Farfetch Limited
Q2 2019 Earnings Call Transcript

Published: 10 Aug 2019

[Operator:]

Good afternoon. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Farfetch Second Quarter 2019 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. [Operator Instructions].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:]

Thank you, Julie. Hello, and welcome to Farfetch's second quarter 2019 conference call. Joining me today to discuss our results are José Neves, our Founder, co-Chair and Chief Executive Officer; and Elliot Jordan, our Chief Financial Officer.Before we begin, we would like to remind you that our discussion today will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements. Forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to publicly update or revise them.For a discussion of some of the Risk Factors that could cause actual results to differ, please see the Risk Factors section of our annual report on Form 20-F, which was filed with the SEC on March 1, 2019.In addition, we will refer to certain financial measures not reported in accordance with IFRS on this call. You can find reconciliations of these non-IFRS financial measures to the IFRS financial measures in our earnings press release and the slide presentation, both of which are available on our website at farfetchinvestors.com.And now I will turn the call over to José.

[José Neves:]

Thank you, Alice.Thank you all for joining us today for our earnings call and hear about the acquisition of New Guards Group that we have also announced.We are excited to talk to you on three important topics. First, our acquisition of New Guards Group, or New Guards, a brand platform that is soon to ramp. Second, we'll walk you through our second quarter financial results. And thirdly, we'll cover some of the big trends we are seeing in the market, including the tectonic shift of luxury brands online and distribution strategy.Let me start with the incredibly exciting acquisition of New Guards. As you know, this September marks 1 year since our IPO, and we said then that it was our strategy to be the platform for the global luxury industry, connecting curators, creators and consumers. We believe this sector is going to grow $100 million in incremental online sales in the next few years. The next 10 years, or what we call our chapter 2, are going to see a revolution in how consumers engage and shop for luxury fashion, online and offline. Our landmark acquisition of New Guards expands our platform vision from a platform leveraged on fashion to a platform enabling a global culture of fashion.Let me talk you through how this acquisition underlines our strategy. New Guards either owns or licenses, designs, manufactures and distributes some of the most sought-after luxury brands, including Off-White, Heron Preston, Palm Angels, Marcelo Burlon, among others. With these brands, New Guards has demonstrated it is the ultimate brand platform of today, incubating and growing emerging talent into highly sought-after brands through a shared services model.The group operates an asset-wide model and strategically procures manufacturing based on all the demand. In fact, inventory on hand in end-of-year fiscal 2018 was just 9% of revenues for the period, which provides for low working capital usage and a profitable business with positive cash flows.Strategically, New Guards brings a very exciting expansion of Farfetch's platform vision to connect the creators, curators and consumable fashion, which I believe will transform the luxury industry.On top of our three existing platforms, technology, data and logistics, we now add a fourth, the Brand Platform. As a result, we can offer the creative visionaries in this industry best-in-class design studios, industrial capabilities and global distribution channels. This is revolutionary for them. Farfetch has the technology, expertise and vision to take their businesses to the next level and unleash the talent of the future. We believe this combination of our businesses will create what we call Brands of the Future. But what do I mean by that?In the past, luxury brands were built by a mix of investments in traditional media and significantly backed investments in directly operated stores. Global brands use the traditional wholesale model, which is capital efficient, but disconnects them completely from the customer and transaction data and could lead to pricing discipline and brand dilution. I believe the Brands of the Future [indiscernible] around this model but rather be made of three ingredients.One, a creative risk-taker that is also able to build a community digitally around her artistic vision; two, best-in-class global e-commerce direct-to-consumer capabilities, both multi-brand via e-Concessions and mobile brand via brand.com, including critical capabilities to serve Mainland China; and three, amplified physical store presence via a new type of wholesale

[Elliot Jordan:]

