Going public has its tradeoffs. A company can raise a lot of money by listing its shares. But it also becomes beholden to a whole new set of investors, who now shape the company’s story via its stock price. It’s a challenge Farfetch has been grappling with as it approaches the one-year anniversary of its initial public offering.
Farfetch is something like an Amazon marketplace for high-end fashion. It provides a platform for boutiques around the world to sell their wares, without having to carry any inventory itself. Once it had investors excited about its potential to grab a big piece of the growing luxury e-commerce business. Now it has them worrying about its spending and whether it can find a path to profitability.
Shares of Farfetch plummeted nearly 50% today following the release of its second-quarter financial results along with news that it had acquired New Guards Group.
Just before market close on Thursday, the online fashion platform announced the $675 million purchase of the streetwear-centered firm, which holds exclusive licenses for buzzy labels including Off-White, Palm Angels and Heron Preston.
Farfetch priced its IPO at $20 a share. Since debuting at $27 in September 2018, Farfetch’s shares have been on a rollercoaster, dipping below $20 within a couple of months, rising again a few months later to just under $30, and then plunging to around $11 after the company reported worse-than-expected quarterly earnings on Aug. 8.
The fall has been great enough that five law firms have said they’re looking into class-action suits against Farfetch, alleging the company may have misled investors about its business, The Times (UK) reports. These sorts of legal actions often arise when a company’s share price falls substantially. Typically they don’t amount to much. But it’s undoubtedly a position Farfetch didn’t want to be in—certainly not within its first year as a public company. (Farfetch had no comment when contacted about the allegations.)
By some measures, the company’s performance has been solid. Sales, for example, are still rising quickly. Both its gross merchandise value, which measures how much inventory it has sold, and revenue have been growing at levels at times exceeding 50% year-over-year. The company also has continued to bring more brands onto its platform, such as Jil Sander and Stella McCartney, while expanding the supply of items from existing partners, including Versace and Valentino.
At the same time, Farfetch has been recording losses well in excess of what investors have expected to see. In part they’re the result of a shopping spree that saw Farfetch acquire sneaker reseller Stadium Goods in December for $250 million in cash and stock. Earlier this month, Farfetch announced its purchase of New Guards Group, the exclusive license holder for designer labels including Off-White, Palm Angels, and Marcelo Burlon, for $675 million.
The spending, along with intense pressure to discount products, contributed to a loss of nearly $90 million in the recent quarter, which triggered the stock selloff.
Farfetch has said the deals are investments to help it expand its offering, especially in the hot categories of sneakers and streetwear (paywall), bolstering its own business in the long-term and those of the acquired companies. New Guards Group, for instance, is a “brand platform” that effectively gives Farfetch the tools to easily launch a label from scratch—a fashion equivalent, GQ called it, of Netflix creating original content. The deal will also see Farfetch ramp up the online direct-to-consumer sales of New Guards brands such as Off-White.
But investors seem to feel Farfetch has yet to shore up its core business. In a note to investors, which one of the firms investigating Farfetch even quoted, Wells Fargo analysts noted that Farfetch’s “story has changed meaningfully since the IPO.”
Investors expressed worries over the wider-than-expected losses due to high acquisition costs and spending on its tech infrastructure, sending Farfetch’s stock down more than 40% during yesterday’s extended trading session.
During a conference call, CEO and co-chair Jose Neves attempted to calm Wall Street’s nerves, describing the New Guards purchase as the latest addition to a portfolio of what the company calls “brands of the future.” By skewing more direct-to-consumer, Neves said he expects higher organic traffic and stronger brand adjacency — a strategy that experts say have proven to work for luxury platforms.
Additionally, the exec singled out Off-White as one of the company’s top 10 brands over the last eight consecutive quarters and revealed plans to take Virgil Abloh’s label from majority wholesale to direct-to-consumer.
“This September marks one year since our IPO, and we said then that it was our strategy to be the platform for the global luxury industry, connecting curators, creators and consumers,” Neves said. “Our acquisition of New Guards also fits squarely within this strategy as it enables us to further elevate our brands, boost full-price mix, reduce promotional activity and offer original and exclusive content.”
The transaction is expected to close in the third quarter.
It’s been just under a year since Farfetch filed its IPO, bringing more attention to the intersection of luxury and technology amid competition from high-end marketplace retailers like Net-a-Porter and MatchesFashion.com.
But the online fashion platform has changed dramatically since its public offering in September, particularly with the New Guards acquisition — adding to its roster of sneaker-first platforms Browns and Stadium Goods.
The latter, which was acquired in December through a $250 million deal, gave Farfetch a portal into the swiftly growing luxury streetwear market — a sector worth an estimated $70 billion in 2017 and that continues to grow 5% year over year, according to management consulting company Bain & Co.
“The lines between high-end fashion and streetwear continue to blur,” added Matt Powell, senior industry advisor of sports at The NPD Group Inc. “The principle of scarcity — [where there is] limited access or low supply and high demand — drives both sectors.”
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 [options] such as social media,” he said. “There are still opportunities to bring that down as we build organic engagement.”
As of Friday afternoon, Farfetch’s stock was in the red 45% to $9.94.