Luxury Electric Business Ushered In "Strong Typhoon" Frequently Shot Purchase Stock Price Crash

On Thursday, the UK luxury electronics business platform Farfetch announced that it would buy the exclusive dealer of the designer brand Off-White, the full equity of New Guards Group of the Italy multi brand group at the price of 675 million US dollars, and announced the key financial data in the second quarter of this year - the net loss after tax increased 406.9% to 89 million 620 thousand US dollars compared with the same period last year, which made the disappointed investment people lose hope. After the opening of the stock market on Friday, the share price of Farfetch dropped 44.5%.

At present, the market value of Farfetch is $3 billion 40 million, which is 64% lower than that recorded on the first day of the New York stock exchange in September 21st last year. (see: the UK luxury electronics platform Farfetch rose 42.3% on the first day of its listing, and its market value exceeded $8 billion).

By the impact of the Farfetch stock price crash, the share price of The RealReal, the second largest luxury electricity supplier just listed in late June, also dropped by 23.3% on Friday. Despite the broad market prospect of the second hand luxury goods industry, The RealReal, a leading enterprise, has yet to make profits. Similar to Farfetch, while its revenues continued to grow, its losses were also expanding. Net income in the first quarter of 2019 was $69 million, a loss of $23 million (net income for the same period last year was $46 million, net loss of $14 million).

Under the trend of luxury digitization, the development potential of new luxury electric business is generally good for all sectors. However, under the intense online and offline competition environment, the cost of luxury electric business has been climbing steadily, but at the same time, it is under the pressure of discount sales. Leading enterprises such as Farfetch and TheRealReal who have won many rounds of venture capital will inevitably experience the heavy test of capital market after listing.

"Gorgeous ambition" has especially summarized the latest analysis and evaluation of Farfetch in the global capital market, which can be seen from the real incentives behind the stock price crash.

Is New Guards a good move?

The acquisition of Italy New Guards group, the most eye-catching asset is undoubtedly the hottest designer Off-White. But many people still have doubts about how long the brand can last, and question whether the acquisition of New Guards is a correct decision. John Blackledge, a senior Internet analyst at Cowen, said: "at the moment, the heat of Off-White is at its peak, and then it will start to slide."

Another analyst, Ike Boruchow, stressed: "New Guards's profitability is very good, which is good news for Farfetch, but whether they can get along with Farfetch's existing business structure is hard to say.

In view of this doubt, Farfetch CEO Jos e Neves stressed in the conference call: "New Guards's financial situation is very good, they are not looking for buyers, but looking for a strategic partner who can help them develop their business. Our successful business model is why many excellent companies want to cooperate with us. When we find that we have the opportunity to improve our platform, we will seize the opportunity when we find that the deal is consistent with our development strategy. "

　　 Frequent acquisitions, integration takes time.

Since its listing, Farfetch has made many acquisitions. In addition to the newly announced New Guards, they also acquired digital technology start-ups, Curiosity China, New York sports shoes and tide brand consignment trading platform Stadium Goods, and merged Jingdong's luxury electronics platform Toplife. (see "ornate ambition" report: British fashion electronics Farfetch acquisition of China's start-up company CuriosityChina, overweight Chinese market digital marketing; Jingdong's luxury electric business Toplife merged with the British luxury electric business Farfetch China company, Jingdong APP first level access to it; Farfetch purchased New York shoes and tide brand consignment trading platform Stadium Goods for $250 million.

Frequent acquisitions have brought a lot of additional costs to Farfetch and squeezed profit margins. In order to acquire New Guards, Farfetch obtained a $300 million senior secured loan from J.P. Morgan Securities PLC (Morgan Chase). Long losses and continuous acquisitions have led investors to worry about when Farfetch will make profits.

In response, Jos e Neves said in a conference call: at present, their cooperation with Jingdong is still in the early stage of integration, and there is still great room for optimization. They are working closely with Jingdong to promote the traffic and conversion rate of the website. At the same time, they also made localization improvements to China's app and websites. Farfetch only 5% of the products currently sold in China are purchased from overseas. Their luxury fashion supply chain in China is expanding, using local suppliers to provide goods for Chinese consumers to cope with the possible impact of such factors as Sino US trade war.

