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Farfetch Limited (FTCH) Q2 2023 Earnings Call Transcript

Farfetch Limited (FTCH)

Q2 2023 Earnings Conference Call

Company Participants

Alice Ryder - VP, IR

Jose Neves - Founder, Chairman & CEO

Stephanie Phair - Group President & Chair of NGG

Elliot Jordan - CFO

Conference Call Participants

Douglas Anmuth - JPMorgan

Jason Helfstein - Oppenheimer

Ashley Helgans - Jefferies

Stephen Ju - Credit Suisse

Oliver Chen - Cowen

Edward Yruma - Piper Sandler

Presentation

Operator

Good afternoon, and welcome to the Farfetch Q2 2023 Results Conference Call. My name is Luke, and I'll be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you.

I'd now like to turn the call over to Alice Ryder, VP of Investor Relations. Ms. Ryder, you may begin your conference.

Alice Ryder

Hello, and welcome to Farfetch's second quarter 2023 conference call. Today's update will include prepared remarks from Jose Neves, our Founder, Chairman and Chief Executive Officer; Elliot Jordan, our Chief Financial Officer; and Stephanie Phair, our Group President and Chair of NGG. Jose and Elliot will also be available to take questions following the remarks.

Please note that unless otherwise stated, all comparisons on this call will be on a year-over-year basis. During today's call, we will also be displaying a slide present throughout our prepared remarks, which can be accessed as part of the live webcast at farfetchinvestor.com. Following the call, the presentation will also be uploaded to the site.

Before we begin, we would like to remind you that our discussions today will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to publicly update or revise them. For a discussion of some of the important risk factors that could cause actual results to differ, please see the Risk Factors section of our Form 20-F filed with the SEC on March 8, 2023.

In addition, we will refer to certain financial measures not reported in accordance with IFRS on this call. You can find reconciliations of these non-IFRS financial measures to the IFRS financial measures in our earnings materials which are available on our website at farfetchinvestors.com.

And now, I'd like to turn the call over to Jose.

Jose Neves

Hello, and thank you for joining us today. I am delighted to be taking you through our Q2 results, a quarter which saw an acceleration of our digital platform growth as well as further progress across key strategic priorities for 2023. And thanks to the decisive actions we've already taken in terms of fixed costs, we are confident we remain on track to be adjusted EBITDA profitable and free cash flow positive for full year '23.

Before we dive into the details about our results and outlook, I think it's important to take a step back and look at the long-term opportunity for Farfetch. As a Founder of Farfetch, I am proud to be celebrating our 15th anniversary in the coming weeks. Since our founding, our strategy has been to build Farfetch to become the global platform for luxury by developing a platform with unrivaled technology, logistics and data capabilities.

And in parallel, we built a global community of boutiques, brands and customers across all major luxury markets in the world. This strategy remains our North Star. And thanks to our progress on all of these fronts, today, we occupy a unique leadership position in global luxury with an extremely exciting future ahead. Underpinning the strategy, Luxury has continued to demonstrate its resiliency and has become an integral part of culture, now more than ever before, which I believe will pave the way to many more years of industry expansion.

Still, the digitization of luxury is in its early innings with digital sales just over 20% of the mix, but expected to expand to over 30% by 2030. This means Farfetch as a leader at the intersection of technology and Luxury is poised for significant growth and profitability. This reinforces our confidence in our previously stated plans to scale to a $10 billion GMV business, generating approximately $400 million in adjusted EBITDA and strong free cash flow by 2025.

In spite of the unprecedented macro challenges since 2022, the decisive actions we've taken in light of these factors make me as confident as ever in our prospects for achieving these targets. The events of 2022, which led to the stoppage of our business in Russia, then our third largest market, a slowdown in China and adverse FX all amidst considerable macro volatility in U.S. and Europe, raised an imperative for decisive action.

As a result, in 2022, we moved swiftly to implement a significant set of actions on costs and capital allocation, making profitability and cash generation and non-negotiable priority over growth after a 14-year stretch of rapid expansion. This is now set as our philosophy for cost and capital allocation moving forward. These decisive actions included not only reductions in head count and other fixed costs, but also a complete redesign of our organization structure and a significant bolstering of our leadership team.

And this June and July, we went even further. We doubled down and executed the most significant cost rationalization in our history as a company. Specifically, the actions taken in the past two months are expected to eliminate $150 million of planned 2023 fixed costs through the remainder of the year. This means G&A and technology expenses are now expected to be a combined $800 million for full year 2023 as compared to the previous guided $950 million. This delivers $50 million in savings versus 2022 despite incremental resources to support the launch of Reebok and new FPS launches planned for 2023 and 2024.

