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Farfetch Files for IPO, Testing Investors' Appetite for Luxury

Farfetch's soaring sales could make for one of the fashion world's biggest public listings in years, though the London-based marketplace has yet to show it can sell luxury apparel online and turn a profit.
Inside Farfetch's Store of the Future demonstration | Source: Courtesy Farfetch
By
  • Cathaleen Chen

LONDON, United Kingdom — Fashion marketplace Farfetch registered Monday to take the company public on the New York Stock Exchange, according to a filing with the US Securities and Exchange Commission.

The company said it plans to raise $100 million, a figure that typically acts as a placeholder when registering for an IPO. The number of shares to be offered — under the ticker “FTCH” — and the price range for the proposed offering have not yet been determined. Earlier this year, some market watchers estimated the company could receive a $5 billion valuation in an IPO.

Founded in 2008, Farfetch has grown into one of the largest luxury e-commerce platforms, with revenue jumping 60 percent to $386 million last year. The company connects consumers with a network of boutiques and brands that sell on its site, taking a commission on each transaction. This year, merchants are on track to sell well over $1 billion worth of luxury goods through Farfetch, up from $910 million last year.

In its IPO registration, Farfetch revealed that its losses also appear to be widening, reporting operating losses of $71.9 million in the first six months of 2018, compared with a $31.4 million loss during the same period last year. The company is investing heavily in upgrading its technology, ranging from data analytics to services retailers can deploy in stores to ease transactions and improve customer service.

“Their priority is going to be basically a platform, a dedicated provider of technology and services,” said Thomas Sineau, an analyst with CB Insights. “That’s where the margin is the highest and potential growth is the highest as well.”

Customer acquisition costs are also rising. Farfetch is one of several companies vying for luxury spending online. Online sales in the luxury market jumped 24 percent in 2017, according to a Bain report, and currently make up 9 percent of the overall market. By 2025, the share of total luxury sales taking place via e-commerce is expected to reach 25 percent. Richemont's Yoox Net-a-Porter is by far the biggest player in the sector, with $2.4 billion in sales last year. Other contenders include MatchesFashion, Moda Operandi and Neiman Marcus-owned MyTheresa.

Net-a-Porter's founder, Natalie Massenet, joined Farfetch's board last year as co-chairman, more than a year after her exit from her own venture.

To stand out among the handful of major luxury e-commerce players vying for the same customers, Farfetch has invested heavily in easing the transactional process and emphasising convenience.

Marketplaces tend to be lucrative, especially with the high margins in luxury fashion

"We started launching more omnichannel propositions, same-day delivery in 10 cities… 'click and collect' in-store and return in-store," Neves said in an interview last year. It's even offering 90-minute delivery for Gucci products, in partnership with the Italian brand.

Farfetch may not be profitable now, but the company’s marketplace model should eventually pay off, said Forrester analyst Sucharita Kodali. She pointed to Amazon, which is reporting consistently higher profits after years of losses.

“Marketplaces tend to be lucrative, especially with the high margins in luxury fashion,” she said. With traditional retailers that buy merchandise at wholesale value, brands themselves are left with a slim profit margin on their products. Farfetch, on the other hand, charges only a commission, therefore allowing brands to keep the bulk of their margin.

Despite its losses now, “there are plenty of opportunities for Farfetch to maintain growth,” she added, as long as the retailer keeps its marketing costs down.

For instance, Farfetch could charge its partners a higher commission as they become dependent on its platform. The company could also venture into lower-scale apparel and accessories down the road, Kodali said.

In the meantime, Farfetch is betting big on data acquisition — another tactic right out of Amazon’s playbook.

Last year, it launched its "Store of the Future" concept: a set of technologies that capture consumer data both in terms of how they behave in stores and how they interact with a retailer or brand offline. For instance, there's a login software that recognises a customer as they check into the store, a clothing rack that detects which products they are browsing and auto-populates their wishlist, a digital mirror that allows them to view their wishlist and summon items in different sizes and colours, and a mobile payment experience.

“It’s just the next step,” Neves said of the project. “How do we go completely, completely into the store? Not just having full visibility of the inventory, and using the physical store as a service point. But how do we go into what we call augmented retail?”

So far this year, the platform has acquired a Chinese digital marketing agency in a bid to boost its presence in the world's second-largest luxury market; inked a strategic partnership with Chanel to enhance the French luxury house's boutique experience; entered into a joint venture with Chalhoub Group, one of the biggest distributors of fashion and luxury goods in the Middle East; and struck a deal with Burberry to expand its global e-commerce distribution and launch a "show to door" London delivery service in a drumroll of announcements designed, in part, to prime the market in advance of its IPO.

Its new customers in the Middle East and China — ushered by a $397 million investment from JD.com in 2017 — that drove the bulk of its growth last year. New consumers in 2017 accounted for 44 percent of its gross merchandise volume, according to the filing.

"We expect growth in new consumers to be driven by further penetration of the luxury consumer market, including growing our business in emerging markets, such as China, the Middle East, Latin America and Eastern Europe," the company said, citing a 2017 Bain study projecting that growth of the global luxury fashion market will be significantly driven by China, the Middle East and Eastern Europe.

Other investors with at least a 5 percent stake in the company include Conde Nast, which sold Style.com to Farfetch last year, Index Ventures, Advent International and Kadi Group.

Farfetch joins a growing slate of companies that went public this year on US exchanges, marking the fourth-busiest year-to-date since 1995, according to Dealogic data cited by the Wall Street Journal. As of July, 120 companies filed for initial public offerings, raising more than $35 billion.

The surge of new stocks can be attributed to a confluence of positive economic factors, including an already bullish stock market and high consumer confidence.

“Now is as good of a time as any for Farfetch to go public,” Modali said. “The markets are doing well, investors are happy and… there’s absolutely an interest for e-commerce.”

StitchFix, a subscription-based retail start-up founded in 2011, was among the latest fashion companies to go public on the New York Exchange. Since its IPO in November, shares have risen over 100 percent.

Goldman Sachs & Co., J.P. Morgan, Allen & Company and UBS Securities are acting as joint lead book-running managers for the proposed offering. Credit Suisse Securities (USA), Deutsche Bank Securities Inc. and Wells Fargo Securities are acting as joint bookrunners. Cowen and Co. and BNP Paribas Securities Corp are acting as co-managers.

Additional reporting by Kati Chitrakorn and Brian Baskin. 

Editor's Note: This article was revised on 21 August 2018. A previous version of this article misstated that Net-a-Porter's 2017 sales totalled $2.4 billion. This is incorrect. Sales generated by Yoox Net-a-Porter Group, the entity formed following the merger of Yoox and Net-a-Porter in 2015, totalled $2.4 billion last year.

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