• 1QFY22 results and outlook hit by war in Ukraine and suspension of operations in Russia, macro situation in China, and acceleration in transition of the marketplace towards being predominantly
full-price
• Digital Platform GMV (gross merchandise value) growth for FY22 now guided to be 5- 10% year-on-year (YoY), previous guidance 28-32%
• Longer-term thesis remains intact, but will still need to navigate a number of near-term headwinds
A tough quarter – Farfetch delivered a soft set of 1QFY22 results, but we believe the directional weakness was somewhat anticipated by investors heading into the print. Total revenue grew 6% YoY to USD514.8m, which came in ~8% below consensus. Digital Platform GMV grew 2% YoY to USD809.5m, which was below expectations by ~14% YoY. Adjusted EBITDA was -USD35.8m; such losses were wider than consensus expectation of – USD18.8m. Management noted that there were 3 key developments that have impacted Farfetch’s 1QFY22 results and outlook. These include a) the war in Ukraine and suspension of operations in Russia for the foreseeable future, b) the Covid-19 outbreaks and macro events in Mainland China, and c) double-digit decline in markdown GMV with the acceleration in transition of the marketplace towards being predominantly full-price.
Fair Value (FV) of USD19 – In light of the above, management has brought down its full-year outlook. Digital Platform GMV growth is now expected to be 5-10% YoY (previously: 28-32%), with the bulk of the downgrade (over 80%) due to Russia and China, with some impact from the shift from markdowns to full-price. In our view, the magnitude of such a revision could reflect the increasingly challenging environment coupled with lack of near-term visibility. Encouragingly, management has indicated that they have been rationalising costs and reducing spend on projects with longer-term payback, striking a balance between supporting future growth and focusing on stronger profitability and cash flow. We note also that full-price marketplace GMV excluding China and Russia clocked YoY growth of ~20% during the quarter. In our view, the loosening of lockdown restrictions in China should help to accelerate the shift of luxury online. In terms of partnerships, management shared that they remain in discussions with Richemont about a potential deal, and that the Reebok and Neiman Marcus partnerships should contribute to growth in 2023. In our view, Farfetch is a disruptive tech enabler for the luxury industry with deep competitive moats, well positioned to monetise the shift of luxury online, and could also be embedding some element of conservatism into the latest guidance. However, we are cognizant that in an environment of rising rates and macro uncertainties, there could be muted appetite for stocks with little to no earnings, which could result in a near-term overhang for the name. Taking into account all of the above, we employ lower estimates and materially higher cost of capital, thus deriving a FV of USD19. BUY. (Research Team)