Stock of the week: Farfetch (FTCH)
“Luxury goods are the only area which it is possible to make luxury margins” – Berard Arnault, CEO of LVMH.
Farfetch’s Business:
Farfetch is an online luxury fashion platform that sells bags, clothing, watches, etc. from over 3500 boutiques and brands worldwide. Call it – the Amazon… for luxury goods.
Seriously, they are one of the only websites that officially sell luxury goods such as Gucci, Dior, and Canada Goose. It is lead by CEO/Co-Founder Jose Neves, who founded the company in 2007. As a general rule of thumb, CEO Founders are an excellent thing to see when valuing a company. Not only do they have the best interests in the company (after all, they essentially built it), but they tend to have a relatively high stake in the company, tying their wealth to the performance of the company.
There are two things types of businesses I like: Tech and Luxury goods. Tech because of its resilience in a downturn and solid margins. Luxury goods because they too have high margins, but their market demographic tends to be higher banked. Therefore sales are less affected in comparison to other parts of retail in a downturn. Put them together, and you potentially have the crème de la crème tech/luxury hybrid.
One factor I do not like about luxury goods is picking a brand – since it is so cyclical. Maybe one year, Louis Vuitton’s popularity will spike due to a popular release. Next year its Gucci. Maybe Drake wears a Canada Goose jacket in his recent music video, but Stromzy is wearing Moncler. The point is, it is hard to predict a trend in fashion. That is why Farfetch is poised to succeed in this space, as it earns revenue regardless of which brands are in season.
Farfetch has had a fantastic run since its March Lows of $6.84, up nearly 300%. The current stock sits just under $27.
Farfetch’s Catalysts:
Due to the Coronavirus, people have been forced to shop online for goods – and this is no exception for Farfetch. In the last quarter, revenue rose 48% year to $721 Million and a reduced cash burn of just $12 Million. They received 500,000 new customers in the quarter, with overall traffic growing 60%.
The primary Catalyst for Farfetch would be another blowout quarter, cementing the customer demand for an online luxury marketplace.
Farfetch’s Risks:
Amazon. Amazon. Amazon. Amazon is stated to be launching its own luxury fashion platform that will operate like the Farfetch marketplace. Which, if successful, will be a huge demise for the stock. The Luxury fashion platform would have access to Amazon’s sprawling delivery and fulfillment infrastructure. However, there is a possibility that Farfetch’s first mover advantage with brands, plus boutique-like attitude to luxury, will help it fend off Amazon’s threat. On Amazon’s threat, CEO Jose Neves stated, “Our data and our conversations with brands indicate they [Amazon] are still far away from getting traction from the industry.”
Amazons store will have 12 high fashion Brands. Farfetch currently offers 3,500.
Farfetch: Conclusion
Displaying a strong lead, Farfetch is poised to benefit in the current environment. With a CEO/Founder at the helm, alongside dipping its toes in two high margin businesses, Farfetch is an excellent little position to have in any portfolio.
