Farfetch Announces First Quarter 2020 Results

Farfetch Limited (NYSE: FTCH), the leading global platform for the luxury fashion industry, today reported its financial results for the first quarter ended March 31, 2020.

José Neves, Farfetch Founder, CEO and Co-Chair said: “When I founded Farfetch 12 years ago, I never imagined that the global platform I was building for the luxury industry would be put to the test in such a devastating crisis. Our hearts go out to everyone who has been impacted by this global pandemic, and we are deeply grateful to the frontline and essential workers who are helping us all manage through this situation.

“Over the past few months, as we have responded to an ever-changing environment to serve the community of creators, curators, and consumers of this industry we so love, our teams have stretched beyond perceived limits, and demonstrated the resilience of our business model. I am extremely proud of them for rising to this unbelievable challenge. I can’t think of a better example of when our people have embodied our values, and I thank every Farfetcher for their resilience and dedication throughout this difficult period.

“The investments we have made to build the global platform for the luxury fashion industry have been paying off, with features such as our global logistics capabilities, geo-diversified supply network, and localized services for a global consumer base, enabling the continuity of our operations and delivery of our strong first quarter 2020 results. But one thing that has become evident over the past weeks, is that the world will not go back to the same ‘normal’ as we knew it pre-COVID-19. As we consider the structural changes that will likely impact the luxury industry, I am confident that our unique set of capabilities position Farfetch to be even stronger in the future.”

Elliot Jordan, CFO of Farfetch, said: “I am very pleased by our financial results in first quarter 2020, which highlight the strength of our business model. GMV growth across the quarter, stable unit economics and cost base leverage means we have significantly outperformed on Adjusted EBITDA, continuing on our path to profitability. Our strong balance sheet positions us well to navigate near-term uncertainties as we continue to build on our position as the leading global platform for the luxury fashion industry by focusing on delivering sustainable growth, while also improving cost efficiencies.”

Consolidated Financial Summary and Key Operating Metrics (in thousands, except per share data, Average Order Value, or otherwise stated):

See “Metrics Definitions” on page 17 for further explanations. See “Non-IFRS and Other Financial and Operating Metrics” on page 17 for reconciliations of non-IFRS measures to IFRS measures.

Recent Business Highlights

Liquidity

• Further strengthened liquidity position in April 2020 with the private placement of $400 million 3.75% convertible senior notes due 2027. Net proceeds of $390 million supplements quarter-end cash and cash equivalents balance of $422 million. Quarter-end cash balance also includes net proceeds from February 2020 issuance of $250 million convertible senior notes to Tencent Holdings Ltd. and Dragoneer Investment Group

Impacts and Actions Taken in Light of COVID-19

• Prioritized the health and wellbeing of Farfetch employees, partners and customers
  • Temporarily closed Browns Fashion, Stadium Goods and NGG brands retail stores, production studios in Los Angeles and Hong Kong (the latter now fully operational), as well as most office locations, enabling employees to work safely from home
  • Enhanced social distancing of Portugal and Brazil production studio employees by reducing capacity and dividing teams into rotating part-time shifts
  • Ensured safety of all employees in production studios and Fulfilment by Farfetch centers by meeting and exceeding government guidelines
  • To date, implemented safety measures have not resulted in a material impact to operations and supply chain
• Many of the brands, boutiques and department stores that serve as our luxury sellers are temporarily offline, as they are currently unable to fulfil orders. To date, this has not had a material impact on GMV due to the fact that 85% of products in our main SS20 catalog were available from multiple sellers
• Towards the latter part of the quarter we observed a slowdown in growth from our larger markets in Europe and North America, coinciding with the implementation of lockdown policies in various countries in those regions. As indicated by the strong growth of GMV year-over-year, this did not have a material impact on our first quarter 2020 results. However, while there were encouraging signs in the China region, the first market to experience the impacts of COVID-19, where we saw a meaningful acceleration in the last two months of the quarter, we did observe a deceleration in Group GMV growth in the latter part of the quarter
• Launched a comprehensive #SupportBoutiques initiative to help boutique partners weather a challenging environment for physical retail
  • Engagement: Encouraged the Farfetch community to support boutiques through marketing campaigns aimed at driving customer engagement with boutique supply
  • Financial: Eased certain service level obligations and lowered some customary platform service fees
  • Operational: Helped boutiques remain operational by warehousing and fulfilling their orders from one of our Fulfilment by Farfetch facilities, and waiving the related service fees
  • Safety: Provided guidance and protective wear to help ensure the safety of boutique employees
• Collaborated closely with global logistics partners to ensure availability of global service routes. During the quarter we incurred some minor disruptions in the fulfilment network and shipments, which did not have a material impact on our operations
• Reduced spend plans for marketing, headcount growth, technology investments, capital expenditures, and other discretionary costs

