What a difference a year can make.
Around this time last year, José Neves, chief executive officer and co-chair of luxury platform Farfetch, was receiving an extremely warm welcome at the New York Stock Exchange, watching his company’s shares soar to $28.45 during the company’s first day on the public market.
Now, just one day shy of the one-year anniversary as a public company, it’s a very different story, with investors’ feelings towards the company having chilled. The stock fell 4.8 percent Thursday to a record-low close of $8.89.
So what went wrong for the one-time stock market darling and is it able to win back investors’ confidence?
Farfetch’s troubles began in early August, when its share price plunged more than 40 percent in one single after-hours trading session, following the release of its second-quarter financials and news that it paid $675 million for Off-White licensee New Guards Group.
Neves told WWD at the time: “I will not comment on stock prices. I never do. Our job is to remain focused on executing a very exciting strategy and opportunity.
“We always said that this is about building the global platform for luxury. We always said that M&A would be part of our tool kit. I think it’s the result of our success and our execution as a platform that we’ve had absolutely world-class companies speaking to us and actually partnering with us.”
It was unclear then whether investors were fretting over the shaky financials showing wider losses or the company’s latest acquisition, but according to several analysts who spoke with WWD, it was both.
The acquisition certainly came as a surprise to investors, especially since it was so hot on the heels of the $250 million purchase of sneaker and street wear platform Stadium Goods at the end of last year, plus the $50 million it spent on independent luxury Chinese shopping platform Toplife just two months later.
“For a company that’s losing money right now, I think investors were surprised that they announced the reasonably big acquisition of Stadium Goods and then announced an even bigger acquisition of New Guards group relatively quickly — probably even before they finish fully integrating Stadium Goods and see the benefits of that,” said Jason S. Helfstein, a managing director at Oppenheimer & Co. Inc.
The move also led to confusion about Farfetch’s business model. That’s because the acquisition of Milan-based New Guards, which owns or has the license for a number of buzzy street wear brands including Heron Preston and Palm Angels, brought the company further into the first-party fashion world, clashing with its origins as a third-party platform that connects customers, brands and retailers around the world.
“I think New Guards is really the one that threw people for a loop,” said Marvin Fong, an e-commerce analyst at BTIG, adding that purchasing the Milan-based company has clearly altered Farfetch’s business model from where it was just a year ago.
“Investors I talk to generally understand it’s an opportunistic deal, but there is a lot of confusion. I think there’s some confusion also on the economic impact and was this acquisition done because there’s something wrong with the market place business,” he said.
At the same time, the company’s second-quarter earnings report also spooked investors. While revenue increased 43 percent to a record $209.3 million, its after-tax loss widened 407 percent year-over-year, fueling concerns about just when the company will become profitable.
In particular, analysts zeroed in on reduced guidance for gross merchandise value on the back on heavy promotional activity across the industry. Many analysts had expected its guidance to increase, primarily due to the Farfetch’s push into China.
But for now, its appears that all is not lost as many analysts are still betting that Farfetch’s stock can bounce back, although much will depend in the short-term on what guidance it provides in its third-quarter earnings statement due out in November.
“Everyone’s kind of waiting for the third quarter report to see if they can really deliver on the margin improvement. If they’re going to let growth decelerate and also if margins don’t recover that will introduce a whole new can of worms,” Fong said. “If the company does show any kind of positive sign the stock could really rebound very strongly….There’s pent up momentum like a rubber band and the snap back could be quite violent.”
Oppenheimer’s Helfstein, for one, is targeting $25 a share, but that’s over a 12-to-18-month period as he believes it will take time for Farfetch to deal with certain headwinds it is facing, such as discounting. He noted that brands are trying to figure out how to bring greater discipline to online channels to prevent aggressive in-season discounting, but the earliest it looks like that can be addressed is March of next year as the fall/winter inventory has already been ordered.
“While Farfetch is still expecting to grow their gross merchandise value and their gross profit in the next few quarters, you probably won’t see an inflection, meaning a re-acceleration in the growth, until sometime early next year and I think investors are digesting if they need to get involved in the stock now, albeit at a very attractive valuation or they should just wait,” he said.
Jonathan Blackledge, an analyst at Cowen, meanwhile, is forecasting a price target of $16, with an “outperform” rating as he thinks Farfetch’s thesis still “largely intact”.
He stressed, however, that key risks include the fact that brands such as Off White may be near peak popularity and that Farfetch could face competition from department stores that appear willing to fight for market share through aggressive promotions at the expense of margin contractions.
According to Luca Solca, an analyst at Bernstein, Farfetch could “potentially recover” if it sticks to its guidance and core business — that of distributing luxury products online.
“The stock has been severely punished as senior management has strayed from their IPO mission,” he said.
Perhaps it’s just that not everyone has exactly the same notion of what Farfetch’s mission actually is.
As Neves told investors last month: “Our strategy has not changed. So we want to be the global platform for luxury. I think this acquisition [of New Guards] extends the platform vision upstream, so this means that we as a brand platform to our existing infrastructure and the New Guards really works as a platform and this is actually how they define themselves.”
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