Farfetch Limited (NYSE:FTCH) Q2 2022 Results Conference Call August 25, 2022 4:30 PM ET
Company Participants
Alice Ryder – VP, IR
José Neves – Founder, Chairman and CEO
Elliot Jordan – CFO
Stephanie Phair – Group President
Conference Call Participants
Ike Boruchow – Wells Fargo
Doug Anmuth – JPMorgan
Stephen Ju – Credit Suisse
Jason Helfstein – Oppenheimer
Lauren Schenk – Morgan Stanley
Louise Singlehurst – Goldman Sachs
Operator
Good afternoon, and welcome to Farfetch Q2 2022 Results Conference Call. My name is Lela, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you.
I’d now like to turn the call over to Alice Ryder, VP of Investor Relations. Ms. Ryder, you may begin your conference.
Alice Ryder
Hello, and welcome to Farfetch’s second quarter 2022 conference call. Joining me today to discuss our results are José Neves, our Founder, Chairman and Chief Executive Officer; Elliot Jordan, our Chief Financial Officer; and Stephanie Phair, our Group President.
Before we begin, we would like to remind you that our discussions today will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to publicly update or revise them. For a discussion of some of the important risk factors that could cause actual results to differ, please see the Risk Factors section of our Form 20-F filed with the SEC on March 4, 2022.
In addition, we will refer to certain financial measures not reported in accordance with IFRS on this call. You can find reconciliations of these non-IFRS financial measures to the IFRS financial measures in our earnings press release and the slide presentation, both of which are available on our website at farfetchinvestors.com.
And now, I’d like to turn the call over to José.
José Neves
Hello, everyone, and thank you for joining us.
I am thrilled to be speaking to you today. After having signed and announced our long-term partnership with Richemont, which marks a major step in Farfetch’s mission to become the global platform for luxury. I cannot emphasize enough the importance of this transaction, not just for Farfetch and Richemont, but for the entire luxury industry.
15 years ago, I founded Farfetch for the level of fashion, with the dream of creating a global tech platform for an industry that previously never had one. The vision of connecting creators, curators and consumers of fashion worldwide to one single Digital Platform tailored for the very specific needs of the luxury industry was and still is at the core of Farfetch.
The industry very much needed a platform. We believe that what was needed was a revolutionary platform that attended to the unique features of luxury, whilst always thinking 10 years ahead and building line of clothes after line of clothes year after year, an advanced set of capabilities that allows us to seamless converge the various modes of shopping, online, offline, monobrand and multibrand globally. And that’s what we’ve built with herculean effort and patience year after year.
All that you have observed from Farfetch over this 15-year journey, was a single-minded pursuit of the vision, which we call Luxury New Retail. The seamless conversions of all modes of shopping, the connecting of the best players in this industry, be them luxury retailers or brands, and the unlocking of the best customer experiences everywhere from east to west.
In 2015, we acquired 50-year-old iconic boutique Browns, back then a circa $25 million turnover family business and transformed it into the star of the future, while also expanding it to a business expected to generate circa $0.5 billion in 2022. Over the course of this seven-year period, we have steadily pursued our Luxury New Retail vision, which was first unveiled at our 2017 Farfetch OS event. There, we launched Gucci F90. The seamless integration of the Farfetch site with 10 global Gucci flagship stores, which was followed by an investment from Chanel and an exclusive collaboration that has reinvented the Chanel retail experience of the future at their Paris flagship and several other locations.
FPS also launched Harrods, perhaps the most iconic department store in the world. And soon afterwards, we expanded our Luxury New Retail vision to China with an alliance with Alibaba, Richemont and Kering. All this has led to a transformational 2022 for Luxury New Retail. This year, we signed and invested in Neiman Marcus Group, a leading U.S. luxury omnichannel retailer, and also inked a 360-degree partnership with Salvatore Ferragamo to be their digital partner in reinventing this heritage brand.
And yesterday’s announcement represents the culmination of these carefully engineered deals. And the extension of our LNR initiative with Richemont marks an inflection point, advancing Farfetch’s mission and vision to revolutionize luxury. We believe this validates, especially when seen together with all the partnerships over the past years, not only that luxury needs the tech platform, but also that Farfetch is perfectly positioned to answer that goal.