Digital Platform

• Third-party transactions generated 86% of Digital Platform GMV at a 29.9% take rate in Q1 2020
• Continued to capture market share of the online luxury fashion industry
• Continued to offer consumers an exceptionally broad selection of luxury fashion through partnerships with more than 1,200 sellers, including over 500 direct brand e-concessions
  • Q1 in-season stock exceeded 300,000 SKUs from more than 3,400 brands
  • Signed new e-concession with Balmain, among other luxury brands
  • Maintained 100% three-year retention of top 100 direct brand and top 100 boutique partners
• ACCESS loyalty program accelerated to 1.4 million enrolled customers at the end of March 2020, with program members demonstrating higher propensity to upgrade to higher tiers as compared to control group
• Following the February 2020 launch of Harrods.com by Farfetch Platform Solutions, Farfetch has enabled Harrods’ global e-commerce business, including throughout the department store’s temporary closure in light of COVID-19 lockdown measures
• As part of Positively Farfetch, our mission to be the global platform for good in luxury fashion, Farfetch announced Climate Conscious Delivery, a commitment to offset the carbon impact of all deliveries and returns, or 85% of our total carbon footprint, by funding global environmental projects

New Guards

• For the fourth consecutive quarter, GMV from NGG brands, in aggregate, exceeded GMV for the single largest brand on the Farfetch Marketplace in Q1 2020
• New Guards’ brand portfolio continued to create culturally relevant collections
  • Off-White retained the #1 ranking as Hottest Brand according to Lyst Index for the third consecutive quarter; also released a Lunar New Year capsule collection, exclusively available online at Farfetch and off---white.com
  • In response to heightened interest from women, Palm Angels launched its first women’s ready-to-wear collection for Spring-Summer 2020
  • Heron Preston collaborated with HP Inc. to develop compostable pouches intended to replace plastic bags used in retail packaging
  • In conjunction with the release of the Beastie Boys Story documentary, Opening Ceremony collaborated with the influential band to create a limited-edition collection, sold exclusively on Farfetch

First Quarter 2020 Results Summary

Gross Merchandise Value (in thousands):

Gross Merchandise Value (“GMV”) increased by $191.6 million from $419.3 million in first quarter 2019 to $610.9 million in first quarter 2020, representing year-over-year growth of 45.7%. Digital Platform GMV increased by $80.2 million from $414.7 million in first quarter 2019 to $494.9 million in first quarter 2020, representing year-over-year growth of 19.3%. Excluding the impact of changes in foreign exchange rates, Digital Platform GMV would have increased by approximately 20.1%.

The increase in GMV primarily reflects the growth in Digital Platform GMV and the addition of $107.5 million of Brand Platform GMV from New Guards which we acquired in August 2019. The increase in Digital Platform GMV was primarily driven by growth in Active Consumers to 2.1 million in first quarter 2020, increased supply available from over 1,200 partners, and the addition of direct-to-consumer brand sales from New Guards. This was partially offset by a decrease in the blended Marketplace and Stadium Goods Average Order Values across the Digital Platform. During first quarter 2020, we also saw a year-over-year growth in transactions through our managed websites supported by Farfetch Platform Solutions, primarily driven by the launch of the Harrods e-commerce site at the end of February 2020.

Revenue (in thousands):

Revenue increased by $157.3 million year-over-year from $174.1 million in first quarter 2019 to $331.4 million in first quarter 2020, representing growth of 90.4%. The increase was primarily driven by 30.6% growth in Digital Platform Services Revenue to $185.2 million and the addition of Brand Platform Revenue from New Guards. In-Store Revenue increased by 87.7% to $8.5 million primarily due to the addition of revenue from New Guards, as well as growth in Browns and Stadium Goods directly-operated stores, despite COVID-19-related store closures toward the end of the quarter.

