What's going on with Farfetch?

Hello, is anybody home? $FTCH

Dec 13, 2023

I’ve previously written about Farfetch here, here and here.

So, let’s start with the facts. On November 28th, the company was expected to report Q3 results after-hours. During the trading session the share price spiked as rumours came out that José Neves (CEO and Founder) was planning to take the company private… The stock closed up 22%.

After hours I received an email with the following:

Farfetch Will Not Announce Third Quarter 2023 Results
November 28, 2023
LONDON--(BUSINESS WIRE)-- Farfetch Limited (NYSE: FTCH), the leading global platform for the luxury fashion industry, will not announce its third quarter 2023 financial results and will not hold its related conference call previously scheduled for Wednesday, November 29, 2023. The company expects to provide a market update in due course.
The Company will not be providing any forecasts or guidance at this time, and any prior forecasts or guidance should no longer be relied upon.

“Ok, so is there a buyout actually in the works?” was my first thought.

Next morning Richemont, the luxury behemoth and Farfetch strategic partner came out with their own press release. It was baffling, and still is.

Richemont notes the media reports on and announcement by FARFETCH on 28 November 2023
Following the recent media reports on and announcement made by FARFETCH on 28 November 2023, Richemont would like to remind its shareholders that it has no financial obligations towards FARFETCH and notes that it does not envisage lending or investing into FARFETCH.
Richemont is carefully monitoring the situation, including reviewing its options in respect of its arrangements with FARFETCH announced on 24 August 2022, which remain subject to certain terms and outstanding conditions. Neither Richemont Maisons nor YOOX NET-A-PORTER (“YNAP”) have currently adopted FARFETCH Platform Solutions and they continue to operate on their own platforms.
Richemont will make a further announcement if and when appropriate.

“Does not envisage lending or investing in FARFETCH?”

This was in response to rumours that Jose would be leveraging his two biggest strategic partners Richemont and Alibaba to take the company private. Well, scratch Richemont out of this deal.

“Reviewing its options??!?!?!…..”

This refers to the August 2022 deal between Farfetch and Richemont for the latter to sell YNAP (their e-tailer subsidiary) to Farfetch in exchange for shares in a complex deal with multiple stages that I care not to revise right now — but I can tell you it was big for the sector and big for Farfetch too.

The deal even included an agreement where the Farfetch FPS segment (the technology services stack) would start working with Richemont brands heavily and a deal where the Farfetch marketplace would start selling Richemont brands directly.

This was big for Farfetch, is all this in the water now?

Anyway this Richemont announcement was a big hit for Farfetch morale and the share price sank some 50% the next day. The stock then stabilised until Monday December 11th where articles from the media and credit downgrades from Moody’s and S&P pummelled the stock hard, taking it from $1.20ish to half that as I write this now.

There was one key piece of “evidence” from Farfetch last week though..

On December 6th the issuer (Farfetch, that is) filed a REPORT OF FOREIGN PRIVATE ISSUER to inform the public that:

On November 30, 2023, J. Michael Evans tendered his resignation from the Board of Directors (the “Board”) of Farfetch Limited (the “Company”), with immediate effect. Mr. Evans’s resignation from the Board was in furtherance of the arm’s length commercial relationship between Alibaba Group Holding Limited, where Mr. Evans serves as President and a member of its board of directors, and the Company. Mr. Evans’s resignation was not the result of any disagreement with the Company or with its operations, policies or practices. He leaves with sincere thanks for all he has contributed to the Board and the Company, along with our best wishes for the future.

So this means that actually something may be cooking between Farfetch and Alibaba and Evans had to resign to avoid any conflicts of interest, obviously. It’s been 7 days though and yet no deal has been announced or agreed. Literally zilch from the company. Zero transparency from Farfetch and investors are fuming.

Endless rumours about fraud, liquidity issues, solvency issues, imminent bankruptcy and a zig-zagging share price makes this festive December hell for retail and professional investors alike.