Just in this last round, we've removed approximately 800 roles are over 11% of starting head count in 2023. As a result of these reductions as well as other cost cuts, costs related to some of our key teams such as our marketplaces, technology, finance, legal and people teams will be back to 2020 spend levels. which means they have essentially rolled back three years of fixed cost expansion. And the cost of our operations, which provides end-to-end part of others are only expected to be 25% above 2020 levels whilst other volume is running 60% higher than three years ago.

Finally, NGG and FPS costs were also rationalized. As these reductions are structural in nature, we expect even greater savings for full year 2024, which we believe increases our ability to achieve our stated 2025 profitability goals. This also means we have made a range of business decisions, including discontinuing beauty as a category on the marketplace and exploring strategic options for Violet Grey, further reduction in our real estate footprint, closing several offices and profitable retail locations worldwide, and concentrating NGG's resources on key brands among several other actions across the Farfetch Group.

I want to emphasize a very important point here. Our North Star remains absolutely intact. Amidst executing the strategy of decisive action we remain focused on delivering on all the strategic initiatives discussed in our Capital Markets Day. Our 2023 FES launches remain on track, including the continued global rollout of Ferragamo as well as Bergdorf Goodman, which is expected to launch in Q4.

I am delighted to report that we launched three additional e-concessions as-a-service brand for Harrods. And that Harrods have also proactively initiated and signed an early renewal of their SPS contract, which extends our partnership into 2028. Additionally, our announced with Richemont continues to advance through the regulatory review process. We continue to work closely with regulators to obtain the final outstanding approvals for the transaction, following approvals in the UK, China and Italy among others.

As a reminder, approval is not required in the U.S. I am confident the combination of our decisive actions in terms of focus on profitability and cash generation and our unwavering commitment for our long-term vision will result in more big wins across our key strategic initiatives while driving us towards achieving our stated 2025 profitability targets.

Turning now to more recent trends. I'm pleased to report Farfetch continues to grow in Q2 with digital platform GMV up 7% and a stronger profitability profile. Total G&A and technology expense was 7% lower. And our focus on cash generation means free cash flow was positive for the quarter. I want to highlight that across most regions, our marketplace business is performing very strongly.

In Q2, GMV in EMEA grew double-digits. And in the Americas, excluding the U.S., it grew more than 20%. Overall, active customer growth was 7% and other growth was 9%. Our margins remained stable with digital platform or the contribution margin of 31%, and brands and boutiques continue to double down on Farfetch with over 40% unit growth of supply.

In U.S., GMV accelerated with Q2 performance sequentially better, although, still single-digit negative year-on-year together with a 10% reduction in demand generation spend. However, as in the case of many others in the luxury industry, we have seen a less buoyant luxury customer in the U.S. We have seen similar macro dynamics in Mainland China. Although, we are seeing improvements with Q2 performance sequentially higher, GMV was also in single-digit decline.

The reality is that the recovery has not been as robust as we had expected when we reported our Q1 results. And as a consequence, we have also reduced demand generation investment in this region. Like in the U.S., we believe this is not Farfetch specific as other luxury brands have similarly indicated China is not growing as quickly as previously expected after its reopening in December.

Whilst brands are reporting strong in-store growth against comps during the previous years, strict lockdowns, online sales have not recovered as quickly as expected by many in the luxury industry. The slower recovery in these two large markets, offsetting the strong momentum we continue to expect in most other regions leads us to moderate our second half 2023 growth expectations for the marketplace.

Our group outlook for 2023 also factors in recent developments in NGG's business, which Stephanie will discuss. Overall, I am delighted to confirm Farfetch is growing. Our key strategic initiatives remain on track. And thanks to the decisive actions we've already taken in terms of fixed costs, we are confident about our objective to be profitable at the adjusted EBITDA level and generate positive free cash flow for full year 2023.

Turning to our executive team and the evolution of our organization. Tim Stone has joined Farfetch to assume the CFO role as Elliot Jordan ends his more than eight-year tenure at the end of this month. We're delighted to welcome Tim to Farfetch. He has 20 years’ experience at Amazon and was also CFO of Ford. Tim brings extensive knowledge of best-in-class customer-centric marketplaces and e-commerce platforms, along with experience in scaling SaaS businesses, proficiency in both 3P and 1P businesses and has a deep understanding of digital as well as physical retail.

He shares my vision of building Farfetch as a leading company at the intersection of tech and luxury with a very strong profit and free cash flow generation profile for the long term. Team is moving to London this month and will be a key member of the executive team taking Farfetch to its next level. And he has big shoes to fill. Elliott leaves with the fondest of memories and will always be an important part of the Farfetch history. Having joined Farfetch as our first CFO and partnering with me to multiply our revenue by 16 times during his tenure, transition the company from private to public and leading so many amazing teams and projects....

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