

Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to Farfetch Third Quarter 2020 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I’d now like to turn the call over to Alice Ryder, VP of Investor Relations. Ms. Ryder, you may begin your conference.

[Alice Ryder:]

Hello. And welcome to Farfetch’s third quarter 2020 conference call. Joining me today to discuss our results are José Neves, our Founder, Chairman and Chief Executive Officer; and Elliot Jordan, our Chief Financial Officer.

[José Neves:]

Thank you, Alice, and thank you all for joining us today. I am very pleased to be speaking to you about Farfetch’s Q3 2020 results. Our business accelerated in Q3 to deliver record Group GMV of $798 million. This record performance was underpinned by the Digital Platform, which accelerated to generate GMV growth of 60% year-over-year, our highest Digital Platform GMV growth in 10 quarters. We believe we are witnessing a paradigm shift in the way people buying luxury. From day one, Farfetch set out the differentiated vision to enable the luxury industry by building a full suite of capabilities to connect the creators, curators and consumers who are the lifeblood of the luxury industry. It has not only positioned Farfetch to capture the accelerating online demand, resulting from increased consumer adoption in light of the continuing global pandemic, but we are actually helping drive this paradigm shift for consumers, as well as for brands. Our Q3 performance was achieved during the quarter when most of the world had reopened physical retail following widespread lockdowns during Q1 and Q2, and when most consumers had the option of returning to their local luxury boutiques and department stores. This online adoption is consistent with what our recently acquired . In a recent survey of our newer customers, 45% said they will continue to do more of their shopping online now that they are used to it. And 23% said, they would do most of their shopping online from now on.

[Elliot Jordan:]

Thank you, José, and hello, everyone. Farfetch continues to operate from a position of strength both operationally and José has been outlining and from a financial perspective. Across the group in Q3, GMV grew 62% year-on-year to $798 million, adjusted revenue increased 69% year-on-year to $387 million, adjusted EBITDA, our measure of underlying operating profitability improved $26 million, compared to Q3 2019 to minus $10 million, taking our adjusted EBITDA margin to minus 2.7% and finally our cash position closed the quarter at $757 million with a further working capital benefit offset by a $42 million tax payment in the current quarter. These results represent a big step forward for Farfetch with strong growth across the business, improving gross margins, further operating costs leverage and substantial progress towards achieving our goal of full year adjusted EBITDA profitability in 2021. I’d like to share some specific insights about the Q3 performance from our three business segments. First our Digital Platform, this platform delivered GMV of $674 million representing 60% year-on-year growth on reported results and 61% growth on a constant currency basis.

[José Neves:]

Thank you, Elliot. Our Q3 results have the incredible momentum behind our business as we leverage our platform to drive online adoption by luxury consumers worldwide. As a result we attracted in Q2 and Q3 a combined 900,000 new customers and our data shows these cohorts are even sticker than cohorts acquired before COVID-19. Moreover our survey of these customers revealed almost half of them plan to continue to do more of their shopping online, on top of this we are driving accelerated adoption and record results while significantly reducing promotional activity. These dynamics are driving better supply as more and more of the most desirable brands choose our unique e-concession model and we are seeing similar strength across our Farfetch platform solutions enterprise business, all of which is delivering improved unit economics and profitability, and positioning us to achieve adjusted EBITDA profitability for the first time in Q4, an exciting milestone ahead of market expectations putting it firmly on the path towards achieving our targeted full year profitability in 2021. I am excited to see the Farfetch platform drive the digital transformation of the luxury industry and the prospects of further leveraging our platform through the partnership with Alibaba and Richemont. As I said, I believe strongly that we have already entered a new paradigm for luxury, not only a paradigm shift in consumer behavior, but also a paradigm shift in brand adoption in an industry that is still very changes online. What we are seeing is the acceleration of the secular trend from a very low online penetration in luxury of 12% in 2019 to an estimated service penetration in 2025. And we are not only benefiting from the secular trend but actively leading it by enabling the industry to embrace our vision of luxury new retail. All of which I believe position us to drive strong sustainable growth further market share capture and expansion of our leadership position in the years to come. Thank you. We will now open the call for your questions.