P.S. I put FOREIGN in bold letters because a foreign private issue doesn’t need to file a quarterly report, making Farfetch compliant! All they need to do is file their annual report on time.

What could have caused this?

I don’t believe Neves intends to take Farfetch private — I say this because he doesn’t have the money firstly, and secondly because he literally has no reason to do so. That would just load him up with more debt and reduce flexibility.

Could there have been some backroom issues with Richemont complaining about the share price and announcing that they were considering pulling back from the deal? Possibly.

Would that freak out Neves and cause him to start trying to fix the issue? Possibly.

If so, why would Richemont come out with the announcement stated in this article above? I don’t know. Chicken and the egg.

Does Farfetch have solvency issues?

Not in my view. The company has a number of important/high revenue strategic partnerships coming online in the following quarters which would increase GMV/revenues and put it in a much better place operationally.

Debt maturities are further down the line and the company has ample time to adjust to the current macro environment which was admittedly very tough.

Farfetch lost the Russian market overnight and had to grapple with lingering environments in China and the USA while their cost structure was over-bloated coming out of an explosive Covid-induced 2021. (They have made cost cuts since and still cutting)

On top of this their balance sheet became overextended with cash being allocated to growth initiatives, working capital requirements and even stuck in VAT receivables..

BROWNS (SOUTH MOLTON STREET) LIMITED

But Farfetch has many assets it could divest to raise cash if need be. Rumours last week mentioned that Neves may be looking to sell Brown’s Fashion, a boutique and online retailer Farfetch bought in 2015 from the Burnstein family.

Company filings show that Brown’s revenues have exploded since the acquisition (20X up!), as well as inventory balances and monies owed to Farfetch (the parent). Divesting that asset could raise 400-500mln GBP* for Farfetch — plugging any potential liquidity gaps. Farfetch could even offload other non-core assets like the Sneakers-focused marketplace Stadium Goods.**

*Why do I say 500mln GBP? Because, as of year end 2022, Browns owed Farfetch 170mln and held an inventory balance of 154mln. These two lines add up to 324mln in liquidity plus any value you want to assign to the going concern of a business that achieved sales of 349mln for 2022.

**In 2018, Farfetch bought Stadium Goods for $250mln and I am sure it has grown since then so there’s another assets Neves can sell if he wants to achieve zero net debt for Farfetch.

According to my calculations, with these two moves the company could lower net debt to zero, immediately.

My thoughts on Twitter last week. TWEET. TWEET.

Can Farfetch become more robust?

Increased sales and a better macro environment would surely do good for the company, but there are other things they are also doing regardless of that. First, cutting overhead quarter-to-quarter, as well as divesting from operations that were loss making for the moment. e.g. Farfetch Beauty, to reduce cash burn.

That move to divest Beauty gave me confidence that management was actually waking up to the importance of cash generation and a lean cost structure rather than just unprofitable growth.

Granted, the technology expense line is still too big and an area where I believe the company can focus more on in terms of bringing it down. And if the Richemont deal does not materialise in the end, you can expect further cost savings just from the ceasing of those initiatives.

UPDATES SINCE YESTERDAY

Since I published this post 18 hours ago, more rumours came out (from Sky News) that Farfetch was in talks with Apollo for a “rescue deal”.

Sadly, we still don’t know what rescuing the company needs as transparency from them is zero. As of Q2 2023, the company had $450mln in cash, they took another term loan after that date giving them another $180mln, and had VAT receivables of more than $200mln that José said were slowing coming in (as cash) and that they could factor them if need be as they are very high quality.

“Apollo Global Management is one of a number of third parties in talks about providing hundreds of millions of dollars in emergency funding to the British luxury fashion site, Sky News learns.”

*Is it a rescue deal? Or is it financing for a management buyout deal? It remains to be seen, but I surely hope this is before Christmas holidays.

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