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13 Aug, 2019

Farfetch Shares Fall 40%

Farfetch Shares Fall 40%

Farfetch is acquiring New Guards Group — the Italian company that owns or distributes a mix of buzzy streetwear brands including Off-White, Palm Angels and Heron Preston — in a bid to add branding power to its platform. The transaction values the Italian luxury producer and distributor at $675 million.

«New Guards owns or licenses some of the most sought-after luxury brands… and it has demonstrated it is the ultimate brand platform of today," Farfetch CEO José Neves said during the company’s second-quarter earnings call, which was held shortly after the acquisition was announced. The deal «will help to deliver our brand-of-the-future strategy and will have significant benefits for our other members».

Farfetch has plans to work with New Guards to launch exclusive concepts, Neves said. The deal, expected to close later this year, will be completed with a mix of cash and Farfetch stock.

Investors were not persuaded. The company’s share price, already down 36 per cent since the September IPO, plummeted another 40 per cent in after-hours trading.

Farfetch has yet to turn a profit. The company reported a loss of $90 million during the most recent three-month period, up from $18 million during the same timeframe in 2018. (Mounting losses were the reason Vogue Businessparent Condé Nast International allegedly sold its £234 million stake in the company earlier this year.) The deal with New Guards is a stepping stone on the path to profitability, Neves said. The New Guards portfolio delivered revenue of $345 million for the 12 months ending 30 April, with profits before tax of $95 million in the same period, the companies said in a joint statement.

Mounting losses make it difficult for many investors to get comfortable with Farfetch, and its recent M&A activity — which also includes Stadium Goods — hasn’t been cheap, according to analyst Jessica Ramirez. But she remains bullish on the company’s prospects, pointing out that these plays could be a smart way to «futureproof» Farfetch’s business.

While Farfetch’s costs continued to mount, revenue rose to $209.26 million during the second quarter, up from $146.69 million a year ago. Analysts were predicting revenues of $199.7 million, according to FactSet.

Even as revenues surge, the company is cutting its growth target, forecasting an increase in GMV (gross merchandise volume) of between 30 and 35 per cent during the third quarter, down from 44 per cent during the preceding three-month period. CFO Elliot Jordan cited pressure from heavy promotions industry-wide.

«Over the June period, we saw a substantial step-up in promotions… from traditional offline retailers and online retailers," Jordan said during the call. «We don’t want customers being tempted away… so we promoted as well.»

Management made the «active and intentional decision» to slow growth rather than continue heavy promotional activity. «We don’t think that’s the right thing to do," Jordan said.

Farfetch continues to spend big on attracting customers. The cost of generating demand rose to $34.4 million, up from $21.89 million in the year-ago period and $31.4 million during the first quarter. When measured as a percentage of GMV, that cost has fallen slightly, according to Jordan. «We are less reliant on paid search and moving to lower-cost such as social media," he said. «There are still opportunities to bring that down as we build organic engagement.»

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