Why online luxury retailer Farfetch plunged 45%


Among the biggest losers on Friday was a retail stock. While the industry as a whole has struggled, most of these retail companies that have been struggling are for the most part brick-and-mortar retail chains that can’t compete with online retailers.

However, this particular company in question happens to be an online retailer to many people’s surprise and saw it’s stock price drop by almost half over the course of the day. Farfetch (NYSE: FTCH) fell by 45 percent after the company reported earnings that portrayed a far different company form the one that went public back in 2018.

The company reported much wider-than-expected Q2 quarter losses amidst the $657 million acquisition of New Guards Group, a platform which also has launched a number of luxury brands. This announcement caught investors off-guard as this shift in strategy wasn’t what investors had initially bought into the company for earlier.

When Farfetch was going public, it was marketing as a company taking a more “asset-light” approach, with not much inventory risk. The original idea when being pitched as an IPO was that Farfetch would be simply an e-commerce platform in the luxury space. Instead, many analysts are saying this surprise acquisition has completely inverted investor expectations in a bad way.

“Taking a step back, it’s clear that the story has changed meaningfully since the IPO, and Farfetch shares are headed to the ‘penalty box’ (we doubt investors will be clamoring to buy the expected weakness in the shares), but there’s still a structural story here,” wrote analyst Ike Boruchow in a note to clients. “Ever since we launched coverage of Farfetch 10 months ago, one of the most common pieces of investor pushback we’ve received is that it’s difficult to get comfortable with the story given that there are so many moving pieces in the business.”

Although the company is still an attractive brand with a strong concept, having grown by 59 percent during the first half of the year, it’s not certain whether this growth is sustainable. Farfetch is just one of many new tech companies with billion-dollar market caps despite recording little to no profits, and making such a major acquisition despite not having a positive bottom-line definitely is worrying to some investors.

Shares of Farfetch fell by 44.3 percent over the course of the day, reaching a five-year low for the company.  Prior to Friday’s selling spree, most analysts actually had a “strong-buy” rating for the stock, with only a handful having a “hold” rating.

Time will tell how analysts will respond to the nosedive in stock price, whether this will be a good buying opportunity or a sign that Farfetch is in a much worse place then they thought it was.

Farfetch Company Profile

Farfetch is an online platform connecting sellers and buyers of personal luxury goods. It was founded in 2008. The company partners with around 1,000 luxury goods sellers to offer their inventory on the platform.

For making the retailers’ stock available to almost a million active customers, the company charges a cut of over 30% (third-party take rate). Geographically, Europe, Middle East, and Africa account for 40% of the company’s sales, Asia-Pacific for 31%, and Americas for 29%. Of total revenue, 81% is generated through platform services, 16% through fulfillment revenue, and 3% through in-store revenue of Browns, a U.K.-based luxury retailer acquired in 2015. – Warrior Trading News