We are thrilled with the myriad possibilities this still opens to expand YNAP’s reach to our attractive marketplace audience, bring their curated supply to enhance Farfetch consumers experience and enable their brand partners to leverage our e-concession integrations to transition away from wholesale distribution among many, many other possibilities. We plan to work closely with Cartier and other Richemont Maisons to innovate their already incredible luxury experience, both online and in their 1,250 retail stores worldwide.
We are excited by the transformation we can enable at YNAP, a group which includes the pioneers of luxury online retail, NET-A-PORTER and YOOX, which, as brands themselves are very complementary to Farfetch, all of those serving different modes of shopping, customer profiles and geographic focuses. In years to come and upon YNAP’s successful transformation, which we expect will return the business to profitability, we are excited about the possibility of consolidating them under the Farfetch Group, as a portfolio of different marketplaces, benefiting both sellers and customers globally, offering more choice, better experiences and more innovation.
There is a lot to be done and still a lot to prove, and we are energized by that. This endeavor never ends because with each milestone, our horizons expand further. Despite the growth and synergies this still brings, the combined groups would represent only 3% of this vast global industry. There is plenty of growth to go for, and strong cycle of tailwinds that we aim to continue to capitalize on. What is pretty clear in my view is that Farfetch has positioned itself to be the preeminent Digital Platform for luxury. And the responsibility is now ours to continue to execute and deliver on this shared vision.
More recently, whilst we’ve been executing on our unwavering pursuit of this Luxury New Retail vision, we have also continued to deliver on our core business performance, as evidenced in our underlying Q2 results. Excluding Russia and Mainland China, each of our three marketplace regions, Americas, EMEA and APAC, delivered high single-digit growth over a tough Q2 ‘21 comp, when overall marketplace GMV was up around 40%. Additionally, on a three-year basis, marketplace GMV growth, excluding Russia and China, accelerated versus Q1 ‘22.
In Q2, we also continued to see the results of the progress we’ve been making in transitioning the marketplace to a predominantly full price destination, as full price GMV increased double digits and markdown sales on the other hand declined once again double digits.
Outside of these three factors, which were expected and discussed on our Q1 2022 call, Q2 underlying performance remained very strong, with full-price marketplace GMV, excluding Russia and Mainland China, growing circa 20% year-on-year for the second consecutive quarter. This is before accounting for FX volatility. In fact, I’d like to point out that all the figures I’ve shared do not take into account the significant foreign exchange rate volatility, which impacted our reported results in Q2.
At constant FX, on a year-on-year basis, Digital Platform GMV increased 2%, Brand Platform GMV grew 68% and revenue increased 21%. Elliot will expand further on the impacts of currency rate volatility.
All of this is to underscore that our underlying business remains extraordinarily strong, with growth accelerating on a three-year basis outside of macro volatility factors. These encouraging performance indicators against the current macro environment demonstrate the resilience of the luxury industry and further demonstrate Farfetch’s steadfast and proficient response to the adverse macro factors the industry is facing.
Finally, I’d like to update you on some organizational evolutions we have made to better position us to achieve our platform long-term vision and reaccelerate growth in 2023, while also driving a more efficient operating structure. As we shared on our last call, we are taking advantage of 2022 being a year of lower growth to further rationalize our business to have more efficient, more profitable and more powerful operations, as we aim to exit 2022 and enter 2023 from a position of incredible strength. I also believe this is the right time for Farfetch to evolve the design of its organization to further align it with our mission of becoming the global platform for luxury.
These reorganizations seize the Farfetch platform at the core of our entire business. This common platform services our three business units, Marketplaces, which includes our B2C activities; Platform Solutions essentially composed of our B2B activities, mainly FPS, but also newly acquired SaaS companies that extend FPS’ ecosystem and Brand Platform, which consists of all NGG activities that are not included in the other two business units, i.e., all non-digital NGG activities, such as directly operated retail stores and select wholesale. We believe that this structure will allow us to drive cost efficiencies by scaling our business, enhancing our profitability and allowing us to invest in our technology and ops platforms at a larger scale.
Historically, the Marketplace has not had a single leader accountable for its entire P&L. But I am taking this opportunity to reinforce the platform philosophy across our organization with clear accountability around each of the three BUs. As such, we have reorganized the business according to these principles and have created two new roles: Chief Marketplace Officer, who will be accountable for the performance of the Marketplace’s BU and Group President, whose role is to position our Farfetch group capabilities to the industry, ensuring our three BUs work together to deliver on Farfetch’s mission to be the platform for luxury.
