Farfetch’s Profitability Concerns Are a Sign of the New Normal

Farfetch is facing a challenge familiar to many of today’s fast-growing e-commerce companies: In order to compete in a crowded field, it needs to continue to acquire and retain more and more customers, but doing so means spending cash — and lots of it.

In August, shares of the online luxury fashion marketplace tanked after it reported a net loss of nearly $90 million for the second quarter, up from $18 million in the same period in 2018. That announcement was coupled with the news that the company would spend $675 million to acquire New Guards Group, an Italian holding company with exclusive licenses to the buzzy streetwear brands Off-White, Palm Angels and Heron Preston. All that spending clearly spooked investors: Farfetch’s stock price plunged more than 40% in the wake of the news and hasn’t recovered since.

While Wall Street has, in recent years, given tech unicorns a long leash to pay out in order to chase growth, that’s shifting following co-working giant WeWork’s disastrous failed IPO, which saw the company’s valuation fall from $47 billion to less than $5 billion today. Investors are also placing greater scrutiny on the money spent by multibillion-dollar companies such as Uber, Lyft and Peloton, all of which went public to great fanfare this year.

On Thursday, Farfetch — which, like the others, has yet to turn a profit — seemed to at least give investors hope for a brighter outlook ahead. Its losses for the third quarter narrowed to $85.5 million from $77.3 million last year, and adjusted per-share losses came in at 18 cents, ahead of analysts’ expectations of 37 cents. The news boosted the company’s shares by nearly 30% on Friday.

On a conference call, executives assured analysts that the company has a plan to achieve profitability, which CFO Elliot Jordan said will entail “continuing to grow gross merchandise volume on the back of our superior customer proposition and expanding market… [and] lowering customer engagement costs through use of our data insights, exclusive content on the platform.” He also highlighted the New Guards Group acquisition, which will eventually means the group’s brands are exclusively available on Farfetch: “That provides us with an even better customer experience with opportunity to drive organic growth in a way we’ve not been able to drive that before.”

Wall Street has made it clear that it is watching closely for a sign of the company’s path to profitability: Earlier this week, Bernstein analyst Luca Solca cautioned that the marketplace “burns cash too fast,” writing in a note to clients: “Farfetch is no Uber of luxury goods distribution: most of the luxury goods brands worth their salt already have limousines of their own. The viability of a business model focused on providing the most aggressive prices is questionable.”

For Farfetch, being compared to Uber “is the last thing in the world that they want,” said Jon Reily, head of global commerce strategy at Publicis Sapient, a digital consultancy. The ridesharing giant has seen its stock plunge 40% from its $45 May IPO price as concerns mount about whether it will ever be able to stop bleeding cash and become a profitable company.

While Uber has additional challenges — including a debate over whether its workforce of independent contractor drivers should be classified as employees — said Reily, “Farfetch’s biggest problem is that there is a ton of competition out there, both in physical retail as well as digital retail.” Also, though the fact that the company doesn’t hold inventory means it bears less risk itself, “they are a little bit at the whim of the designers, and the designers don’t necessarily need them in order to be successful themselves because they have their own vehicles toward success.”

The task for the company now will be proving that its scale, technological and logistical prowess and roster of more than 3,000 brands will be enough to keep shoppers coming back over its competition, which includes heavyweights such as Yoox Net-a-Porter, Matchesfashion and Ssense.

Founder and CEO José Neves said the company has seen existing brands double down on the platform this year: “We believe Farfetch is the sole multi-brand luxury platform who can offer brands the advantages of a direct-to-consumer e-concession model, including full control over merchandising and pricing, as well as higher margins as compared to the only alternative, which is wholesale distribution.”

The additional pressure isn’t unique to Farfetch; e-commerce companies across various stages are contending with a more cautious environment post-WeWork.

According to Andrea Hippeau, principal at the venture capital firm Lerer Hippeau, whose portfolio includes Allbirds, Everlane and Le Tote, “If private and public markets sour on DTC, companies will need to control their own destiny and there is only one way to do that: profitability. When we invest in a new DTC startup, we don’t expect them to be profitable from day one, but we definitely want to see the roadmap to get there.”

For Farfetch and other fashion-tech giants, the worry is that achieving profitability amid such fierce competition will be like “the task of redesigning a malfunctioning aircraft” while it’s flying, as Solca put it.

“Obviously everybody wants to be profitable,” said Reily. “That said, I think we’re sort of crossing the cusp of investors now starting to think, ‘Wait a minute, this isn’t sustainable. There’s too much money being spent here.'”

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