Farfetch Earnings: U.S. and China Weak, New Guards Performance Disappoints

We are reducing our fair value estimate for Farfetch FTCH from $12.20 to $11.40 as we lower our assumptions for the current year’s growth and profitability, due to weakness in the company’s main markets (the United States and China) and sluggish revenue development for its New Guards Group. We still see Farfetch’s shares as undervalued, but continue to prefer Zalando ZLDSF in the online apparel space, based on its bigger scale and sounder financial position.

Digital platform gross merchandise value, or GMV, was up 7% in the quarter, with 7% growth in active customers even as it declined by a single digit in the U.S. and China. The downgraded outlook for 10% growth in GMV now implies an ongoing mid-single-digit decline in these regions for the rest of the year.

The main disappointment was New Guards Group, which saw a 42% decline in constant-currency brand platform GMV in the quarter. Farfetch attributed this to delays in wholesale stocking and onboarding challenges with the Reebok launch. GMV for this division is expected to be flat for the year as weakness in core brands is offset by Reebok.

We have previously forecast volatility for New Guards, given the early stage of brand development, which we will bring forward. We have also observed weaker performance from less established, more wholesale-driven brands at other luxury companies—notably mid-single-digit growth for Moncler’s MONRF Stone Island, with a 25% decline in the Americas market in the quarter.

New Guards remains important to Farfetch’s profitability, with a 67% adjusted EBITDA contribution by 2025, assuming a 20% margin, as projected at the Capital Markets day last year. Farfetch is reducing costs to shore up profitability, and it added $200 million of a term loan, with net proceeds of $180 million. This should be sufficient to cover liquidity needs for now, since the business still absorbs cash.