[Operator:]

Our first question comes from Doug Anmuth with JPMorgan. Your line is open.

[Doug Anmuth:]

Great. Thanks for taking the questions. I have two. First, José, just -- do you see the paradigm shift toward online luxury taking place? Are you seeing any movement among some of the bigger luxury brands that have typically not sold online through the platform? Just curious what the potential is to bring them on over time now that you’ve seen this inflection? And then, Eliot, if you could provide a little bit more color on the 4Q guide just for Digital GMV the 40% to 45% growth relative to the 60% in 3Q, is that all about kind of managing the growth with profit, or are there other factors we should be thinking about in 4Q? Thanks.

[José Neves:]

Thanks, Doug. Yes. I think it’s very clear that brands are accelerating and fast tracking their digital strategies. We have 550 brands on the Farfetch platform and if you can fashion. So we already have, if I am not mistaken, all the brands from the caring group or most of them. We have LVMH with several brands, FENTY. For example, FENTY is a new addition in Q2, where we are an exclusive multi-brand platform for them. And this last quarter, we ended signing more brands. We signed Moncler, which is a top 10 brand. We signed Ralph Lauren, we signed Dolce & Gabbana and that is, so I think we are strengthening the ties with the brands we already had. We are adding brands from other groups. At cost, the announcement we’ve done last week opens the door to conversations with Richemont. Richemont was a gap in our brand portfolio. We have so many things we can offer, the Maisons that’s under Richemont Group from Marketplace, FPS, Media Solutions China, Start of the Future that we are excited about continuing conversations. But all in all, we are strengthening in a very, very salient way the fantastic relationship we already have with most of the industry and signing new e-convergence. Absolutely, it gives the paradigm shift for a brand adoption and brand adoption of the Farfetch unique e-concession model in particular. Thank you.

[Elliot Jordan:]

And, Doug, hi. Just on Q4 expectations, so we are focusing on the longer-term here as we always have been really in terms of managing growth. And 40% to 45% is market beating in our belief in terms of how we see the course of pan out for online growth. It’s also a head of Q1 and Q2 this year, ahead of last year’s numbers as well. And I think it will be an increase pretty much across the Board in terms of market expectations. So, I think we are continuing to focus on good solid levels of growth, particularly setting ourselves up for next year and the year after that in terms of sustainable growth rates. What I will point out in terms of how we built that out, the stock value that we have on the platform today is the highest it’s been at over $3 billion worth of products available through the third-party, and obviously, our first-party business predominantly, obviously, third-party. And that’s coming through from a step up actually from brand partners. We are seeing again continued growth in terms of stock and trade as well. The last quarter further shift of GMV towards brand partners and we expect that to continue. And the key thing is, as José and I have been saying earlier on, is we want to help the industry to maximize full price. During this period, we want to pull back again year-on-year on promotional spend just as we did it in Q3. And I think that means, as I say, setting ourselves up for longer-term sustained growth. But I think because we are doing that we have to watch the promotional environment. I think we have to watch consumer sentiment, the continued impacts of the pandemic. I think winter will be a slightly different season in terms of what customers will do in terms of spend during the pandemic, whereas the summer people were still at least going out to get credit for here and things like that we were seeing purchases coming through. So, I think we have to watch what this category will do. And I think there also be, as we have seen, a bit of category mix impact as well. So, we are actively managing to these numbers for the benefit of all parties on the group. We are still seeing new customers coming through and retention, but I just don’t think we want to go for a 60% growth rate win, 40% to 45% is a much better place to be in terms of supporting all players on the platform.

[Operator:]

Our next question is from Stephen Ju with Credit Suisse. Your line is open.

[Stephen Ju:]

Hi, José. So, congratulations on the quarter, as well as your new partnership in China. And so this is the second time we are thinking about the opportunity in China. So as you think about what happened before? And what you want to see now with your new commercial partner? What do you think you will do that will be very different? And also, what do you think the addressable fashion sharper population in China can be? And, Elliot, thanks for the LTV/CAC disclosure for the most recent cohorts. Stepping back a bit, I think, the market sounded very difficult to believe a little over a year ago when you acquired NGG that it will serve as a differentiated content-driven customer acquisition vehicle, but it seems like the high in-demand nature of the brand, there indeed helping to bring customers in. So, anyway to quantify the benefits that you are seeing and the demand acquisition cost there? Thank you.