Thank you, José, and good evening, everyone.I will run through the results of Q2 and how we have continued to execute in line with our growth strategy. I will explain the impact of New Guards Group on the financials moving forwards and then provide an update on guidance for H2.I'm pleased to report that Q2 grew ahead of our previous guidance and that Farfetch continues to lead the growth of the online luxury industry. Q2 was our biggest quarter ever with Platform GMV of $484 million, up 44% year-on-year and 49% year-on-year on a constant currency basis. The key drivers to growth were the increasing number of active customers, higher orders per customer and a stable $600 average order value on the Farfetch Marketplace.Since our last call, we have added 34 direct brand e-Concessions and 45 boutique partners to our Marketplace, and we now service 18 clients from within our Farfetch Platform Solutions business.Third-party take rate was 31.4%, demonstrating the value of the platform proposition to our broad client base. Our first-party business grew at 108% year-on-year to 10% of the GMV mix, contributing to the platform services revenue of $177 million, up 53% year-on-year. This strong growth was achieved whilst leveraging the fixed-cost base, which has allowed us to react to the changing promotional landscape within the industry, invest into our technology and data platforms, and deliver Q2 underlying EBITDA margin of negative 20.8%, which is in line with the guidance I provided on our previous call.Adjusted EPS loss of $0.15 per share is in line with consensus.What stands out from the results of the quarter is the platform gross margin of 48% and order contribution margin of 28%, a decline year-on-year as a result of three things. First, a decision to promote across the latter half of the quarter to remain price competitive and to retain our valuable customer base. This accounts for approximately half of the year-on-year decline in order contribution margin.Secondly, investing in longer-term customer engagement strategies such as Access, our loyalty program, and Farfetch Communities, plus additional paid digital media spend to drive long-term retention. This accounts for approximately one-fourth of the year-on-year change in order contribution margin.And finally, a charge we have taken to write-down and clear excess end-of-season inventory within the first-party business.We execute our strategy by constantly assessing the lifetime value and customer acquisition costs on a cohort-by-cohort basis. These metrics are in a very strong position. The 2016 customer cohort lifetime value, now accumulated over 24 months, is 3x the cohort's original customer acquisition spend, which is an increase over the lifetime value of the 2015 cohort, which was just under 3x CAC at the 24-month point. The Q4 of 2018 cohort is now in positive lifetime value with payback achieved within the initial 6-month period. And the Q1 2019 cohort remains on track for payback within the first 6 months as well.Our more established customer cohorts continue to deliver stronger profitability. Orders from customers that first shopped on Farfetch five years ago in Q2 2014 achieved a 55% order contribution across the last quarter, which is approaching the 60% long-term order contribution target we have established despite the promotional environment. This strong position means we have room to invest in our customers, driving loyalty and substantial lifetime values and means we are well positioned to deliver profitable growth over the longer term.In light of the external environment, we have actively managed the growth of the fixed cost base with technology spend and G&A at 11% and 38% of group adjusted revenue, respectively. This compares favorably to last year and demonstrates our ability to drive significant operational leverage from the fixed cost base.The investments of previous years are paying back, delivering higher revenue per employee, improved operational metrics in our production and customer service teams, and substantial increases in our capabilities across our technology infrastructure. As a result, our second quarter underlying adjusted EBITDA was minus $38 million, and our operating cash outflow was minus $28 million, reflecting the negative working capital profile of the marketplace.Depreciation and amortization was $14 million across Q2, in line with Q1 2019, although $9 million higher year-on-year, reflecting an additional $4 million of amortization of right-of-use assets, $2 million in relation to acquired intangibles and $3 million extra amortization of capitalized development costs.The Q2 2019 share-based payments charge is $46 million, reflecting an ongoing quarterly charge of $40 million, which has increased from Q1 because of additional grants and a one-off charge within Q2.Loss after tax was $90 million, resulting in a loss per share of $0.29 or loss of $0.15 per share at the adjusted level when reversing out the impact of share-based payments and the amortization of acquired intangibles that are fair valued.Our cash and cash equivalents reduced by $116 million in the quarter, which reflects the operating cash outflow of $28 million and payments in relation to the acquisitions of Toplife and CuriosityChina, which both completed in the quarter; the purchase of land for our new Porto campus and various smaller investments in innovation projects under our Dream Assembly accelerator.Turning to the acquisition of New Guards Group for an enterprise value of $675 million. In addition to the strategic value to the group, New Guards will be immediately accretive to Farfetch revenue, profitability and operating cash flow.As José was outlining, the New Guards business model has attractive financial characteristics similar to the Farfetch model, including minimal inventory holdings, low CapEx requirements and strong operating cash flows.Revenues over the six months to April 30, 2019 were $189 million, up 59% year-on-year. Earnings before tax over the equivalent period was $57 million, and operational cash inflow was $48 million.Looking over the last 12 months to April 30, 2019. New Guards revenue was $345 million, and earnings before tax was $95 million.With this new acquisition, in addition to the granular reporting on performance within our stores and on the platform, Farfetch will now report GMV revenue, gross margins and order contribution delivered from the Brand Platform, the connected wholesale business.Going forward, the Farfetch group will have five revenue streams. First, the primary revenue stream of the group today

