Deep Dive into Farfetch stock: recessions hit luxury markets differently

The rich continue to spend, and luxury brands continue to grow.

• Last week, Hermès International reported sales growth of 24% (constant exchange rate) in the recent quarter. LVMH also saw similar results.
• Hermès International raised prices by 4% and is planning another 10% increase in 2023.

40% of US consumer spending comes from the top 20% of households. In past recessions, the wealthy slowed spending less than other consumers.

They’re also getting richer. Last year, global financial wealth grew by 10.6%, and the top 1%’s percentage of US wealth continued to rise. Which brings us to one online luxury marketplace in particular.

Farfetch (NYSE:FTCH) is a UK-based luxury apparel marketplace. Brands and boutique stores come to Farfetch to sell goods, and the wealthy come to part with their millions.

Head to their site, and some of the first items you will see are a $2,000 pair of pants and a $160K Rolex.

It’s been a tough year for Farfetch. $FTCH is down 90% from its peak, and the (once) high-growth tech stock has been hit from all angles.

• A slowdown in two important markets, China and Russia.
• Inflation and recession concerns have investors worried about the hit to consumer stocks.

They only have $675M left in the bank as of last quarter. At their current burn rate, they’ve got roughly just under two years of cash. Eventually, they’ll have to raise money, which could dilute existing investors 📉.

Investors are concerned about a potential decline in the luxury market (no signs yet), and a broad market decline could take $FTCH even lower.

That’s a lot of bad news. Where’s the good?

Farfetch put its eggs in a major acquisition. In August, Farfetch said they would acquire 47.5% of Yoox Net-a-Porter Group (YNAP), owned by luxury behemoth Richemont.

• The news, combined with a strong earnings report, sent $FTCH up over 50%.
• But the stock has lost all its gains as markets deteriorated through September.

Being the calm investors we are, we don’t react to news, right? Instead, we take the time to see how things play out.

Why does the acquisition matter? Richemont owns dozens of luxury brands like Cartier, Montblanc and IWC. With the deal, Farfetch will offer many of Richemont’s brands on its platform.

Farfetch also has the right to buy the remainder of YNAP, and Richemont will own 10-11% of Farfetch after the deal closes.

Several analysts see the acquisition as a home-run for Farfetch:

• “It’s going to be a big revenue opportunity,” per Wedbush Securities analyst Tom Nikic (The Information).
• Farfetch’s 2024 earnings forecast could be “80% too low” given YNAP’s growth driver, per Wells Fargo analyst Ike Boruchow (SA).

At a $2.6B market cap with a 1.2x price-to-sales multiple, levels significantly lower than their COVID highs, Farfetch still looks like a highly speculative investment.

The Average Joe:

“We’re looking to clear two hurdles first. More signs of a market turnaround (Fed) and Farfetch selling more stock to bring up cash balances.”