[José Neves:]

Thanks, Stephen. I think, we obviously consider China a very, very strategic market. And as we have stated in several earnings calls, in the last few quarters, the JDStar was taking more time to ramp up than what we expected. It wasn’t performing to the level that both companies expected, and we both tried to optimize it and we started looking at data as well. So as we acquired Stadium Goods, we also acquired a Tmall Star City, which had a Tmall channel. So we could see the same skew -- exactly the same skew on Tmall and the same skew on the JDStar by Farfetch, obviously, because Stadium Goods assortment is also on Farfetch and we could see the difference and it was quite a magnitude of difference. We also have data from our brands and we have data from the market. So it became evident toward that while both companies are fantastic, e-commerce companies and incredible platforms and we fully respect to JD and the team and we work incredibly hard on both sides to really maximize the channel. It wasn’t really yielding and we saw the data -- what the data was clearly showing as both in our own direct experience and also what the brands are sharing with us. So that makes us very, very confident that the Tmall platform, Luxury Pavilion in particular, we also went to open an start front into like Soho, which is a new section of the site we have launched and also Tmall Global for certain brand. They not only have 757 million customers, so considerably more than JD. They have the intent. They have the female customer. They have fashion as one of the core categories that we know. The core category at JD Electronics and so clearly we believe the intent is there. And also there is an incredible alignment of visions. When I met Daniel and he was talking about New Retail and I will check my in 2016, and vision really the convergence of physical and digital retail, I checked and it was the same year 2016 where we as the Farfetch as outlined augmented rebuild, which was our own name for that same strategy. We now combine the two name that it’s called Luxury New Retail powered by Farfetch and it’s a global initiative. So, we immediately saw we have an upside here not just in China, but an opportunity globally to really leverage in Alibaba’s best-in-class, really, there is no other company in the world that has branded to the magnitude and extended timing to really believe a decision. So absolutely fantastic alignment in the global strategy and how we see the world. The data shows the intent and the client base is a much better fit for us, quite frankly. And we also structure the deal in a way that I think aligns incentives. As you know we are going to launch a joint venture and where Alibaba and Richemont will own 25%. They can build up certain milestones actually to 49%. So that I think aligns insures operationally on the ground in a very, very strong way. So, we are very, very confident, and of course, this will take time. We expect to conclude the JD structuring in the first half of 2021 and then very relatively quickly after that launch the Alibaba storefront -- the Tmall storefront, shall I say. And I think obviously it will have full impact in 2022, as we then starts to optimize the channel, et cetera. That’s a very exciting, not just about the China opportunity per se, but also about the global opportunity that we have in hand.

[Elliot Jordan:]

And Stephen just on LTV CAC and NGG, the first-party original, there is absolutely no doubt in my mind that having the brands from the New Guards Group on the marketplace is driving down the engagement cost with customers. It’s interesting that actually we have talked a lot about FY, but Palm Angels has absolutely rocketed up. Now listed brands always at the last couple of months and is growing very, very rapidly within the Farfetch Marketplace. I look at baskets that include an NGG brand and other brands, and the growth of those baskets year-on-year is in triple digit. So we are seeing this halo effect coming through by having original content on the platform and customers buying them to the other brands. It’s also allowing us to speak with real conviction around our editorial and the proposition to customers through the app, through our email campaign, through the online editorial and that is continuing to drive strong engagement with customers. When I look at the LTV over CAC, and again, what I said earlier on around the Q2 cohort that 500,000 customer cohort that we acquired three months ago now. If I go all the way back to 2017, there were only two quarters in that history, Q1 ‘17 and Q3 ‘17 that have had a higher three-month LTD over CAC than this quarter just gone. So, all through last year -- all through 2018, we have been -- we are now ahead of that in terms of this Q2 cohort LTV over CAC. So it’s a phenomenally powerful cohort. And it’s not only the lower demand generation that Gareth and our team have been doing in terms of using data to really focusing on customers that are going to buy, reduce wastage in terms of bidding and the treating from markets that we don’t want to, but this ability to shift away from paid search into lower cost channel, social media, the email and push notifications. But it’s also on the promo sites. The promo reducing significantly year-on-year has helped push up the lifetime value of this cohort as well. So everything is working perfectly for us to be able to engage with customers. And the good news is that means paid sheer of GTV has dropped down this quarter year-on-year versus previous quarters where it’s hovered at a pretty consistent level. So we have been able to drive more organic engagement as well on the back of all this that we are doing to engage with customers. And of course, the re-launch of the Farfetch brand has also been instrumental in this. I think it’s really resonated with our customer base and we are able to drive customers in a more organic way. Final point and then I will pass to the next question. Referrals, GTV from referrals was up over 100% year-on-year. So our customers are also telling their friends and recommending by that referral feature to shop on Farfetch and that’s driving great engagement as well. So I think everything fits us up well for next year.

