When Farfetch made its $6bn debut on the New York Stock Exchange last September, the online marketplace was unlikely to predict it would face legal action from disgruntled investors less than a year later.
However, cut to August 2019 and the luxury fashion specialist’s market capitalisation has fallen to little more than £3bn after posting a wider than expected loss after tax of $89.6m (£73.3m) for the second quarter of its financial year, compared with $17.7m (£14.6m) during the same period the previous year.
Adjusted EBITDA losses also spiralled to $37.6m (£31.1m) in the quarter, compared with $25.4m (£21m) the previous year.
“With over $1bn worth of acquisitions in under a year, Farfetch is unlikely to come back into the black any time soon”
Despite a healthy 43% spike in revenue to $209.3m (£172.1m), Farfetch has come under fire as US law firms – Hagens Berman, Holzer & Holzer, Glancy Prongay & Murray, Johnson Fistel and Howard G. Smith – issued alerts to investors to join class actions against the business.
Hagens Berman said it is pursuing the legal action due to “possible disclosure violations” by Farfetch concerning “the veracity of [its] statements about the company’s business model, particularly related to [its] growth and profitability”.
Big spender
Perhaps adding fuel to the fire for disgruntled investors, Farfetch unveiled the $675m (£552m) acquisition of luxury brands platform New Guards Group alongside its ballooning losses, a move Farfetch founder and chief executive José Neves said “will transform the luxury industry”.
Neves hailed “market-leading growth” at New Guards, which was founded in 2015 and owns rapidly growing luxury label Off-White, but analysts warned the acquisition and integration of New Guards could keep Farfetch in the red longer than had previously been expected.
The bigger underlying question is more existential – should the fashion etailer be investing so heavily in other businesses at a time when its own losses are already widening?
This is not the first time Farfetch has drawn fire from investors for its spending habits. One of the luxury fashion retailer’s earliest investors, magazine titan Condé Nast, pulled its $293m (£234m) stake in the business in July, reportedly triggered by concerns about how much the platform was spending on marketing.
New Guards is the latest in a string of acquisitions by Farfetch since its IPO, including sneaker marketplace Stadium Goods in December and Chinese etail titan JD.com’s luxury ecommerce arm Toplife in February, which cost a combined $300m (£248.5m).
Farfetch is eyeing rapid growth categories to supercharge performance in the coming years. The retailer’s investment in Chinese luxury ecommerce comes as the country’s shoppers are forecast to comprise 40% of luxury spend by 2025, according to McKinsey, while Bain & Co predicts that 50% of China’s luxury fashion purchases will be made domestically by that time.
Its acquisition of Stadium Goods comes at a time when streetwear has become a driving force of customer spend in the luxury market, and the purchase of New Guards will enable Farfetch to develop its own private-label collections with similar turnaround times to fast-fashion stalwarts.
In April, New Guards co-founder Davide de Giglio said the business’s technology and systems enable it to produce high-end T-shirts, sneakers and leather items in three weeks – a pace that is far from commonplace in luxury fashion today but is increasingly expected by consumers.
How far?
From streetwear to fast fashion and China, Neves is arguably backing all the right horses in terms of investment. And, as etail powerhouse Amazon has demonstrated, continual investment in the future – sometimes at the cost of the current quarter – can be a vital ingredient of long-term success.
But do investors have the patience required to continue to back Farfetch while they wait to see if the many bets pay off?
“The question is how long investors will be willing to wait for Neves’ vision for the future of fashion to become a reality”
While New Guards’ growth is impressive – sales rose 59% year on year in the 12 months to April to $345m (£285.8m), according to Business of Fashion – it is a relatively new and untested business.
With over $1bn worth of acquisitions in under a year, Farfetch is unlikely to come back into the black any time soon.
Farfetch still has a slew of high-profile investors from Felix Capital to Index Ventures and Natalie Massenet – the etailer’s co-chair and co-founder of fund Imaginary Ventures.
The question is how long they and the luxury fashion marketplace’s other investors will be willing to wait for Neves’ vision for the future of fashion to become a reality.
It has plenty still to do to prove it is the ‘Amazon of luxury fashion’.
Tech. 2019
Sara Wood, EVP of product at Farfetch, will be speaking at Tech. 2019 in London in October. To see the packed programme and buy tickets visit www.tech-festival.com
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