Description

Farfetch is a London based luxury e-commerce platform that trades on NYSE and has a market cap of $16.5bn. Basically, it is a marketplace that distributes luxury products from brands and retailers to the global consumer and takes 30% commission for the job. It is uniquely positioned in the rising global luxury market and has a visionary founder at its helm. Actually, in luxury business there is no company with the same business model, which should make this company quite attractive to investors. The company has been growing strongly for years and has partnerships with 3500 luxury brands and 1400 sellers all around the world which gives them depth of inventory no one in the industry can match. Its GMV of $3bn represents just a fraction of roughly $300 bn luxury goods market. Since e-commerce is significantly under-penetrated in the luxury market and Farfetch is leading online luxury platform, the company is going to be the greatest beneficiary of three secular trends: 1) growing luxury market 2) online taking share of the luxury market 3) Farfetch increasing its online market share.

Farfetch was written on VIC two years ago by aprovecha413, as a short. I wish I heard about this company back than when it traded for a third of today's price but even now, after 2020 meteoric rise, FTCH is a great buy for a long haul. The stock will easily beat the market in the next 10 years period.

Farfetch was founded in London in 2008 by Jose Neves, a Portugese with background in fashion and coding. 25 years ago Neves started his own shoe brand but over the years moved to building a marketplace for luxury brands. It paid off. Farfetch has become the largest online luxury distributor with revenue growth of 50% per annum in the last few years. Obviously, Covid led to sudden acceleration of online shopping across the board, including the luxury goods industry. The online sales as a share of luxury goods market doubled in 2020 ( in part because the whole industry fell by more than 20%), to 23% but still has a long way to go ( this year online share could even drop due to offline bouncing back strongly). In 2018 Bain estimated that the online luxury market will grow 23% annually over the next five years. The reason for the slow start is that for years luxury brands have been reluctant to sell online. They felt that it is much harder to maintain the aura of the brand by selling online instead in a luxury shop on Avenue Montaigne or Fifth Avenue. It was never consumer dislike of online sales that prevented move to digital retail. Partially, reluctance for moving online was the consequence of the fact that online retail was dominated by large retailers like Amazon that have too broad offering and were not really tailored for luxury customers, as well as luxury brands who care deeply where and how their goods are sold.

Farfetch filled that niche. It has built and is cherishing long-term relations with luxury brands and retailers, it understands the market and all its particularities. Finally, as a platform specialized in luxury it has appearance of exclusivity that Amazon and similar platforms will never have. Besides Neves, who has a long history in the fashion industry, Farfetch is full of luxury fashion veterans with strong connections to luxury brands and butiques: Stepanie Phair is the chair of British fashion council, Giorgio Belloli has close ties with Kering and Prada, Natalie Massenet founded and led Net-a-porter until the merger with Yoox Group in 2015.

First big name Farfetch brought to the platform was Gucci. Other followed. Neves won them over particularly with e-concession model he and his team invented where brands decide what, when, how and at what price they sell. That way the control over their brand remains in their hands. It is shop within a shop. It is essentially DTC on somebody else's platform. With every new platform customer, proposition to move to or stay on the platform becomes even stronger. These special relations are sometimes endorsed through direct ownership of Farfetch. Chanel, Kerig( Artemis), Richomont - all have stakes in Farfetch. On top of that Farfetch offers solutions ( FPS) that enables sellers and brands to run their own websites using Farfetch's infrastructure.

It turns out that luxury fashion industry actually has a very long tail with many, and increasing number of brands that consumers want. Being on a one single platform makes it much easier for a consumer to choose. In 2015 Johann Rupert, CEO of Richemont, was calling for a single platform for all the industry players because this game is just to big for any company to dominate it. After 6 years, and a lot of wandering around by big brands , it is becoming increasingly clear that Farfetch is going to be that platform.

So, luxury was a late adopter of online, but even before covid, estimates were that digital will represent at the minimum, 30% of luxury sold in 2025. First, Bain projected that online will represent 25% of market in 2025, than in 2018 increased that to north of 30%, and now, after COVID push, it's more plausible that online in 2025 will be not less than 35%. Additional boost for online sales comes from generational shift, with Millennials and Generation Z customer cohorts becoming more relevant as well as a Chinese tech savvy consumers.

Farfetch makes money by taking roughly 30% commission (on smaller brands even higher than that) and additional 8% in case it handles fulfillment. In addition, Farfetch sells its own brands which represent around 15% of GMV and runs two traditional retail stores in London. The company owns Stadium Goods which is reseller of sneakers, New Guards Group which has a licence for Off-White brand and Browns, fashion retailer and Farfetch first acquisition. As of Q1 2021, the company had 3,3 million active customers on its platform. On average they spend $600 per order. In 2020 alone the company added 1 million active customers, a 50% increase from a year ago. During the last few quarters they added 500k new customers per quarter. The largest market is US, however China, currently the second largest, is poised to take over very soon.