I am delighted to share that Edward Sabbagh, previously VP Marketplace, will take the post of Chief Marketplace Officer and that Stephanie Phair will be our Group President. I am excited with this new structure, and I believe it prepares us for the incredible growth ahead of us in 2023 and in years to come.
One of the benefits of this work has been the identification of a number of duplications and overlaps across the previous arc. This means that we will be able to streamline our organization and reduce our headcount around overlapping functions and teams. But because we have areas of our business that are adding large clients and growing rapidly, our overall headcount by year-end ‘22 is still expected to be just slightly higher than year-end ‘21. At the exact level, two of our executives will be transitioning out of the business: Chief Marketing Officer; Gareth Jones, as well as Chief Commercial and Sustainability Officer, Giorgio Belloli, who will be succeeded by our Senior Vice President, Commercial; Stephen Eggleston, who has been with Farfetch for almost seven years. Giorgio will remain on board to help with the transition until the end of 2022 and then, in an advisory capacity through the end of 2023.
I want to thank both Giorgio and Gareth for their incredible contributions to advance Farfetch’s mission to be the global platform for the luxury industry, and for building teams with amazing talent to carry us through our next phase. I also want to thank all those Farfetchers, who have been an incredible part of our journey and will now part ways with us as part of this reorg. They are all incredibly talented. We wish them the very best, and we are sure they will do extremely well.
And now, I’d like to congratulate Stephanie on her new role and pass the call to her to update you on the progress we’re making within the Farfetch Group.
Stephanie Phair
Thank you, José, and hello, everyone. I look forward to stepping into the Group President role, where I will focus on working with our partners to further grow their digital capabilities through leveraging our audience, our global reach and our technology solutions across the Farfetch Group.
Today, I would like to take you through some of the key initiatives and recent developments across our areas of focus, including our brand’s engagement, Farfetch group partnership with Ferragamo and customer resilience and how we’re positioned for the volatile macro environment we are currently in.
We continue to see strong brand engagement on the platform with brands continuing to increase their supply in the marketplace, up double digits in Q2, and working with us on unique collaborations and launches, demonstrating our strategic value as the online partner of choice for the luxury fashion industry. As part of our efforts to drive excitement and cultural relevance with new global audiences, we recently launched Farfetch BEAT, our new concept retail series of limited edition releases with the most exciting voices in fashion culture today only on Farfetch and leveraging our unique community of brand and retail partners, NGG brands, Browns and Stadium Goods.
With the goal of driving organic traffic and new customer acquisition via low-cost channels with social buzz and PR, we’ve been very pleased with the initial releases. The first drop opening ceremony for Peter Do, which celebrated Asian-American design, sold out in 2 hours, generated over 2 million social media impressions, and campaign level press coverage, while also seeing us push social commerce with our digital marketing strategy and a campaign with fast-growing new social media platform, BeReal.
Turning to our media solutions business. We are continuing to rapidly scale our high-margin media solutions business, and I’m pleased to announce that in the second quarter, media solutions reached record sales via paid brand campaigns across multiple categories, such as Gucci Fragrances, De Beers diamond collection, Versace Jeans Couture Spring Summer 22 collection and Planners [ph] Amplification of Farfetch Beauty.
Beyond the transactional value, our brand and boutique partners are buying into our valuable global consumer base, three quarter millennial and Gen Z with a 70-30 female male ratio. And from a consumer perspective, by allowing brands to leverage our first-party data to tap into our millions of monthly visitors, we are able to provide the newness and differentiation that the luxury customer demands. We have also been gaining traction with brands beyond luxury fashion to market to partners that embody our ethos and the luxury lifestyle. For example, we have held campaigns with the likes of Porsche and Moët & Chandon, luxury and fashion adjacent brands with similar customer profiles to Farfetch.
Our media solutions capabilities are also an important component of our recently announced global strategic partnership with Salvatore Ferragamo. We couldn’t be more excited about this engagement as it epitomizes the power capability and potential of the Farfetch platform and overall Farfetch proposition. Ferragamo has a rich heritage of creativity and craftsmanship. And with the recent appointment of Marco Gobbetti as CEO, we’re excited about his visionary approach to revive this iconic brand by looking to Farfetch as the strategic partner to accelerate Ferragamo’s digital capabilities and create new engaging shopping experiences.