[Operator:]

Our next question is from Lloyd Walmsley with Deutsche Bank. Your line is open.

[Lloyd Walmsley:]

Thanks. I got two questions, if I can. First, just on the new platform solutions websites launched in 2020 that contributed to Q3. Can you just give us a sense for how much that contributed growth and kind of the pipeline looks like for Platform Solutions? And then secondly, just as we think about Farfetch joining Luxury Pavilion, do you think that may -- that combined with just the pandemic may hasten luxury brands to develop their own presence more on the platform, since you are kind of effectively bringing them on there and how do you think there will be an interplay between retail store on Luxury Pavilion versus like others having a presence there. How do you think about it, how should we think about it?

[Elliot Jordan:]

Lloyd, hi. I will take the first question on...

[José Neves:]

Hi, Jordan.

[Elliot Jordan:]

FPS and I will let José take the question on China. So, I am not going to break it out unfortunately. So it’s going to be a short answer to your question around the impacts from the brands on the growth rate, but the pipeline is looking good. The rest of this year is more focusing on further brand from the New Guards Group collection, but then we have got a very strong pipeline of third-party brands to launch starting in Q1 next year. But once we are closer to that, I will give you a better update then.

[José Neves:]

So, I will take the Luxury Pavilion question. We think it’s very complementary. So you have essentially two types of brands, let’s say brands that already has store front on the Luxury Pavilion, our plan to open one and brands that due to their scale is not easy to open a company in China or even if you don’t want to open a company to find TP produce specific inventory. And let’s not forget that every product within the Luxury Pavilion is in China have crossed the border and using the dedicated stock just for that channel. And that is done by third parties called TPs, Tmall partners, that’s the model. And this model is very high cost in terms of OpEx, but very high risk as well because obviously you have that stock linked to their channel. So what we do and I think that’s incredible breakthrough for the industry is bringing the global offer from the 3,500 brands that are on the Farfetch platform, 550 of them with e-concessions to bring that global inventory to triple Luxury Pavilion. What does that mean? It means that if you are a brand, we have a store front on Luxury Pavilion and you have, let’s say, 100 skews. By the way you will find that typically that’s the number of skews that even the large brands have. So they don’t have thousands of skews like they have on the Farfetch marketplace. So, if you are one of those brands, you certainly capture a much larger share of voice in that channel by adding on Farfetch, on the Luxury Pavilion, as opposed to not doing that. And then we have very exciting medium brand, medium size brands, small brands even brands 100 million, 150 million, 200 million brands would find it relatively difficult to set the commerce operations in China and even to sell in a marketplace. So for those it’s a unique opportunity. It’s one single integration and your inventory is available all around the world, including in China on the Farfetch app and now including in the Luxury Pavilion, and of course, if you look Soho, Tmall Global in the future as well. So we think it’s an incredible proposition and this is what Farfetch had cited on both our Alibaba and the brand had cited. Of course, this announcement comes with the endorsement of the Tmall. It comes with an increased shareholding from Artemis and which share decision and also share the Luxury New Retail global vision which we feel very, very, very confident about.

