Why Going Private Won’t Solve Farfetch’s Problems

Farfetch’s long, tumultuous quest for profitability is far from over, but whatever comes next will likely happen away from investors’ prying eyes.

On Tuesday, The Telegraph reported that Farfetch’s CEO Jose Neves, who founded the company in 2007 and holds the majority of its voting shares, was in discussion with top shareholders and JP Morgan to delist the luxury e-tailer. Farfetch then cancelled its quarterly earnings release, scheduled for Wednesday, an unusual move that strongly implied seismic changes were imminent.

The potential delisting caught the market by surprise, with Farfetch shares jumping more than 20 percent on Tuesday. While analysts and fashion insiders have been speculating about the marketplace’s trajectory for years, few had a Neves-led buyout on their list.

In retrospect, of course, this outcome feels almost inevitable. Since its IPO in 2018, Farfetch’s stock has lost more than 90 percent of its value, and its market capitalisation has plummeted from a high of $26 billion in February 2021 to just over $600 million today. The company has never turned an operating profit, prioritising marketing spend as it sought to dominate the online luxury e-commerce space. Worryingly, its momentum has also stalled, with sales declining in recent quarters. New businesses meant to drive sales and profits, including beauty and brand operator New Guards Group, have struggled.

As a private company, Farfetch would face less scrutiny as it looks to improve its bottom line. A take-private deal could also be an opportunity for Farfetch to go back to basics — selling high-end goods online from the curated inventories of local luxury boutiques — after years of chasing dominance beyond luxury e-commerce with a series of acquisitions: British department store Browns in 2015, sneaker reseller Stadium Goods in 2018, brand incubator New Guards Group in 2019 and niche beauty retailer Violet Grey in 2022.

Less clear is what such a deal would mean for Farfetch’s relationship with Richemont. The two companies have been working for over a year on a complex transaction that would see Farfetch acquire a 47.5 percent stake in YNAP, mostly for shares, with the intention it would buy the rest in a few years once its onetime rival becomes profitable. European Union regulators approved the deal in October, theoretically clearing the way for all parties to proceed.

Richemont is likely to be having second thoughts, analysts say. The Swiss luxury giant released a statement on Wednesday saying that it “does not envisage lending or investing into Farfetch.” The e-tailer’s stock more than reversed the gains made on Tuesday, plunging over 50 percent on the news, its steepest one-day drop this year.

The steep sell off reflects how the YNAP deal is widely seen as a potential lifeline. It could add over $3 billion in gross merchandise volume — a measure of sales on its core marketplace. Under the terms of the deal, Richemont would also replatform its brands using Farfetch’s technology, giving a boost to Farfetch’s white label software service.

Any other potential partner in taking Farfetch private (Chinese e-commerce giant Alibaba, which teamed up with Richemont in 2020 to invest over $1 billion in Farfetch through a joint venture could be a candidate) could be on the hook to foot the bill for the rest of its YNAP deal in the next few years, as Farfetch currently has $1 billion in debt.

Focussing on the core business may not be enough, with or without YNAP. Luxury spending generally is down as aspirational consumers see their spending power dwindle in a challenging macroeconomic environment, with even traditional luxury players like LVMH and Kering seeing softening demand.

Those challenges are even more pronounced in the luxury e-commerce sector, due in part to consumers returning to in-person shopping. YNAP has long struggled to turn a profit (the reason behind the sell-off plan in the first place), despite having the backing of a major luxury group. Canadian e-tailer Ssense reduced its workforce by 7 percent in January, citing stagnant sales growth, while Munich-based online destination Mytheresa reported a sales slowdown in September.

And then there’s the question of whether Farfetch actually would simplify its business if it was taken private. Neves has always taken big swings, whether in beauty, brand building or the “store of the future.” With a majority of voting shares he had the freedom to pursue his vision, even as CEO of a public company. Still, going private would free Farfetch from the need to issue public disclosures, and from the real-time feedback of its stock price.

“It could be José [Neves] saying, ‘well, if I’m not a publicly held entity, I can do all the initiatives that I want to do,” said Tom Nikic, an equity research analyst at Wedbush Securities. “He can’t be [backed] into a corner as far as voting rights are concerned.”

That’s certainly how things have played out at X, formerly known as Twitter, where Elon Musk has scared off users and advertisers since taking the company private last year.

Neves fortunately doesn’t share Musk’s penchant for courting controversy. But whether he has the discipline to stay laser-focused on making his marketplace profitable - and whether he’ll have the capital to implement his strategy - remains to be seen.

THE NEWS IN BRIEF

FASHION, BUSINESS AND THE ECONOMY

Shein filed for US initial public offering in New York. Goldman Sachs, JPMorgan Chase and Morgan Stanely have been hired as lead underwriters on the IPO, which could launch in 2024. Shein will have to persuade sceptical investors, politicians and regulators that the controversies surrounding forced labour aren’t an obstacle to its growth.

