Access both platforms from your single Saxo account.
Farfetch files for IPO
Peter Garnry
Head of Equity Strategy
Farfetch, the London-based technology platform for luxury fashion, has just filed its F-1 for IPO on the NYSE with a proposed maximum offering size of $100 million. The company has applied to have its Class A ordinary shares listed on NYSE under the ticker symbol ‘FTCH’. In the latest filing, the number of shares and offering price has not been published so we cannot make any valuation comparison in this initial IPO analysis. As soon as the company updates its filing we will update our analysis with valuation comparison against relevant peers.
The business
Farfetch is a technology platform for the global luxury fashion industry that connects brands, retailers, and consumers in what the company characterises as a fragmented market. The company was founded 10 years ago and has established an interesting position in the global fashion industry, worth $307 billion in 2017 and expected to grow to $446bn by 2025 according to Bain. The majority of revenue is generated through the Farfetch Marketplace connecting around 2.3m consumers with 980 luxury sellers.
As with many other online retailers, Farfetch has acquired a foothold in the physical world by acquiring Browns, a British fashion and luxury goods boutique, in May 2015. Browns operates two retail fashion boutiques in London. The company has 3,000 employees with two-thirds of its workforce employed in Technology & Product and Operations.
As of December 2017 the company had 936,000 active customers, up 44% year-on-year,and revenue was $386m in 2017, up 60% y/y. According to Bain, the luxury market grew 6% annualised since 2010 with online luxury fashion growing 27% annualised in the same period. The online market share in luxury fashion is around 9% and thus far lower than most other retail markets.
The business
Farfetch is a technology platform for the global luxury fashion industry that connects brands, retailers, and consumers in what the company characterises as a fragmented market. The company was founded 10 years ago and has established an interesting position in the global fashion industry, worth $307 billion in 2017 and expected to grow to $446bn by 2025 according to Bain. The majority of revenue is generated through the Farfetch Marketplace connecting around 2.3m consumers with 980 luxury sellers.
As with many other online retailers, Farfetch has acquired a foothold in the physical world by acquiring Browns, a British fashion and luxury goods boutique, in May 2015. Browns operates two retail fashion boutiques in London. The company has 3,000 employees with two-thirds of its workforce employed in Technology & Product and Operations.
As of December 2017 the company had 936,000 active customers, up 44% year-on-year,and revenue was $386m in 2017, up 60% y/y. According to Bain, the luxury market grew 6% annualised since 2010 with online luxury fashion growing 27% annualised in the same period. The online market share in luxury fashion is around 9% and thus far lower than most other retail markets.
The business consists of three main pillars:
Applications: the core engine of the business with Farfetch Marketplace as the largest application built on the platform connecting consumers and luxury sellers. Farfetch Black & White Solutions is a white-label e-commerce offering.
Services: offers product presentation capabilities, demand generation through Farfetch’s marketing engine, secure multi-payment processing, and supply chain management.
Data: the company accesses rich data from luxury sellers on the platform to better understand marketing campaigns, fashion trends, and consumer behaviour. Farfetch has 631 engineers and data scientists working on the data solution.
As the financial statements below show, the company is growing very fast by investing heavily in infrastructure and technology. The opposite side of this is an operating loss of $94.5m in 2017 that is likely to increase in 2018 based on the numbers available as of June 30, 2018. If Farfetch follows the same trajectory as Zalando then profitability will increasingly be a priority as a publicly traded company. One metric that stands out and is likely an indicator of a sticky business model is the number of orders/active customers, which has increased from 2015 to 2017 on top of a higher average purchase value per order. This is an indication of a healthy ecosystem.
Applications: the core engine of the business with Farfetch Marketplace as the largest application built on the platform connecting consumers and luxury sellers. Farfetch Black & White Solutions is a white-label e-commerce offering.
Services: offers product presentation capabilities, demand generation through Farfetch’s marketing engine, secure multi-payment processing, and supply chain management.
Data: the company accesses rich data from luxury sellers on the platform to better understand marketing campaigns, fashion trends, and consumer behaviour. Farfetch has 631 engineers and data scientists working on the data solution.
As the financial statements below show, the company is growing very fast by investing heavily in infrastructure and technology. The opposite side of this is an operating loss of $94.5m in 2017 that is likely to increase in 2018 based on the numbers available as of June 30, 2018. If Farfetch follows the same trajectory as Zalando then profitability will increasingly be a priority as a publicly traded company. One metric that stands out and is likely an indicator of a sticky business model is the number of orders/active customers, which has increased from 2015 to 2017 on top of a higher average purchase value per order. This is an indication of a healthy ecosystem.
Another key indicator for any business, but especially e-commerce firms, is the lifetime value to consumer acquisition cost. As the chart below shows, the ratio is above one already after six months which explains why the company is confident in its high investment strategy generating operating losses in the short-term.
Revenue is geographically well-diversified with Europe, Middle East, and Africa being the largest segments following by Asia-Pacific. Unfortunately, the company does not break down its Asia-Pacific exposure but given how much China is mentioned we expect China to be a big part of this segment, especially given the integration with JD.com and WeChat.
Risk profile: The Farfetch IPO comes with risks for investors. Key investment risks are slower online adoption/penetration than expected as luxury proves to be more a physical experience than online. The company is not profitable, which creates greater credit/equity risks for shareholders and creditors. The luxury fashion industry is highly competitive and fast-changing. which makes it difficult to predict. Farfetch is dependent on luxury sellers wanting to sell their goods on the platform and these sellers likely have the upper hand on the take-fees. GDPR could potentially slow down retail growth as it increases friction for customers.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)