[Operator:]

Our next question is from Louise Singlehurst with Goldman Sachs. Your line is open.

[Louise Singlehurst:]

Hi. Good evening, José and Elliot. Thanks for taking my questions. You must be absolutely delighted. It’s a great path to EBITDA turning positive well in Q4. I will just touch on these questions, which is asked already. I wondered if you could just elaborate a bit more on that balance and if you look to this in terms of obviously management growth and the profitability of the platform. But obviously I think you very much forgive them to sending a bit more to drive even for the fourth quarter pace of the growth. But I suppose the question is that do you really got 2.7 million customers today, is there a turning point into the platform in terms of customer engagement beyond the actual active user numbers, also that in the brand awareness of Farfetch because I think the 2.7 million across three regions is still quite a low number? And then secondly, related to that, I wondered if you would help us think about the regional growth, I know that explicit in terms of the detail, but if you could give us a rank particularly interested in the China number following details from last week? Then lastly, I wondered if you could just talk about obviously, José, obviously the benefits of getting some of the brands now direct, obviously, Moncler has been -- Moncler product has been available on the platform some time, but the benefit of having the direct relationship and what that means in terms of inventory and driving traffic? Thank you.

[Elliot Jordan:]

Hi, Louise. Good speaking to you and very good questions as always. Thank you for that. I think Q4 with the momentum that we have got behind us and the amazing work that the team has been doing to deliver scale and leverage. If you think about our technology platform this quarter, 8% of adjusted revenue that’s driving significant scale and leverage year-on-year. We are able to get to profitability on 40% to 45% growth next quarter. It was higher growth. I would see that flow through to -- potentially more profitability rather than us sort of cutting back on growth rate to try and get to profitability. It’s not about that all really. It’s about balancing what we think is the right growth for the platform and our suppliers on the platform over this quarter, which I think will be more promotionally heavy not by us but by the market. And would we want to spend on promotions just to attract customers that we are wanting to bind on promotion to deliver a faster growth rate, probably not, because the history of the customers that initially buy with us on promotion shows that they are not the strongest cohorts in terms of lifetime value over the long run. And we have been down the path before where we keep spending on promotion, because we wanted to make sure we didn’t miss a single customer that was visiting us. Well, that didn’t work out in terms of great LTV. What does work out is the digital marketing team focusing on a customer group that is going to be with us for the longer term and we have seen that over the last couple of quarters, live promotions means a higher LTV in the short-term and we believe over the longer term. So, although, I do agree with you 2.7 million active consumers in this market is a number that leaves us with significant opportunity from here on, and is it right to pull the promo handle in the next 13 weeks, well, no next sort of six weeks to eight weeks, just to acquire them now when they are going to be promo customers, I don’t think so. I think it’s better to envied everything we are doing in terms of engagement, the brand work to build a client base that’s really strong over the coming quarters and is actually earlier on in a sustainable level of growth, which 40% to 45% is pretty good in my view in terms of what we are now expecting. So, it’s really more about the customer cohort that we would be shopping -- that would be shopping with us if we were to change anything there. In terms of your regional demand question, again, we don’t break this out too much, but I would say that we saw all three of our regions accelerate growth. So from Q2 into Q3, all three regions ticked up in terms of year-on-year growth rate. Actually the Americas stepped up more than any other market, any other region and that was coming through again by the focus from the team and to Mexico. The U.S. was particularly strong in terms of year-on-year growth, Q3 versus Q2. You remember last time we spoke, I said the U.S. had sort of woken up toward the back of Q2 and was driving growth in the early parts of Q3, that delivered a fantastic acceleration and as I say all other markets accelerated, China in a very good place, particularly Mainland China. We are still seeing challenges in Hong Kong in terms of growth, but Mainland China is doing well. And then, lastly, Middle East very strong year-on-year, U.K. very strong year-on-year, so I think we have got the broad base of customers from across all three regions.

