Luxury Ecommerce Merchant Farfetch Goes Public

In one of the biggest consumer-facing IPOs of the year, Farfetch, an internet luxury-fashion market, listed on the New York Stock Exchange on September 21. Originally priced at $20 per share, the stock — FTCH — started at $27 per share, rose to $30 and closed at $28.20, 41 percent over the target opening price. The company, which is based in London, sold 44.2 million shares and raised $885 million in the IPO, finishing with a valuation of $6.2 billion, including shares already held by workers.

Farfetch could have recorded on the London Stock Exchange or the Financial Times Stock Exchange. However, it chose a U.S. exchange presumably due to the financial uncertainty brought on by Brexit. Another benefit is that by filing in the U.S., Farfetch can benefit from specific disclosure benefits. It says in its F-1 registration filing (for foreign entities):

We’re qualified to be treated as an emerging growth company, as described in Section 2(a) of the Securities Act, as modified by the JOBS Act, and we might benefit from certain exemptions from various reporting requirements which are applicable to other public companies which aren’t emerging growth companies, including introducing only restricted selected financial information in the registration statement on Form F-1 of which the prospectus is a part rather than being required to follow the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. Because of this, our shareholders may not have access to particular information which they might deem important.

However, being situated in the U.K. has some potential drawbacks. In its filing, Farfetch says:

Lack of clarity about potential U.K. legislation and regulations, such as financial laws and regulations, taxation and free trade arrangements, immigration laws and employment legislation, could raise costs, depress economic activity, impair our ability to attract and retain qualified personnel. There is significant uncertainty about our future ability to use E.U. nationals. If the United Kingdom and the European Union are not able to negotiate acceptable withdrawal conditions or if other European Union member countries pursue withdrawal, barrier-free accessibility between the United Kingdom and other European Union member countries or one of the European Economic Area overall might be diminished or removed. One of these factors could have a material adverse effect on our business, results of operations, financial condition and prospects.

Farfetch is working with a dual-class stock construction. It provided Class A shares with one vote per share, and Class B shares with 20 votes per share. Creator José Neves, 44, owns the Class B shares and, because of this, has a controlling stake in the business with 77.4 percent of voting rights.

Worldwide Customers

Founded by Portuguese billionaire Neves in 2007, Farfetch works in Europe, the U.S., the Middle East, and the Asia Pacific. In 2017, Farfetch initiated a partnership with JD.com to market luxury brands in Asia. However, nearly all of its brands and retailers are located in the U.K.; they account for 86 percent of earnings.

As of June 30, 2018, the Farfetch market provided access for more than 2.3 million customers in 190 countries to 980 luxury sellers. Of the 2.3 million customers, 1.1 million are considered”active customers” — over occasional buyers. In 2017, 91 percent of orders were cross-border, along with the top 1 percent of Farfetch’s clients accounted for approximately 20 percent of the market’s gross merchandise value. The company has offices in the U.S. (Los Angeles), Brazil, Portugal, and China.

In 2015 Farfetch obtained a tiny brick-and-mortar British boutique named Browns.

Farfetch hosts 614 independent luxury retailers and 375 brands. In 2017, Farfetch had $386 million in earnings, up 59 percent from 2016. However, losses are increasing at an equally substantial rate. In 2017, Farfetch incurred losses of $112 million, 37 percent more than the $81 million it lost in 2016 and almost twice the 2015 losses of $61 million. Farfetch will probably exceed last year’s losses since from the first six months of 2018 it lost $68 million. The business hasn’t been profitable.

Befitting a luxury fashion market, Farfetch targets wealthy customers. It reports the average household income of its clients is $121,500, and 66 percent are female. The average age is 36.

How Farfetch Works

Vendors typically enter one-year contracts with Farfetch. Ninety-eight percent of these vendors are exclusive to Farfetch.

Farfetch provides localized sites, multilingual customer care, and logistics providers. Including same-day delivery in 18 major worldwide cities.

Farfetch operates a revenue-sharing version where it receives commissions from merchant transactions. It doesn’t control the pricing plans of merchants, except for Browns, which might impact its ability to compete on price with another distribution channels utilized by its own brands and retailers.

Bain & Company, a financial consulting firm, estimated that the global market for private luxury goods at $307 billion in 2017 and will grow to $446 billion in 2025. Online sales include only 9 percent of total luxury sales, so there’s a whole lot of potential for expansion. Much of the expansion is expected to come from China, but the current trade war between China and the U.S. could dampen the Chinese market and consumer spending.