Ferragamo has been an e-concession partner for many years, but this partnership expands the brand’s participation on the marketplace, leveraging Farfetch’s global audience to appeal to a more millennial and Gen Z luxury customer globally. As part of the partnership, Farfetch will power Ferragamo’s e-commerce site using Farfetch Platform Solutions, and Ferragamo will begin to invest this year in Farfetch’s media solutions while also exploring future retail innovations. Ferragamo’s endorsement and embarking on an integrated partnership of this scale marks a critical evolution point in our Farfetch platform proposition journey, further cementing Farfetch as the -platform of choice for the luxury fashion industry.
Moving on to our consumers. Our private clients continue to perform the strongest of any cohort and are reflective of the resilience of the luxury consumer. During the quarter, we maintained over 90% retention of our private clients who delivered strong AOVs of circa $1,100. Also during the second quarter, we saw an increase in high-value transactions, with a focus on hard luxury investment pieces and the number of transactions exceeding $10,000, so an increase of 11% year-on-year.
Fashion Concierge, which is our proprietary sourcing service, continues to be a differentiated proposition for our private clients. Private clients that use Fashion Concierge have a 30% higher retention rate versus other private clients, who do not use the service. We intend to continue to grow and focus on enhancing this private client experience, which still has significant room to grow and become a bigger part of our business, and we’ll be launching a more direct conversation request module in the second half, expanding fashion concierge to more of our PC customer base.
We remain steadfast that luxury is a resilient industry, and given our differentiated proposition and platform capabilities, we believe we are well positioned to deliver sustainable long-term growth.
And now I’ll hand over the call to Elliot to discuss our financial results and outlook.
Elliot Jordan
Thank you, Stephanie, and hello, everyone. I’d like to discuss the financial results of Q2, which reflect better-than-expected trading across all platforms, offset by foreign exchange impacts that were worse than expected, as a result of the stronger U.S. dollar. The overall results demonstrate our ability to address near-term challenges, deliver robust underlying growth and manage our resources effectively to achieve our goals moving forward.
I want to start by noting that the historic strengthening of the U.S. dollar against most currencies over the last quarter, particularly the euro falling in line with the U.S. dollar for the first time in two decades, created a significant headwind for many U.S. dollar reporting global companies. We have high exposure to this historic appreciation in the U.S. dollar, because more than half of our Digital Platform GMV is transacted in non-U.S. dollar customer currencies, and 100% of the Brand Platform is transacted in euro. The impact is even greater to revenues as the vast majority of our Digital Platform commission revenue is booked in euros, and Brand Platform revenue is made up entirely in euros.
Finally, our profitability is also impacted because the positive contribution to adjusted EBITDA from our profitable foreign entities is reduced on translation to U.S. dollars. As a result, across Q2, we achieved revenue of $579 million, an increase of 11% year-on-year or 21% on a constant currency basis. Gross merchandise value of $1 billion, twice the GMV of Q2 2019, and up 1% year-on-year or 8% on a constant currency basis. Our gross profit growth outpaced revenue growth to deliver an expanded gross margin of 46.2% versus 44% in Q2 ‘21.
Our adjusted EBITDA was a loss of $24 million versus a loss of $21 million last year, and we remain well-funded with $675 million in cash, cash equivalents and short-term investments.
The major drivers of reported GMV and revenue growth included high-single-digit growth in the marketplace, outside China and Russia, including growth in full price of 20% year-on-year. Our Brand Platform growing GMV at 47% year-on-year from strong demand for Off-White and Palm Angels and a catch up on the lost sales in Q1 2022. And our In-Store GMV growing 39% year-on-year.
I’d now like to discuss these factors in more detail starting with performance across the Digital Platform. Reported Digital Platform GMV declined year-on-year by 3% to $883 million, but grew 2% year-on-year at a constant currency, which was slightly lower than the Q1 2022 constant currency growth of 5% year-on-year as Q2 had a full quarter of impact from reduced trade in Russia and China.
By region, for the Marketplace, GMV from China was down year-on-year due to COVID-19 restrictions. However, we have seen strong engagement from customers including during our 618 event in the China market and year-on-year growth on Tmall, which means we remain optimistic about the China market and our overall proposition moving forward. We expect this market to return to growth over the next 12 months.
Russia saw zero sales across the quarter and will remain closed for the foreseeable future.
