Public Markets Startups

A Quick Look At Fashion Ecommerce Startup Farfetch’s IPO Filing

Farfetch, an ecommerce player in the fashion space, filed to go public in the United States today. The London-based startup intends to list on the New York Stock Exchange under the ticker “FTCH,” provided its debut goes as planned.

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The firm’s F-1 filing lists a $100 million placeholder sum for its public offering. The final figure will likely be higher, as the firm has a history of large rounds. Indeed, Farfetch has raised a smidge over $700 million to date according to Crunchbase, including a $394 million round led by the Chinese commerce giant

Farfetch has grown quickly in recent years. In 2015, the firm’s revenue of $142.3 million generated a gross profit of $72.6 million. The next year, Farfetch’s $242.1 million in revenue generated $116.9 million in gross profit. In 2017, the firm’s $386 million in revenue kicked out $204.8 million in gross profit.

In the three, full-year periods, Farfetch generated gross margins of 51 percent (2015), 48.3 percent (2016), and 53.1 percent (2017).

Narrowing to its most recent results, Farfetch had revenue of $267.5 million in the first half of 2018, generating $136.9 million in gross profit. That compares favorably to the firm’s H1’17 results, including revenue of $172.6 million and gross profit of $94.3 million.

However, there the good news almost ends. Consistent growth and somewhat stable gross margins are welcome at any company. However, Farfetch’s cost structure has greatly exceeded its gross profit growth in dollar terms.

The firm’s “selling, general and administrative” (SG&A) costs grew from $125.8 million in the first half of 2017 to $208.8 million in the first half of 2018. The firm’s resulting “loss after tax” grew from $29.3 million in the first six months of 2017 to $68.4 million in the first six months of 2018.

Even worse, the firm’s cash burn from operating and investing activities worsened over the same period.

In the first two quarters of 2017, the firm had a negative operating cash flow of $26 million and negative investing cash flow of $12.8 million. In the first two quarters of 2018, those figures worsened to negative $106 million and negative $27.4 million, respectively.

After the cash hit in the middle of last year, the firm radically boosted its burn. (Let this be a lesson to us all the next time that we are impressed by a big new round; what they always seem to generate are deficits.) The question for the formerly-kinda-cash-efficient firm is if its growth is enough to outweigh concerns about its newly-bolstered losses.

Across every profit metric that we tend to cover—operating losses, net losses, adjusted EBIDTA, and so forth—Farfetch is doing worse through the first half of this year compared to the year-ago period when taking both quarters as a whole.

The firm’s second quarter was far better than the first, notably, regarding its loss after tax. That’s mostly due to it having financing income during the period, compared to a financing cost in the first quarter. That shift was enough to move its loss after tax from $50.7 million in Q1’18 to just $17.7 million in Q2.

Why Can’t Anyone Make Money

Farfetch’s SG&A costs as a percent of revenue have run at least 75 percent of revenue since the second quarter of 2017. The firm had two quarters with SG&A under the 70 percent-of-revenue zone from Q4’16 to Q1’17. It has since bumped back up.

Farfetch’s cash consumption is impacting its balances. The firm dropped from $384 million in cash at the end of 2017 to $337 million at the end of the second quarter. That’s $47 million in cash gone during the half-year period, or about 12 percent of its hoard. Farfetch’s $82.3 million in financing income during the period helped, of course, to mitigate it $133.4 million operating and investing cash burn during the same period.

The only good news we can really put on the firm’s losses are that its Q2’18 loss after tax was smaller by around $2 million than its Q2’17 loss after tax. But the firm had lower financing costs in the year-ago period, making the comparison difficult.

We’ll know more when it prices.

Top Image Credit: Li-Anne Dias

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