[José Neves:]

Thank you, Elliott.This time one year ago, I remember writing my founder's letter, reflecting my love for this industry, how I saw it evolving and the role of Farfetch in this transformation. One year on, I am incredibly proud of what our team's achieved and the progress we've made in what I then call Chapter 2, the second decade of Farfetch ahead of us.Today, one year into Chapter 2, this beautiful industry faces incredible opportunities, but at the same time, some recent challenges. We've recently seen the difficulties of some brands, department store and e-tailers to adapt what is an industry influx. Yes, this is a huge global industry, growing resiliently and strongly with the three secular trends of China, millennial consumers and digitalization, gaining speed and shaping it right in front of us.This industry is very special, very different. Luxury has to evolve around emotions, not price. Farfetch has now cemented its position as the leading technology platform for the global luxury fashion industry. In traffic and sales, we are now the largest single destination for in-season luxury, growing at twice the speed of the overall online market. This comes with a huge responsibility to do the right thing for the industry we love, but it also comes with thrill and excitement. We are reinventing the future. We're doing it for the love of fashion. Of course, the ready-to-wear model has an inherent mismatch between supply and demand. And the small level of markdowns and promotion could actually help the environment. It is when participants start to focus mainly on price, I believe the luxury ecosystem will suffer long-term harm.After a long period of reflection and conversations with our execs, our Board and our community, I am incredibly excited with the evolution of our strategy. Our platform vision has now expanded, from a platform enabling transaction to a platform enabling a global culture of fashion. This means empowering individuality, not just for consumers and for curators, but also for the creators of fashion. This industry needs to go back to inspiration and move away from a build-up of commoditization of luxury, where dozens of online shops sell the same product competing on price. We're past where the various online destination differentiates by inspiring customers and shaping culture in their own ways.Our marriage to New Guards fits perfectly in this strategy. And I am thrilled that New Guards' Chairman and CEO, Davide de Giglio; and Chief Commercial Officer, Andrea Grilli, absolutely share my vision of transforming the way creators, curators and consumers interact over years to come.We believe this will be revolutionary for existing and new creators of fashion, but it will benefit tremendously the entire ecosystem. As our global and growing consumer base comes to work organically for inspiration, original content and the unrivaled experiences, all with a significant benefit. Boutiques and brands will see their brand adjacencies elevated, and again, enjoying the full economic benefit of their creation. Our high fashions are also more excited than ever in how we are a leading as a positive force for this global industry for the love of fashion.Thank you all. And I will now open for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions].Louise Singlehurst with Goldman Sachs. Your line is open.

[Louise Singlehurst:]

José, just in terms of the acquisition of New Guards Group, let's start with that. You talk about the new dimension of strategy. Can you just highlight what that actually means in principle? We're lucky to have you on the call, so if you could think about how we should consider the multiyear strategy, and what's really changed over the past kind of 12 months to really focus our attention on the first-party expansion? And then just associated with that, if you could talk about the timing of the acquisition. So obviously, a lot going on in terms of the core business. Obviously the drive to really focus on the rollout of Access and the core platform. But if you could just talk about the platform and the timing of the acquisition. And then thirdly, just in terms of Off-White and the other brand, is there a plan to have exclusive distribution? And I may have misheard this on the call in terms of the commentary, but did that have the brands exclusive to Farfetch plus the boutiques, i.e. it will not be on Net-a-Porter, MatchesFashion, et cetera, going forward? And then my last question for Elliott, just in terms of guidance, I think we talk about that 50% GMV growth for the full year, but if you could just clarify what that would be excluding New Guards Group?

