What the Potential Richemont Deal Means for Farfetch | This Week in Fashion, BoF Professional

The stakes just got higher for a deal between Farfetch and Richemont.

On Thursday, Farfetch reported earnings that missed forecasts on both the total value of merchandise sold during the quarter ending Sept. 30 (they were up 23 percent instead of 30 percent year-over-year) and adjusted EBITDA, or earnings before interest taxes depreciation and amortisation (generating $5 million instead of $10 million year-over-year).

Plenty of other online retailers have reported a similar slowdown, after red-hot growth during the first year of the pandemic, when many consumers had no alternative but to shop online. Farfetch is also dealing with higher shipping costs and Apple’s new privacy rules just like every other retailer.

But for investors, the most compelling aspect of the Farfetch story was always its meteoric growth, which would someday soon lead to profits. Thursday’s results inserted a little doubt into both dreams. Farfetch’s stock plunged 10 percent Friday morning.

In an interview, founder and chief executive José Neves focused on the big picture, reiterating that Farfetch is still the market leader in online luxury, and still on track to achieve many of its original goals for the year in terms of growth and adjusted EBITDA. He attributes volatile sales to the unpredictability of the pandemic. He pointed to strategies that should bear fruit in the short- and medium-term, like increasing its fulfilment services clients to get better shipping rates, increasing the advertising it sells on its platform, launching beauty and continuing to expand in China.

Even so, analysts say Farfetch could really use a potential tie-up with Richemont and Farfetch’s largest competitor, Yoox Net-a-Porter (YNAP).

Last week, both companies confirmed the discussion of four different points: Farfetch could invest in YNAP along with other companies; YNAP could adopt Farfetch’s back-end technology; Richemont could contract Farfetch to power all of its brands’ e-commerce sites; and Richemont could start to sell its brands on Farfetch’s marketplace.

Neves said Thursday he had nothing to add to the statement that confirmed the advanced talks last week and promised no set outcome.

But clearly Farfetch stands to benefit the most from a deal that involves the addition of Richemont’s brands as clients both on Farfetch’s marketplace and, along with YNAP, on its white-label e-commerce platform.

Such a deal should boost Farfetch’s customer base and revenue and increase the supply of products it offers, driving increased profitability and growth, wrote Cowen’s Oliver Chen in a note on Thursday. Farfetch could also gain from YNAP’s curation and branding capabilities, which still sets the business apart from Farfetch.

Bernstein’s Luca Solca said “an outright majority acquisition of YNAP [by Farfetch] could raise questions, depending on the dilution it involved,” though the companies have only said a minority stake was under discussion so far.

E-commerce consultant Michel Campan said working with YNAP could at the least be a way for the marketplace to land a major new customer.

“The key in e-commerce is the acquisition of clients,” he said.

Indeed, the industry’s largest luxury brands are focused on funnelling more of their sales through their own direct-to-consumer e-commerce businesses, raising an existential threat for companies like Farfetch and YNAP that depend on their business to draw customers.

Farfetch, with its asset-light marketplace model, was already emerging as the preferred type of partner for major luxury brands moving away from wholesale, and competitors like Mytheresa and YNAP have added marketplace or e-concession options to appeal to them too.

Landing Richemont as a client would be a big get, though Campon said hard luxury will be trickier for Farfetch to sell due to the category’s different type of clientele and seasonal calendar.

But Farfetch is probably more interested in powering Richemont’s brands on their own channels, which could encourage other luxury brands to follow suit. Currently, Farfetch’s clients in “platform solutions” include Harrods and Burberry.

“I believe we are one of the few marketplace [software as service] solutions in fashion and, in my view, the only one with at-scale credentials in luxury,” said Neves on the call with analysts Thursday. “[This] represents a very large opportunity for Farfetch in the long term.”

THE NEWS IN BRIEF

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THE BUSINESS OF BEAUTY

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PEOPLE

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MEDIA AND TECHNOLOGY

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Compiled by Joan Kennedy.