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 higher 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’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.
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. 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.
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 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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