[José Neves:]

Louise, thanks for your question. So I think, first of all, our strategy has not changed, so we want to be the global platform for luxury. I think this acquisition expands the platform vision upstream. So this means that we, as a Brand Platform, while we're existing infrastructure, and the New Guards really works as a platform, and this is actually how they define themselves. And I think it's important to note that this is not a 1P business. So they do not take -- for the majority of their business, they do not take inventory risks, so they close with 9% of inventory as a percentage of total revenues.Most of it was in transit to retailers that already saw this. So the risk is around 5% in terms of their 1P exposure. So this really doesn't change much the 1P exposure that we already had with Browns once you add all things up and take the ratio.So it is a platform play that brings our capabilities upstream. And I think what's really exciting for us is this ability to elevate the Farfetch brand with exclusive collaborations, exclusive collections and in the future, with totally exclusive brands, smaller boutiques on the platform.So to answer one of your questions regarding the current distribution of Off-White, we will respect these contracts, and this will be ultimately a decision by the NGG management. And of course, historically what we believe, we believe in direct-to-consumer, we believe in e-Concessions, we believe in connected wholesale, so wholesale that is truly omnichannel and with real-time capability of all transactions and data. This is the way the industry is going, this is the way the big groups are going, this is the way New Guards will be going as long as those patterns -- those historical commercial patterns of NGG follow that path. I think they are a tremendous amplifier for those brands, and therefore, I don't see any change to that.

[Elliot Jordan:]

And Louise, just in terms of guidance. So the 50% year-on-year, including New Guards, this is a group GMV level to $2.1 billion. The New Guards is roughly $150 million. That's my estimate for the GMV that will come through after the consolidation period starts. So if I take that off, we're at around 39% year-on-year, excluding New Guards, and that ties into the Platform GMV growth. As I say, 37% to 40% is the updated guidance for the full year. Obviously, 44% over the first half and 30% to 35% growth across the second half. I should point out that's still well ahead all of our competitors.

[Operator:]

And our next question comes from Douglas Anmuth with JPMorgan. Your line is open.

[Douglas Anmuth:]

Great. Elliott, can we stick with guidance? Just trying to understand the Platform GMV better, the 30% to 35% that you're talking about for 3Q and the 37% to 40% for 2019, particularly when you have Stadium Goods and China earlier integration than expected in there as well. So just trying to understand the pressures that are there. And then you talked about it as being a managed -- probably a managed outcome as well -- or managing the growth. Help us understand that better. And then just second, and maybe related, if you could help us understand the backdrop around the increased competitive pressure more, the geographies where you're seeing that and the types of retailers? Some more detail there would be helpful.

[Elliot Jordan:]

Sure. Sure, Doug, let's start with that because that, I think, drives everything we're talking about. Really, over the June period, sort of the second half of the quarter, we saw a substantial step-up in the promotional environment from, I guess, traditional offline retailers and also online e-tailers. Traditional offline retailers, we suspect is because the traffic's not there, so they're having to promote, they're going earlier in terms of sale, they're going into mid-season sales. They're going quite deep in terms of discounting and basket-level promotions on a sort of blanket approach. That then flowed into the e-tailers.So our major competitors online, they're growing low-single digits. To prevent themselves guiding to negative growth, they've had to promote quite heavily to remain competitive, and that all flows into our business in some respects that we've got very valuable customers. As I said, those customers that have been with us for a few years now driving strong order contribution, we don't want them being tempted away by these competitors' promotion. So we decided to promote across the latter half of the quarter as well, and that's obviously what's taken the order contribution margin down.So what we did sort of looking at Q3, Q4, given that we've been growing at 44% and everybody else is growing substantially lower than that, the view is, yes, we could keep growing faster than 40%, but that incremental growth would come at the cost of very, very heavy promotions. We don't think that's the right thing to do. We'd much rather work with our boutique partners to find a full-priced strategy. And so what we've decided to do is actively manage the P&L and the growth rates to 30% to 35% across the second half and take off that need to promote. That'll still be substantial market share gains, which obviously is the key point, but also allows us the breathing room to setup for next year and the year after that and the year after that with Stadium Goods, Toplife and New Guards now being integrated into the business. So very active decision, very intentional decision. We could keep growing if we wanted to, but we decided 30% to 35% is a much better place to be at.And then in terms of the full year, obviously when you do the math, it's sort of 44% across Q1 and Q2, 30% to 35% across Q3 and Q4, that gets to 37% to 40% for the full year at the platform. And then as I said on the back of Louise's call, adding New Guards wholesale connected GMV gets us up to $2.1 billion, which is the 50% year-on-year.Sorry. Sorry. Sorry. Doug asked about other parts of the market. I think in China, as José said, we're extremely pleased with how China's going. It accelerated from Q1 into Q2. So Q2 China growth was faster year-on-year than Q1. It's closing the gap on the U.S. as our number one market. I think the key thing to point out, though, with Toplife is we've always said it's a 2020 and beyond opportunity. There's still opportunities or integration and aspects of tailoring the model fully, working with JD to target the right customer base. And so we're looking forward to that coming as a major part of the growth story next year rather than this year. And Stadium Goods, as we've always said, much smaller than the platform overall, contributing growth of course, but we're not breaking it out at this stage.