The Americas overall continued to show resilience, and GMV from this region is now 87% higher than 2019.
Core Europe growth accelerated coming out of Q1 with faster growth in Q2 from the UK, Italy, France and Spain, while we continue to see weaker performance in the DACH.
Active customer numbers were stable quarter-on-quarter and up 13% year-on-year at 3.8 million, a very pleasing result as we are seeing at least 50,000 customers drop out of this metric each quarter from the loss of Russia trade. This drop-out of Russia customers is expected to peak in Q4 2022 at just over 100,000 customers.
We also continue to see strong demand for our Media Solutions product, delivering the highest-ever contribution to platform services revenue and helping deliver a 90 basis-point boost overall to our third-party take rate, which was 31.2%.
In terms of margins, Digital Platform order contribution margin was 31.7%, a 240 basis-point decline year-on-year. This decline is attributable to higher demand generation expenses year-on-year because of continued investment in acquiring and engaging customers, cost inflation in paid channels, and a redistribution of media spend from Russia into higher-cost geographies. A 230 basis-point decrease in gross margin from our first-party business because of pricing and stock clearance activity, both mostly offset by a 290 basis-point improvement in third-party gross margin to 69% through higher Media Solutions income, improved commission levels, a higher pass-through of costs to consumers, and efficiencies gained in shipping, partially the result of currency movements.
Now, I’d like to move on to our Brand Platform. During the second quarter, we resolved the warehouse issues impacting our operations in Q1 and alongside strong demand for NGG brands, Off-White and Palm Angels, delivered Brand Platform GMV of $107 million, an increase of 47% year-on-year or 68% on a constant currency basis. Year-to-date, Brand Platform GMV has grown 12% year-on-year or 22% on a constant currency basis. Brand Platform revenue was $117 million, reflecting the GMV position, and $10 million of revenue from our new partnership with Reebok, which commenced in March 2022.
On margins, due to the Reebok revenue, lower royalties on Palm Angels following the majority acquisition of this brand, and improving underlying product margins, we delivered Brand Platform gross profit of $61 million at a 53% gross profit margin, an increase of 560 basis points year-on-year.
Moving on to our operating expenses, which are comprised of G&A and technology. Total costs were up 17% year-over-year, with operating leverage from our platform services and marketing cost lines and additional year-on-year spend on warehousing costs for first-party stockholding. Profit after tax was $68 million including a noncash benefit from the revaluation of items held at fair value of $252 million. We finished the quarter with a liquidity position, including cash and cash equivalents and short-term investments, of $675 million. In Q2, we closed the previously announced strategic investment of $200 million into the Neiman Marcus Group.
I’d now like to cover our outlook for the rest of the year. As the Q2 results highlight, we are successfully managing many factors across the business and achieving strong underlying revenue growth and improved gross margins. We are also progressing our cost-saving initiatives to focus resources on areas of the business that are delivering stronger near-term payback and on achieving our strategic initiatives, including those announced yesterday.
On a constant currency basis, our H2 outlook remains largely unchanged from last quarter. However, we expect the stronger U.S. dollar will continue to impact our reported growth and profitability for the rest of the year. As a result, our full year expectations are: Digital Platform GMV growth of 0% to 5% year-on-year; Brand Platform GMV growth of 0% to 10% year-on-year: Digital Platform order contribution margin above 30%; and Brand Platform gross margins about 50%. In addition, our cost-saving initiatives allow us to target breakeven adjusted EBITDA for the second consecutive year.
I will reiterate that ongoing currency movements may adversely impact our reported figures. In terms of reserves, which are largely held in U.S. dollars, we continue to closely manage our liquidity position. H2 profitability and an improving working capital position as we exit the year means that cash and cash equivalents is expected to close above $650 million at year-end.
And with that, I’ll turn it back over to José for his closing remarks.
José Neves
Thank you, Elliot. Luxury is an amazing industry, cemented in the pillars of creativity, craftsmanship and culture, and from a financial point of view, very profitable and resilient, even in very adverse macro environment. We always believed this $300 billion industry needed its own tech platform, tailored with specific needs and revolutionizing the luxury shopping experience both online and offline. And we built Farfetch over 15 years to be that platform. We call this vision, Luxury New Retail. The 1,400-plus luxury brands and retailers who are part of our community, share this vision. And this week, I am thrilled to have announced our deal with Richemont, which is a major step forward in our mission.