The increase in Digital Platform Services Revenue of 30.6% was driven by 19.3% overall growth in Digital Platform GMV and an increase in the mix of first-party GMV, which grew 39.6% year-over-year, and is included in Digital Platform Services Revenue at 100% of the GMV.

Digital Platform Fulfilment Revenue represents the pass-through of delivery and duties charges incurred by our global logistics solutions, net of any Farfetch-funded consumer promotions and incentives. Whilst Digital Platform Fulfilment Revenue would be expected to grow in line with the cost of delivery and duties, which increase as Digital Platform GMV and order volumes grow, variations in the level of Farfetch-funded promotions and incentives will impact Digital Platform Fulfilment Revenue. In first quarter 2020, Digital Platform Fulfilment Revenue increased 9.4%, a lower rate as compared to Digital Platform Services Revenue growth, due to an increased proportion of orders that qualified for free shipping year-on-year, as well as some targeted consumer engagement activities.

Cost of Revenue (in thousands):

Cost of revenue increased by $87.3 million, or 96.1% year-over-year from $90.8 million in first quarter 2019 to $178.1 million in first quarter 2020. The increase was primarily driven by the addition of Brand Platform cost of revenue related to New Guards and growth in first-party GMV and the associated cost of goods, as well as delivery costs and duties on an increased volume of transactions, and growth in our In-Store revenue and the associated costs of goods sold. As we are reliant on third-parties to provide shipping and delivery services, potential changes in their operations in light of COVID-19 could result in future impacts to our service levels or cost of revenue.

Gross profit (in thousands):

Gross profit increased by $70.1 million, or 84.2% year-over-year, from $83.3 million in first quarter 2019 to $153.4 million in first quarter 2020, primarily due to the addition of New Guards Brand Platform operations and the growth in our Digital Platform Services Revenue. Gross profit margin in first quarter decreased from 47.9% to 46.3% year-over-year, primarily driven by a lower Digital Platform Gross Profit Margin due to an increase of first-party sales in our total sales volumes which has a lower gross margin profile, as well as increased Farfetch-funded consumer promotions and a decrease in In-Store Gross Profit Margin, partially offset by the addition of New Guards Brand Platform.

Selling, general and administrative expenses by type (in thousands):

First quarter 2020 demand generation expense increased 20.8% year-over-year to $38.0 million, while remaining relatively flat as a percentage of Digital Platform GMV at 7.7% as we drove an increased mix of GMV through unpaid channels, and continued to invest in paid channels to engage new customers on the Farfetch Marketplace.

Technology expense, which is primarily related to development and operations of our platform features and services, and also includes software, hosting and infrastructure expenses, increased by $6.1 million, or 30.5%, in first quarter 2020 from first quarter 2019, primarily driven by an increase in technology staff headcount. We continue to operate three globally distributed data centers, which support the processing of our growing base of transactions, including one in Shanghai dedicated to serving our Chinese customers. First quarter 2020 technology expense as a percentage of Adjusted Revenue decreased from 13.8% to 8.7% year-over-year as Adjusted Revenue grew at a rate greater than the underlying costs.

Depreciation and amortization expense increased by $37.2 million or 263.8% year-over-year from $14.1 million in first quarter 2019 to $51.3 million in first quarter 2020. Amortization expense increased principally due to $30.7 million of amortization recognized on intangible assets acquired in recent acquisitions. Amortization expense also increased as a result of the historic investment into technology, where qualifying technology development costs are capitalized and amortized over a three-year period. Depreciation expense increased as a result of new leases entered into across the group.

Share based payments decreased by $12.0 million or (30.9%) year-over-year in first quarter 2020 from first quarter 2019. The decrease was driven by a $24.7 million year-over-year difference in the fair value remeasurement for cash-settled payment awards and the related employment taxes, as result of an increase in our share price during first quarter 2019 ($22.5 million fair value increase) as compared to a decrease in our share price during first quarter 2020 ($2.2 million fair value decrease). This was partially offset by a $12.7 million year-over-year increase in share based payment expense for equity-settled awards, which was driven by a $9.4 million increase related to additional employee awards and $3.3 million from long-term employee incentives related to the acquisition of New Guards.