[Operator:]

And our next question comes from Ike Boruchow with Wells Fargo. Your line is open.

[Ike Boruchow:]

So first, just to piggyback off Doug's question, I understand kind of what played out at the end of the quarter and the commentary and the plan on the back half of the year. But Elliott, is there a reason why I think you said you expect the competitive pressures in the market to last the next two to four quarters? I'm just curious where the analysis came from and where the thought process on that is? And then just on the acquisition of New Guards. How does that impact the long-term targets on profitability that you guys have talked about in the past? And does it impact the timing of your ability to scale or eventually hit breakeven?

[Elliot Jordan:]

Great questions, Ike. So the two to four quarters -- as you know, the luxury industry works relatively slowly and is a season-over-season type sort of basis. And I'm sure you've heard the fashion houses, Prada, has said this publicly, Kering has said this publicly. They will be looking to pull back on the distribution in some of the traditional retailers and the e-tail model and focusing more on e-Concessions, which Farfetch is the only e-Concession. So we expect that will take a couple of seasons to work its way through.In the meantime, those retailers are going to be overstocked versus the demand they're going to experience, and so they're going to presumably continue to mark down and promote to try and drive top-line growth or at least stem the loss. So whilst the industry adjusts to the supply and demand and moves more towards Farfetch as an e-Concession model, we expect that, that promotional environment to stay for a few more quarters.In terms of New Guards Group, it absolutely contributes to the overall 30% EBITDA margins. So the last 12 months to April, profit before tax was $95 million versus revenue of $345 million. There's opportunities, I believe, to continue to drive EBITDA margin in that business as we leverage the synergies of joining Farfetch. So very strong in terms of the margin targets.And in terms of route to profitability, obviously, a profitable business will help that path to profitability and the positive operating cash flows moving forward.

[Operator:]

Our next question comes from Eric Sheridan with UBS. Your line is open.

[Eric Sheridan:]

Yes. I think in continuing on with the current season, I want to stick to sort of the business mix and some of the back-and-forth that's going on. So I guess we're just trying to really understand why two to four quarters again is the right number? What do you think sort of breaks the temperature in the industry or fever in the industry, that that's the right way for investors to think about it? Because you can imagine investors are now trying to really understand what sort of growth they're underwriting in this business over the next couple of years, not just the next quarter. And then now that we've got sort of five lines of revenue or five different buckets of revenue, maybe following up on the last question, can you walk through a little bit more what investors should expect either in terms of linearity or volatility with respect to growth and contribution margin structure for the business going forward? And how to think about that, not only just in the second half of this year, but into 2020 and 2021?