Farfetch largest online competitor is YOOX Net-a porter, which has a different business model. It is still a classical online retailer that controls the entire value chain: it sets the prices, owns the inventory, promotes the brands,....It is not as asset light business as Farfetch which gives Farfetch significant advantage. It is a big drag on growth relative to marketplace and e-concession model. Lately, they recognized superiority of e-concession model ( "It's true for Net-a-porter, because the connection that has already started with the concession model shows higher capability to answer to the needs of our clients both in terms of vertical and horizontal. So, we have - basically we have a larger choice of assortment with the concession model and we also have deeper or more available products for the best seller of it" Jerome Lampert, Q4 2020, Richemont conference call)  so they are moving towards a mix of a traditional wholesale model and e-concession model but I believe they came a bit late to the party.

Farfetch has the depth of the selection, designer count, by far the biggest number of SKUs, 360k at the end of 2020, which is the direct result of its marketplace and e-concession model. No competitor comes even close to that. If a person is into luxury its the app with most SKUs s/he wants to download on his/her phone, rather than every app of the brand s/he likes. Due to its size and broad luxury offering, LVMH can go alone. Probably Hermes too with its uber-exclusivity strategy, but all others need platform like Farfetch. The case for going alone for most brands became much weaker after introduction of e-concession model since it gives them enough autonomy. Multibranding is something consumers need and will represent the much larger chunk of the online luxury goods market. By some estimates around 80 % of the market. Farfetch is in the best position to take the share leading platforms in other industries have, like Expedia, Booking or Spotify.

Farfetch brand awareness has followed its strong sales growth. In late 2018 it had 1.1 million followers on Instagram and 600k on Facebook vs. 3.2 million and 1.6 million for Net-a-porter. Now, it is 3.1m and 2.5m for Farfetch vs. 4.5 m and 1.7m for Net-a-porter. The gap is closing and it is just matter of time when Farfetch will surpass Net-a-porter in brand awareness as well.

China

With regards to market size, China has a third of $300 bn luxury goods market. It is the fastest growing market which could take half the global sales in 4 to 5 years. Like in the rest of the world, luxury brands hesitate to sell their products through local marketplaces since they are similar to Amazon or Ebay and so they need Farfetch. Farfetch widened its reach in Chinese market after the JV deal with Alibaba and Richomont and launching a flagship store on Tmall Luxury Platform, becoming a permanent banner on Chinese platform and one of 5 navigation buttons. It is not the first luxury platform with such a deal but Farfetch is bringing to China 3500 brands that were not present on Tmall ( around 90% of them) or even on the Chinese market. Chinese couldn't buy it online or offline. Only on trips to Milan or Paris. Besides, there are smaller or newer luxury brands that even there are hard to find but they are available on Farfetch to Chinese consumers. Last year, Chinese consumers were not able to travel abroad, yet their international luxury spending didn't fully transfer home because luxury goods were either not available in Chinese stores or Chinese online luxury market is in the early innings of growth. Since intercontinental travel won't reach 2019 levels soon, FTCH has an opportunity to build huge consumer base in the next few years. With Tmall storefront, Farfetch will get access to Chinese luxury customers much faster since Alibaba has close to 800 million monthly users. This deal is just a beginning of Alibaba-Farfetch partnership in China.

Valuation

The online luxury industry is quite fragmented and ready for consolidation. In 2020 the size of the online luxury market was $59bn. Farfetch share was 5.4% of the market, a considerable increase in share from 2017 when it was 3.4%. With huge and increasing SKUs, competent and visionary management, there is no reason why this trend wouldn't continue. My expectation is that Farfetch market share could easily double in 5 to 7 years . That is in line with Credit Suisse expectations that the number of Farfetch active shoppers could increase tenfold, to 30 million. Now we are talking about $15 to $20 bn in GMV. So, in 5 to 7 years we shall have $15 to $20 bn business, that is still in early stage of growth and has an asset light business model. That kind of business should be worth much more above its current value of $16.5bn.

The lack of profitability in this stage is not something to worry about since the company is still in the growth mode: acquiring new customers and capturing market share. That model has been proven succesful time and again with many internet companies. And Farfetch is doing that very efficiently. LTV/CAC ratio has been steadily increasing. According to the management, LTV has been particularly strong in the last few quarters. Since payback for customer acquisitions has been so great, it doesn't make much sense to slow it down by focusing on profitability. As an online platform it is no surprise that the business is very scalable and with time, G&A and technical costs will level off and profit margins will increase. Moreover, with scale more expensive crossborder fulfillment costs ( currently 85% of all fullfilment costs) will make smaller share. A more personalized approach to customers and various loyalty programs will increase the margins as well( currently 1% of customers represent 27% of revenue). For a while the management has been talking about 30% EBITDA margin in the long term which is very achievable considering everything mentioned above and the fact that other online marketplaces have similar margins ( although they don't have as rich customers as Farfetch does). On $10 bn in revenue and $20bn in GMV that is $3bn in EBITDA. 20 to 30 multiple on that and you'll have a pretty good return. Let's go even further! In 2030 the luxury market is going to be around $600bn. Could 10% to 15% of sales go through Farfetch? I don't think that is unlikely scenario. In the market that is 50+% online, possibility of that happening is more likely than not.

Catalyst

Stronger revenue growth, new partnerships, new brands