Farfetch, with a $5.4 billion market cap, is the largest player in the rapidly growing space of online luxury marketplaces. But its stock has tumbled this year, from a high of $29.69 in March to $17.37 at yesterday’s close, as the 12-year-old company has dug deeper into China, struggled to hit profitability and seen a major investor cash out.
All of those issues will be weighing on investors when Farfetch issues its fourth earnings report as a public company this afternoon. But once again, China looms largest.
This “is an investment year for Farfetch,” Ed Yruma, managing director at KeyBanc Capital Markets, wrote in June, the same month that Farfetch opened its flagship store on JD.com after earlier acquiring the Chinese giant’s luxury platform, Topline. That was a savvy move, opening up the London-based Farfetch—which had already been working with JD.com, one of its largest shareholders, since 2017—to 3 million Chinese consumers on a platform they were already familiar with. While that number might sound small, given that JD.com serves 300 million people, Marvin Fong, an analyst at BTIG, notes it is still “almost twice the size of Farfetch’s current active consumer base” in China.
The opportunity is huge: A report by McKinsey predicts that Chinese consumers will account for 40% of the world’s spending on luxury goods by 2025, totaling some $175 billion, up from a third now, and a separate report by Bain & Company expects that 50% of those purchases will be made in China, rather than abroad.
But investors are also wary of how much of the sector’s growth is reliant on the country, and the U.S.-China trade war could present challenges.
Investors will also be examining Farfetch’s integration with Stadium Goods, a streetwear and sneaker-focused marketplace that it bought in December for $250 million. In May’s earnings release, José Neves, Farfetch’s founder and CEO, said it was ahead of schedule.
In addition to the fast-growing sneaker segment, Stadium Goods focuses on reselling, another retail craze that investors are betting on. Online luxury consignment shop The RealReal, for example, saw its stock soar more than 40% when it went public in late June.
There’s definitely interest from Farfetch in reselling beyond Stadium Goods, and in May it began testing a consignment platform for handbags. But it might still be too early to tell if this will play a bigger role at the company, particularly as concerns over spending continue.
Just last month, Condé Nast pulled its £234 million stake in Farfetch, reportedly because of the company’s growing marketing spend. And while analysts are estimating revenue will be $199 million for the second quarter, up from $174 million in Q1, they still don’t expect Farfetch to be profitable yet; the company’s Q1 loss after tax was $109 million, and Yruma at KeyBanc doesn’t expect the company to break even (before taxes) until 2021.
The Topline and Stadium Goods acquisitions cost a combined $300 million, but analysts see them as necessary spending to keep the company’s gross merchandise value growing and are urging patience as the luxury industry prepares to make a belated shift online. Still, another quarter of big losses won’t be easy to swallow for a company now more than a decade old.