[José Neves:]

Eric, so I think, the -- as Elliott pointed out, looking further afield beyond Q3 and Q4, we are definitely extremely confident that looking at 30% growth rate, and we are absolutely managing the growth. As you have seen, we have been beating our growth estimates. And we could continue to accelerate market share capture. Given the promotional sense of the market, we could still do that profitably because as Elliott shared, our CAC-LTV ratios are extremely healthy, and we still have payback more than six months inside of the promotional environment. But we just don't think it's the right thing to do. We think it creates a vicious circle, and it's not what our cherished brand partners are asking us to help them do. And we think we are going to capture market share still very aggressively. But smoothing the curves that 30%-plus growth, which absolutely remains the target for many years to come. And obviously, the path to profitability and the 30% long-term EBITDA profitability that we are very confident we are going to have in the future.So the two to four quarters is really an estimate. The industry, as Elliott pointed out, moves slowly. To be faster, we just want to temper -- like we -- it really depends on the brands and how fast they will retreat the volume of supply difference into wholesale. They had indicated that they are doing that. We know they're doing that. We don't know how fast. It's not in our hands. What we know and is in our hands is the expansion of supply on e-Concession which is absolutely remarkable as we see 275% growth of supply from Prada, triple-digit -- high triple-digit growth on the main luxury groups.And then if we looked at 450 brands that now operate direct e-Concessions on Farfetch, of which we've had 100% retention rate, by the way, in the last three years. It shows the industry is really moving to a direct-to-consumer model, of which, in the multi-brand realm, Farfetch is the only global e-Concession player.The secular trend is definitely strongly, strongly in our favor. We just think that right now, we will help the brand in the transition, and we will ease on the response to the aggressive promotional spend and slightly moderate what is a very, very aggressive market share capture. But long-term, this 30% growth is something we always have in our model and something that we are actually increasingly bullish about.

[Elliot Jordan:]

Just in terms of the five revenue streams, so obviously we're very confident on the 30% GMV growth moving forward over the long term that we've already -- always said that from the outset of the IPO that, that's the target for us. And if you break that out and look at the new revenue streams, clearly, the third-party business is growing very strongly with new clients within the Platform Solutions business coming onstream next year. That will help drive that growth next year.If I look at what we've purchased in terms of New Guards, the connected wholesale revenue grew 59% year-on-year across the first half. That's at 40% gross margins and should continue to seek to grow at good levels as we bring on new brands. It's not just about the brands that are currently in existence with the New Guards. It's a factory of brands and can achieve more growth from new brands coming onstream next year. The 1P business and the 1PO business are obviously 10% of our revenue at the moment. With 1PO coming onboard, we can expect that probably to go to 13% to 15%. But of course, a third-party business, with e-Concessions growing, will be hard to match even with the first-party business that we've acquired through New Guards.And then, lastly, the third-party original, that's really just a combination of what we're already seeing with third-party sales already on the platform, but obviously adding in the fact that the wholesale margin will also be captured for brands bought and sold on the platform by our third-party boutiques.

[Operator:]

Your next question comes from the line of Luca Solca of Bernstein. Your line is open.

[Luca Solca:]

I wonder what is prompting you from a strategic viewpoint to be so actively engaged on M&A. You've been laying up a very long list of acquisitions, starting with Stadium Goods, Toplife, New Guards Group and others, CuriosityChina. And this is making your business model more complicated. And the original idea building an Uber of luxury and fashion, digital distribution. Is it possibly the case that you're seeing that this original model is not working and not producing enough of a profitability so that you have to complement it with other activities? Or where is this logic coming from? If you could explain us, that would be great.

[José Neves:]

Absolutely, Luca. Thank you. So I think we always said that our strategy was to be the global partner for luxury. That has not changed. If you look at the acquisition, Stadium Goods is a category that we had already they were -- that was actually not on the marketplace, and a category that is very much a strong part of growth in the industry and especially in the luxury realm. The China acquisitions, it's written in the initial statement, the global platform for luxury from China obviously being a key, key market for us. And New Guards Group brings another dimension, a brand dimension to the platform. We always said M&A was only one of the tools in the toolbox. We were very fortunate to be trusted partners in with all these companies. I think it reflects, in fact, the extraordinary execution.We're talking in terms of New Guards, a company with give or take USD 500 million in annualized sales and almost 30% profitability, no debt. In terms of cash in the bank, they don't need -- they were not looking for a financial transaction. They were looking for a strategic partner that would really elevate their business.So the result of the success of our model is precisely why these very, very successful companies want to partner with us. And when we see opportunities for making progress on our platform vision, we will seize them. We will seize them studiously, cautiously. And as you may imagine, there are hundreds of opportunities that every single day are put in front of us. But when they are absolutely world-class companies, such as New Guards, these are opportunities that absolutely make sense and fit well in our strategy, and we will take them.