General and administrative expense increased by $49.5 million, or 79.9%, year-over-year in first quarter 2020 compared to first quarter 2019, primarily due to the incorporation of New Guards into the group and an increase in non-technology headcount across a number of areas to support the expansion of our business. General and administrative costs decreased as a percentage of Adjusted Revenue to 37.0% compared to 42.3% in first quarter 2019 primarily due to Adjusted Revenue growing more than the general and administrative expense cost base, and the addition of New Guards, which operates with lower general and administrative costs as a percentage of Adjusted Revenue.

Other items of $5.0 million in first quarter 2020 primarily reflects transaction-related legal and advisory expenses.

Gains on items held at fair value (in thousands):

In first quarter 2020 the gain of $65.4 million comprised of a $44.0 million fair value revaluation gain related to the embedded derivative liability associated with Tencent and Dragoneer convertible senior notes, and a $21.4 million fair value revaluation gain related to Chalhoub Group’s put option over their non-controlling interest in Farfetch International Limited. There were no such items in first quarter 2019.

Impairment losses on tangible assets (in thousands):

The impairment charge of $2.3 million in first quarter 2020 relates to a reduction in the carrying value of the right-of-use asset, and property, plant and equipment at one of our smaller retail locations. This resulted from our quarterly considerations of potential impairment of assets, including our retail stores, whereby indicators of impairment were present. For first quarter 2020, our impairment assessment incorporated the potential impacts of COVID-19 across the broader economy as well as from the current temporary store closures.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA improved by $7.9 million, to $(22.3) million in first quarter 2020, for the reasons described above. Adjusted EBITDA Margin improved from (20.7)% to (7.4)% over the same prior year period, primarily reflecting lower general and administrative expenses, demand generation and technology expenses as percentages of Adjusted Revenue, and was partially offset by lower gross profit margin.

Loss After Tax

Loss after tax increased by $1.5 million, to $79.2 million in first quarter 2020. The decrease in the operating loss from $85.5 million to $42.3 million was broadly fully offset by a higher charge in relation to unrealized foreign exchange revaluations of non-United States Dollar denominated receivables and payables. The quarterly improvement in operating loss was primarily due to the $65.4 million gain realized on items held at fair value during first quarter 2020, as described above.

Liquidity

At March 31, 2020 cash and cash equivalents were $422.0 million, an increase of $99.6 million compared to $322.4 million at December 31, 2019. The increase in cash and cash equivalents is primarily due to the private placement of convertible senior notes to Tencent and Dragoneer, pursuant to which we received $250 million (excluding transaction-related legal and advisory expenses) in first quarter 2020. This was partially offset by a net cash outflow from operating activities, primarily due to the seasonal reversal of working capital benefit in first quarter 2020, as well as New Guards’ acquisitions of Ambush and the Opening Ceremony brand.

On April 30, 2020, we completed the private offering of $400 million in aggregate principal amount of convertible senior notes for net proceeds of $390 million. The notes will mature on May 1, 2027, unless earlier converted, redeemed or repurchased in accordance with their terms. The notes will bear interest at a rate of 3.75% per year payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2020.

Outlook

While the COVID-19 pandemic has not had a material impact on our first quarter 2020 performance, the uncertainties resulting from the evolving nature of the situation could have material impacts on our future performance. Factors involving COVID-19 that could potentially impact our future performance include, among others:

• extended disruptions to our operations, fulfilment network, shipments
• reduced supply from fewer sellers being able to sell on the marketplace and/or production shutdowns potentially delaying Fall-Winter 2020 collections
• weakened consumer sentiment and discretionary income potentially arising from a prolonged shutdown and declining macro-economic conditions

We cannot estimate the duration of the COVID-19 pandemic or the potential impacts we could ultimately see on our business and results of operations, however, depending on the duration and scope, it could be material.

In light of the heightened uncertainty surrounding the evolving COVID-19 global health pandemic, we are not providing forward-looking financial guidance at this time, but we remain focused on our path to profitability and continue to target Adjusted EBITDA profitability for full year 2021.

Conference Call Information

Farfetch will host a conference call today, May 14, 2020 at 4:30 p.m. Eastern Time to discuss the Company’s results as well as expectations about Farfetch’s business. Listeners may access the live conference call via audio webcast at http://farfetchinvestors.com, where listeners can also access Farfetch’s earnings press release and slide presentation. Following the call, a replay of the webcast will be available at the same website for 30 days.