[José Neves:]

And Louise, I will take the question on Moncler and what changes. I think, first of all, Moncler is one of our Top 10 brands, even just with the wholesale channel. So very, very exciting to see this brand. It’s one of the very few brands in our Top 20 brands, that is -- that was not direct. I think we have maybe another one and so that’s an excellent record from our commercial team. And I think what is open, well, first of all, as you know, brands have and Moncler has outlined their digital strategy and has been clear also on how they want to divest from wholesale and double down on direct-to-consumer and this is an example of exactly that. So they are building down on direct-to-consumer channels with their e-concession on Farfetch. So that means the direct presence on the platform becomes more and more important as the brands divest from wholesale. Important to note that all our competitors are wholesale businesses, right? So Farfetch is the only global online luxury destination at scale and that operates an e-concession model and the number two, number three, number four, number 10 player is essentially a wholesale, it sound for these brands, which means, what we expect to see our competitors with less and less access to supply, and obviously, we continue to be able to grow in that with these brands since they are prioritizing our channel. But that’s not the end of it. I think the most exciting is we start to develop a different quality of partnership, right? So when we -- what we see when we sign these brands, as we start to do exclusive, it starts to be the partner of choice for new products, for new launches. They start to see the incredible power of the platform in terms of reaching the millennial customer. Globally, we have I can point you some examples. This year we launched Gucci Off The Grid Cap Field. Before then we did a global event with Balenciaga, including the first joint show in China, physical trunk show in China with Balenciaga and our VIP customer base. All of these things are very exciting and they only come, obviously, when you have direct relationships with the brands in the shape of e-concessions. And what we see is, they start then prioritizing us over other multi-brand online channels, not just because they have double the margin, let’s say, they have been -- and double -- certainly double the revenue and give or take double the margin, but also is a direct-to-consumer relationship. They get much more granularity in terms of the data, they had full control of pricing and merchandising. And so there is many advantages beyond the depth of stock, but obviously depth of stock as we continue this growth, this 60% base in Q3, 40% to 45% in Q4, it’s essential that we have like bottomless access to inventory in the years to come, two years, three years, four years, five years, in fact, extrapolating these numbers. Having these e-concessions is really important for us.

[Operator:]

We have time for one more question. The final question comes from Eric Sheridan with UBS. Your line is open.

[Eric Sheridan:]

Thank you for taking the question. I’d love to ask a two-parter directed at each of you. With the utilization you are going to have at the end of this year and then raising the capital you are doing on the back of the transaction with Alibaba, how should we think maybe for you, José, strategically, and Elliot, for you sort of financially as part of some investments you want to make, broadly about deploying that capital, how should investors think about, what sort of the priorities are after deploying that capital against your growth objectives and driving equity returns? Thanks so much.

[José Neves:]

Elliot, do you want to take the question? You are the treasury man.

[Elliot Jordan:]

Yes. Absolutely. Sorry, I was just on mute, the classic answer to any question over the last six months. Yes. I think, Eric, as you point out, we are extremely well capitalized $757 million at the end of the quarter and that should get up to $800 million by the end of the year due to working capital. And the transaction last week, it wasn’t about boosting the balance sheet. It wasn’t about raising money. That was about making sure we have got meaningful alignment between ourselves and the strategic partners and the cash is the output of that focus, really. I do think the investment means we have got very aligned interest in China and global business and we look forward to working with our partners. The cash, as it stands at the moment, has got no specific purpose other than continuing to invest behind the great results we are seeing on the platform as we help the whole industry navigate the shift online. We won’t be doing anything other than focusing on our strategy of evolving the business to support the growth online with 12% market share now moving to 30% in the next five years. Farfetch is going to lead the way with that and the funds that we have will be used to ensure we are taking advantage of any opportunities to drive good return for investors over that time period. I don’t think it’s an excessive amount of cash to have. I think it’s a good level of reserves for us to be able to deploy as we need to. But it doesn’t take our eye off the ball of continuing to drive growth, focus on unit economics, profitability for the full year, next year and if anything else comes along, we will see what happens. But at this stage, we will put it straight into good investment on the bank -- in the bank.

[José Neves:]

I think that’s probably it. Unfortunately time is up. We look forward to speaking to you again in three months’ time. And Alice and Diana are available, of course, as always, if you have any more questions for the Investor Relations team. Thanks everyone and speak to you in February.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.