[Operator:]

Your next question comes from the line of John Blackledge of Cowen. Your line is open.

[John Blackledge:]

Great. Great. Just a couple questions. I've been hopping between calls, so I apologize. On the guidance, the lower Platform GMV guide, was it just promotions? Just curious if you saw maybe a slowdown or something as the quarter progressed, which maybe led to the little bit of a lower guide in the back half of the year. Second would be, if you could talk about the Stadium Goods integration, and maybe -- I don't know if you can call out the impact of it or what it added to the Platform GMV growth in the second quarter? And then the third question would be the JD integration. Sorry, if you've talked about this already in the Q&A. Just any color on kind of traffic differences you're seeing in browsing and/or purchasing with the Farfetch store on JD versus consumers using the local app and/or the web page?

[Elliot Jordan:]

John, good questions. So in terms of the quarter that exited, as we were saying, it's -- it was the promotional environment, really, that it's across the board. And to sort of follow-up on one of the earlier questions, it wasn't in one particular market. It was pretty much global. The U.S., Europe, within Asia as well, we saw very, very heavy promotions. And obviously we wanted to go toe to toe to be competitive for our customers. So it's very hard to unpack within that anything other than the -- so the competitors are really feeling it.With Farfetch growing at 44%, we're obviously stealing significant market share from the e-tailers. And obviously, the shift from off-line to online, we are helping drive that because we've got one of the best propositions out there and the broadest range of products for the customer. So I think what we were seeing was a retaliation on Farfetch's position, and that's what we're seeing.My view and shared by the Board, as we discuss the second half, was, let's moderate that growth, let's focus on long-term sustainable growth, let's not carry on down the road, which could lead much further down in terms of profitability of that whole industry by continuing to promote and much better to focus on long-term customer value and drive that view rather than promote. But that's really the view on the guidance and why we've decided to go for 30% to 35% versus higher than that.In terms of Stadium Goods, we're not really breaking it out. It is a small part of the overall platform, and it obviously helps over the longer term, but really isn't worth breaking out of the numbers. We're talking overall platform growth, and that's what we're guiding towards.In terms of JD, we're seeing interest from customers on the JD platform. Clearly, China is an environment where you need to learn as you go what suits for customers on various channels. The team has done a absolutely fantastic job driving faster growth across Q2 than across Q1. That has come from not only JD's go-live, but more importantly, from the core product out in China being the app [indiscernible] on WeChat and the portal itself more broadly, the website more broadly. So we're very pleased with China overall.We think we're well setup as the luxury gateway for China to be able to help the brand, more brands as we've been saying and now with us as an e-Concession model, so we've now got over 450 brands e-Concession, and China, obviously, is open to them via Farfetch. So a huge opportunity and a huge opportunity for Stadium Goods to go-live with their own app in China as well. So very excited about where that opportunity could be. JD will be a part of that from 2020.

[Operator:]

Your next question comes from the line of Jason Helfstein with Oppenheimer. Your line is open.

[Anthony Liberto:]

Anthony on for Jason. Just a quick question. Does owning brands through New Guards put you in conflict with any of the 3P customer brands?

[José Neves:]

It's José here. Thank you for your question. So this is something that I have actually personally socialized, obviously, in a very confidential way and without naming the targets. We have key partners and got a very, very strong level of confidence. I think -- on the contrary, I think, luxury brand wants to be on Farfetch because Farfetch has amazing brand adjacencies, amazing other luxury brands and other products that they want to be seen next to.Put into perspective, we have 3,000 designers represented in the platform, 450 are direct. The others are represented by boutique. And this is what attracts the likes of Gucci and Prada and others to our platforms is the incredible level of luxury and brand adjacencies. This move elevates that even further. So I am entirely, entirely confident that this will bring forth and elevate the interest of our brand partners, creates a competitive halo effect that builds around original content, and that will -- it will benefit all participants.

[Operator:]

Your next question comes from the line of Ed Yruma with KeyBanc Capital Markets. Your line is open.

