Sep 18, 2018
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Farfetch aims to take on Amazon in ambitious $5bn New York IPO

Sep 18, 2018

Farfetch, Europe’s best answer to Amazon in the field of luxury and fashion, will complete by the end of this week its much-anticipated initial public offering (IPO) on the New York Stock Exchange with a valuation of up to $4.8 billion if investors pile in to buy its shares.


Artemis, the family holding that controls luxury group Kering, owner of Gucci, Balenciaga and Saint Laurent, is planning to invest $50 million in the offering, according to Farfetch’s documents filed to the US Securities and Exchange Commission earlier this month.  

Farfetch is hoping to attract US and UK-based investors but many fund managers and analysts are scratching their heads to understand how a company losing so much money with no profitability in sight could be so expensive. Farfetch’s losses after tax last year deepened 37 percent to $112.3 million.

Farfetch’s valuation is much richer than that of online retailer Amazon which became the second company in history this month to reach the $1 trillion mark after Apple, helped by the stock market’s rally. Farfetch is seeking a valuation equal to seven times its prospective 2018 revenues versus a valuation of around 4.5 times for Amazon.

Investors buying Farfetch shares will be making the bet that it can outwit and outgrow Amazon, which has made no secret of its ambitions to expand in luxury and fashion. Both companies are Internet market platforms. They do not buy stock from brands, unlike Yoox Net-A-Porter and Matchesfashion.com. They connect retailers and brands with consumers online and take commissions on each purchase. Farfetch has been very good at cutting off Amazon’s access to the luxury market by forging strategic relationships with brands such as Saint Laurent, Burberry and Thom Browne, as well as with major retailers such as JD.com in China and the Chalhoub group in the Middle East. Also, it has signed exclusive relationships with most of its 900 partner boutiques. As of June 30, Farfetch had over 3,200 different brands sold on its platform.

Farfetch, which is aiming to attract technology, retail and consumer goods institutional funds, ends its roadshow in Kansas City on Wednesday after a tour that started in London on Sept. 6 and travelled throughout the United States stopping by New York, Boston, Chicago and Los Angeles. The company’s price range of $15 to $17 a share gives it a valuation of $4.2-4.8 billion. Pricing is to be announced on Thursday and shares to make their debut on Friday under the ticker “FTCH.”

Investors said one of their concerns was that it was not clear to them how long Farfetch could retain its competitive advantage in a rapidly changing market.

As fashion and luxury brands invest in their own e-commerce business, they could put pressure on Farfetch to accept lower commissions which could affect future revenues. “I think the average commission of Farfetch will probably go down with time, but on the other hand, they will attract so many brands and are so much into innovation, digital and newness that they have significant growth potential,” said Caroline Reyl, head of premium brands at Pictet Asset Management, which runs several funds focused on premium brands with assets totaling 1.8 billion euros.  Reyl said she was also impressed by the quality of Farfetch’s management and the leadership skills and vision of Farfetch founder and CEO José Neves.
By June 30, Farfetch’s third-party take rate stood at 31.7 percent against 33.7 percent the previous year while the average order value was $622.1 versus $591.7 the previous year.  

Farfetch says the online market for fashion and luxury is growing several times faster than the overall luxury goods market worth $307 billion in 2017. It is expected to rise around 6-8 percent this year and reach $446 billion by 2025.

José Neves will have considerable power thanks to a dual-class voting structure that will give him 78 percent of voting rights, meaning that the company cannot make any strategic decision or be taken over without his consent. "The fact that the CEO has so much voting power could be an issue for investors. All shareholders should have the same rights," said Andrea Gerst, who runs the GAM luxury fund in Zurich with 350 million euros worth of assets under management. Gerst said the fact that Farfetch was loss-making might be normal for a technology stock but it made valuation difficult. “Farfetch is a great story and a great success so far but it is hard to make a correct valuation because it is losing money. With technology companies like Farfetch, it is difficult to make a forecast for the next 10 years as there are so many changes happening.” Several market sources said Farfetch told investors it aimed to produce a margin of around 30 percent of EBITDA (earnings before interest, tax, depreciation and amortization) but it did not give a precise time horizon for it.  

In its prospectus, Farfetch informs investors it does not plan to make any profit in the foreseeable future, preferring instead to invest in technology and market share – which is a strategy technology investors understand and generally encourage.

"We may continue to experience losses after tax in the future, and we cannot assure you that we will achieve profitability and may continue to incur significant losses in future periods," Farfetch said in the filing.  Amazon and other online retailers such as Net-A-Porter purposefully made losses for years to invest in acquiring new customers.

“Our promise to our investors is a boundless dedication to our consumers, restless innovation and to focus on achieving sustainable, continued growth,” José Neves said in his personal letter included in the SEC document.

The SEC document show that Farfetch incurred a loss after tax of $112.3 million on revenues of $386 million in 2017, up from a loss of $81.5 million on revenues of $242.2 million in 2016. It also shows that as of June 30, Farfetch was sitting on a cash pile of $337 million.

“When you start to become big, the question everyone asks is how long can you retain your competitive advantage,” says Mario Ortelli, managing partner of the luxury advisory company Ortelli&Co. “You have to provide somehow a higher value for the customers: better service, lower prices, curated selection, exclusive products, compelling loyalty schemes, etc.”

Another concern is how long Farfetch can defend full-price sales as most of its competitors such as Net-a-porter started with full prices but after seeing that the market for them was getting smaller and smaller, they started offering more and more discounts.

Farfetch has raised more than $700 million since its inception a decade ago. If the company is priced at $16 a share at the mid-point of its indicative price range, net proceeds would total $446.5 million.
The documents show that Farfetch became registered in the popular tax-haven of the Cayman Islands in May. Also, Farfetch’s Chinese shareholder and partner, Internet retailer JD.com which invested $397 million in Farfetch last year, was granted the right to purchase shares through a placement to preserve its stake after the IPO-induced dilution. After the IPO, its stake should be just around 17 percent, making it the biggest shareholder.

“I think that is actually a reassuring point,” said one New York based analyst who spoke on condition of anonymity. “It means that sets a floor on the stock as if it wants to, JD.com can buy them out.”

The filing also shows that Neves’ wife Daniela Cecilio on Oct. 31 2017 sold to Farfetch for more than $2 million her fashion concierge company originally called ASAP 54, in which NAP early investor Carmen Busquets put money. The filing says: “The consideration for the purchase was $2,183,000, which was satisfied through the issuance of shares of Farfetch.com at a price per share of $48.40. The Share Purchase Agreement contains customary warranties and indemnities in favor of Farfetch.”

While the press made much of the fact that Daniela Cecilio was José Neves’ wife, the investment made sense for Farfetch as it had long wanted to have its own VIP service and it was logical for the company to buy a company it had closely followed instead of buying a company providing the same service which it did not know well.

Most members of Farfetch’s executive team including José Neves have options to buy shares that expire ten years. Natalie Massenet, a non-executive director, will continue to act as the company’s co-chairman and ambassador at events and will provide consultancy services. She has options that expire in 2026. Massenet was succeeded by this year as chairman of the British Fashion Council by Stephanie Phair, who is Farfetch’s chief strategy officer.

Farfetch declined to comment on any matters related to its SEC document or details regarding its IPO.

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