　　 Down sales growth expectations

The current environment is not too optimistic. Ella Ji, an analyst at China Renaissance, said: "the slowdown in global consumption has begun to affect the fashion industry, and Farfetch is no exception. In addition, their cooperation with Jingdong has not shown any significant results. " Although Farfetch maintained a consistently high growth rate in the second quarter, it reduced its sales growth forecast for the whole year from 40% to 35% to 37%.

On the downgrading of sales growth, Jos e Neves also explained: "in the second half of the second quarter, we found that the overall scale and frequency of discount sales in the retail industry increased. In order to ensure that customers were not robbed by competitors, we were also forced to increase sales promotion efforts at this stage. This prompted us to change the strategy: we can continue to maintain more than 40% growth rate, but this will bring us a lot of marketing costs. We hope to reduce the intensity of discount sales, which will reduce sales growth to 30% to 35% in the second half of the year, but let us have more room for operation and lay a solid foundation for future development. "

Increasingly complex business structure

Frequent acquisitions also pose another problem for Farfetch: the business structure of Farfetch has changed significantly compared with IPO.

"If we look back, it is obvious that the status quo of Farfetch is quite different from that of IPO, especially in terms of business structure." Analyst Ike Boruchow said: "one of the most common feedback we get from investors is that they find it difficult to feel comfortable with Farfetch because their business structure is constantly changing dramatically."

The acquisition of New Guards also exacerbated this concern. 95% of New Guards's revenue comes from wholesale and licensing channels, which makes Farfetch's already complex income flow more complicated.

After the acquisition of New Guards, Farfetch will have five different income streams.

Farfetch revenue generated from the third party transaction on e-commerce platform

Farfetch self catering sales of e-commerce platforms and offline stores (including British buyer's shop Browns). This part of the business has additional risks such as inventory management.

The wholesale revenue of New Guards's brand is estimated to be around 40% of gross profit margin.

Directly sell New Guards's direct selling revenue through Farfetch platform.

Third party retailers sell products from the brand of New Guards on Farfetch platform, bring sales revenue to the brand and deduct income from the platform.

"One of the biggest attractions of Farfetch when they are in IPO is that their business models are very lightweight, without too much assets and low inventories. They are free from the risks that many traditional retailers need to face. They are just a simple luxury trading platform." Marvin Fong, an analyst at BTIG, said: "but after so many acquisitions, Farfetch has become more like a consortium. They have to manage several different assets efficiently. Investors do not like this model."

Luca Solca, a luxury analyst at Bernstein, said: "Farfetch has a long way to go from earnings, and frequent acquisitions make it increasingly difficult for investors to judge whether the business model of Farfetch is effective."

Jos e Neves said that the acquisition of these brands is only a strategy for Farfetch to enhance its competitiveness. For example, the two acquisition in China is to increase the influence in the Chinese market and truly make Farfetch a global luxury platform.

It's not the end of the world.

Although the share price has plummeted, it is not the end of the world for Farfetch. Many analysts have expressed optimism about their future prospects while lowering their target share price for Farfetch.

Financial Services Company Wells Fargo lowered Farfetch's target share price from US $32 to US $17, but maintained a rating of Outpeprfrom for Farfetch shares, and said: "the online luxury market still has great potential for development, especially considering the rapid growth of the Chinese market, which makes Farfetch still have great opportunities for development in the future." John Blackledge, an analyst at Cowen, also lowered the target share price of Farfetch from $33 to $16, but he also stressed: "Farfetch is still the most advanced platform in the global luxury online market."

Farfetch's decision to reduce the frequency of discount promotions has given many people more confidence in them. Ed Farfetch, an analyst at KeyBanc Captial Markets, said: "the decision to reduce the sale of Farfetch will have a certain impact on their short-term sales growth, but I think they are still enjoying a very favorable position in the luxury retail industry. In the long run, this decision will help them."

In addition to Farfetch and TheRealReal, Revolve, the recently successful IPO fashion dealer Revolve, also released quarterly financial data on Thursday. The loss widened to US $28 million 100 thousand due to the large amount of buyback of B stocks (see "ornate ambition"): after the debut of Revolve, the first financial data released by us: Sales and active users grew by more than 20% over the same period last year. By the end of Friday, shares of Revolve Group fell 15.58% to $26.12 per share. Similar to Farfetch, Cowen did not cut Revolve's "win over the market" stock rating, but only lowered the target share price to $40 per share.

In addition, the US monthly subscription of Stitch Fix, a fashionable electricity supplier, also fell by 5.44% on Friday. On Friday, the overall decline in the S & P 500 index was 0.66%.