Morgan Stanley downgraded LVMH to end six years of bullishness. The luxury-good giant was downgraded to equal weight over concerns about weakening demand in the sector. Shares fell as much as 1.9 percent.

Mytheresa’s growth and profits slip amid luxury slowdown. The luxury e-tailer saw profit margins fall 7 percent in the first quarter. Mytheresa expects sales and profits for the full fiscal year ending in June to come in at the lower end of its previous guidance.

Foot Locker raised its forecast following a strong Thanksgiving week. The athletic retailer now expects a full-year comparable sales decline of 8.5 percent to 9 percent, compared with a previous forecast for a decrease of as much as 10 percent.

Victoria’s Secret sees progress despite wider-than-forecast loss. A third-quarter loss of 86 cents a share, after excluding some items, was deeper than the average analyst estimate of an 80-cent loss. Still, the company said its sales in November are the best monthly performance in nearly two years.

Dr. Martens issues fourth profit warning of year amid weak US sales. The footwear brand said sales fell 5 percent to £396 million ($499 million) in the six months to 30 September. Shares in the retailer plunged 20 percent after the announcement.

Gucci employees in Rome go on strike over the move of the company’s creative office. The decision would involve transferring 153 of 219 employees to Milan by March. The transfer will not involve staff reductions, according to a Gucci spokesperson.

LVMH is facing a shortage of luxury artisans and is seeking apprentices in the US. More workers in the US and Europe have been turning away from this type of manual work, instead preferring positions in the knowledge economy. LVMH is forecasting that it will have a deficit of 22,000 workers by the end of 2025, a record shortfall.

China’s A-list flock to Hong Kong for Louis Vuitton’s first show. Designer Pharrell Williams unveiled his pre-fall 2024 men’s collection to about 1,200 guests. LVMH has been at the forefront of shifting more resources into mainland China to capture the shift by wealthy Chinese to buying more of their luxury goods domestically.

Africa’s top clothing retailer Pepkor pushes expansion in Brazil. The company’s Grupo Avenida SA unit nearly doubled its contribution to sales, accounting for about 4.3 percent of revenue, Pepkor now plans to open 50 stores a year in Brazil, double its initially planned rate.

Castore raises £145 million in funding round. The investment will support the activewear label’s functional capabilities and infrastructure systems to further build out the company’s supply chain.

Apparel maker Faherty explores selling minority stake. The company has tapped a financial adviser as it seeks to solicit interest from potential investors including private equity firms and family offices. Terms, including Faherty’s potential valuation, couldn’t immediately be learned, according to Bloomberg.

THE BUSINESS OF BEAUTY

Shiseido is “fully confident” in the Chinese market despite a slide in sales. Chief executive Toshinobu Umetsu said the company is “never shaken” in its determination to invest in China. Shiseido reduced its forecast for core operating profit by 42 percent for 2023 reflecting the effects of the boycott of Japanese-owned brands in China.

Ulta Beauty raises annual forecasts and the company’s longtime CFO Settersten will retire. Settersten will be succeeded by Paula Oyibo, the company’s senior vice president of finance. Shares of the beauty retailer rose 6.6 percent in extended trading after the company also beat third-quarter results.

PEOPLE

Matthew Williams to exit Givenchy. The American designer will depart the LVMH-owned house effective Jan. 1. Williams had held the role of creative director for three and a half years.

Vans owner VF Corp lays off 500 employees in a restructuring push. The job cuts took place across all brands, corporate functions and geographies. The company has been struggling to survive a tough US retail environment.

Vanessa Kingori to exit Condé Nast and to join Google. She will be joining Google UK as managing director of technology, with a focus on deploying new tools including artificial intelligence. Kingori’s departure comes after years of restructuring at Condé Nast.

Carlos Nazario is named Harper’s Bazaar style director at large. Nazario will be responsible for styling the magazine’s covers and leading a team of creative collaborators. The February edition of Harper’s Bazaar will feature Nazario’s first cover for the Hearst-owned publication.

MEDIA AND TECHNOLOGY

TikTok ban in Montana was blocked by court as a free speech threat. The social platform argued that the state had a misguided view that its Chinese ownership poses a national security threat. The ruling comes at a time when US courts are grappling with government regulation of large social media companies.

US federal judge ruled against Meta in the company’s privacy fight with the FTC. The judge ruled that the regulator can seek to reduce the amount of money the social media company makes from users under 18. Meta said it would appeal the decision.

Jezebel was acquired by Paste Magazine. Paste’s founder Josh Jackson said the website has plans to resume Jezebel’s editorial operations and begin publishing as early as Wednesday. The acquisition was an all-cash deal but the figure paid to acquire the title was not disclosed.

Compiled by Yola Mzizi.