[Ed Yruma:]

I guess first, given this very difficult trading conditions in luxury, what is the overall health do you think of the boutique partners that you have? Are you seeing maybe potentially higher rates acquiring a business, given some of the discounting? And then two, as it relates to kind of overall industry inventory levels, is your expectation that the luxury house are able to kind of pull back on inventory? Do you think the demand improves? And kind of what underpins maybe some of the improvement you're hoping for longer term?

[José Neves:]

So in terms of the boutiques, actually, we have seen a lot of health coming from small multi-brand luxury boutiques that have embraced an omnichannel vision. We have extremely high retention, figures that are close to 100% on our boutique network. And I think that actually is in contrast with the department stores who unfortunately have had a much harder time. And in general, I think the smaller format is in good health. It's really the large-scale format, both department store or large-scale e-tail, that is obviously much more demanding in terms of the sheer amount of dollars to drive the necessary investments in working capital, technology, infrastructure to stay relevant. And this is where we've seen most of the same in the industry.I think the channel dynamics, the brands have been very clear, some very publicly such as the one on the capital markets day. They've added privately [indiscernible] clothing in private from other brands. The brands have been very clear. The more they can move direct-to-consumer, direct-to-consumer being their own brand dot-com, obviously, but also move to brand e-Concession. So we all understand that a consumer shops multi-brands, the consumers are still in the physical world and in the online world even more in that space. So nobody's going to download 200 apps on their phone. So the brands are clearly trying as fast as they can to move from less wholesale and less online wholesale into more direct-to-consumer models, of which Farfetch is the only global e-Concession model.How fast will they be able to make the transition? It's a question I don't have the answer for, and hence, we estimate this to be in the two to four quarters' timeframe.On our side, we will do everything to accelerate it. And as you've seen, with e-Concessions, we're adding every quarter, this past quarter, we added over 40, 4-0, e-Concessions to the platform. The main ones are going to supply in triple digits. So we're now part of the equation, which is welcome the brands and provide the result and ease the integration, so that they can move as fast as possible to our model. Then the brands will have through their sites in terms of taking a little bit of a hit on their wholesale revenues and that is actually on their channel, so that's something that it's another part of the equation.

[Operator:]

The final question will come from Marvin Fong of BTIG. Your line is open.

[Marvin Fong:]

Just a question on demand generation expense. Given the promotional environment, is that something that you're going to dial up to generate business? Or is that something you might dial back down just to maintain good return on your spending? And then second question, just to give us some additional comfort that this is mainly a promotional phenomenon, could you maybe comment on how orders or growth in active consumers is behaving? It was very good in the second quarter. Could you maybe give us some update on how it's trending thus far in the third quarter?

[Elliot Jordan:]

Marvin, so just in terms of demand generation, you'll see, actually, from Q1 to Q2, as a percentage of GMV, the demand generation dropped back a little bit. So we were able to pull back on the demand generation as we targeted the right level of customers, less reliance on paid search, moving more towards lower-cost channels such as social media and retargeting display, of course, and affiliates and then into our more organic channels, including what's coming through from the loyalty program, Access, in terms of organic engagement. And we saw quite a lot of organic traffic build on the back of the Farfetch Communities initiatives. So we are seeing a lot more customers on the website or predominantly through the app, actually, on a more organic fashion as they start to engaged by the content that we're now putting through on a day-to-day basis. So that's a significant opportunity for us.At 7.1% of GMV, that's roughly 19.5% of our revenues. And so still opportunities to bring that down even further as we build that organic engagement.At the moment, we are making sure we focus on new customers and bringing them into second-, third- and fourth-time orders. So we are pinging them a little bit more in terms of media spend, particularly on that retargeting, to drive that sort of flip between new customers into existing. As I said earlier on, once you get to a mature state, we're retaining 55% of the revenue from an overall contribution basis, so very strong profitability from a total-by-total basis, and in particular, payback within six months. So we're always tailoring the spend, the promotion, the organic, inorganic traffic to make sure that it's the right cost to service versus the sort of revenue per visit, and those are all in a very good place.

[Operator:]

There are no further questions in the queue. I turn the call back over to the presenters.

[Alice Ryder:]

Great. Well, thank you all for joining us. We look forward to speaking with you on the call next quarter.

[Operator:]

This concludes today's conference call. You may now disconnect.