There is a lot to do and a lot of growth to go for. And while we have our eyes on our North Star, our feet are firmly on the ground. We are adeptly navigating the macro environment with our marketplace delivering high single-digit growth outside Russia and China, and taking the opportunity of a year of slower growth to redesign our organization and make it much leaner and more powerful. This means we will exit 2022 in a very strong position.
In 2023, we will lap the impact of Russia. And I believe China will return to growth. Additionally, we will start to see the impact of large deals such as Reebok, Neiman Marcus Group and Ferragamo. These multiple factors of growth, combined with the strong underlying performance of our business outside macro affected regions, and the rationalization we took the opportunity to take action this year, make me very bullish for 2023 and beyond in terms of growth, profitability and cash generation.
We expect to share our ambition for 2023 as well as our long-term vision in an upcoming Capital Markets Day, which we are planning to take place before the end of the year.
Thank you. I will now open the line for your questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Ike Boruchow from Wells Fargo.
Ike Boruchow
Thank you. I guess, my question was on the Richemont transaction, just around timing. I believe you guys said yesterday, you expected to close before the end of next year. I guess, my question is, it seems like a long time. Can you kind of walk us through why it might take so long for the deal to close? And then, the second part of the question is, are you able to begin the YNAP and the Maison integration to FPS before the deal actually closes, or do you need to wait for that transaction to actually close before you can start to go to work? Thank you.
José Neves
Thank you. This is José. I’ll take your question. I think first of all, just to share our philosophy, when we announced deals and give indicative time lines, I think we’ve done a good job in terms of managing expectations. If you look historically at our deal with JD, we announced it. We then launched and went live and started generating revenue before the expected time, so ahead of time. Same with Harrods, same recently with Alibaba. And I think we like to keep it that way, especially when you have things that are not under our control. In this case, there will be regulatory review in more than one jurisdictions, as you would expect. And we really want to be respectful of the regulators here.
And that also means that we will review what work can start and what work will need to wait for regulatory approval. Of course, we will go as fast as possible. And this is also Richemont’s will. As you have heard from Johann, Cartier, the other Maisons are very, very keen to be replatformed and showing the marketplace. Same thing with YNAP. This is transformation that is eagerly anticipated by the CEOs of the various Maisons and the online distributors. And so, we will go as fast as possible. But again, we want to be balanced in our views and keep that philosophy in terms of when we do announcements, provide expectations and then that are realistic and then beat them if possible.
But I would like to highlight that 2023 is already, even if the regulatory approvals take a little longer and all of that, is already lining up to be a fantastic year for Farfetch. We have Reebok, we have Neiman Marcus Group. We have Salvatore Ferragamo. We have the organic growth that you are seeing in the business outside of macro factors, again, full price growth of 20% excluding Russia and China. We will lapse the stoppage in Russia. And I believe China will turn into a strong tailwind.
So, that is already incredible growth that we anticipate coming out of all these different vectors and we’re confident of that. And of course, if then we’re able to move even faster with Richemont, various assets of the deal, of course, we will seize that opportunity as well. Thank you.
Operator
Our next question comes from Doug Anmuth from JPMorgan.
Doug Anmuth
One for José, one for Elliot. José, just hoping you could talk about what gives you the confidence that China turns into a strong tailwind next year and just how you would assess the learnings on the Tmall, or — pavilion thus far?
And then, Elliot, just the shift to full price was more than offset by a decline in markdown sales. Was this driven by less markdown inventory or just less demand overall? And can you update us on the current mix there? Thank you.
José Neves
Hi, Doug. In terms of China, I think, first of all, we remain very bullish about China in the medium and in the long term. We think this is an incredible market. It will be the largest luxury goods market in the world by 2025. We have an incredible position there as the only Western player that has for many years invested in that market, creating incredible capabilities there. And I think that we will be able to seize the strong demand for luxury products, especially online where penetration is still very low in that market. So, we remain very bullish in the medium to long term in terms of China, and we’ll continue to invest in that market.
I think what makes me confident is that we see strong engagement from the Chinese customer. We continue to see high traffic, elevated levels of traffic. We continue to see — we saw a very strong June 18 event. Tmall is seeing positive growth in spite of the macro headwinds. And I think right now, we’re seeing in terms of our app which is the larger part of our business there, we’re seeing double-digit declines. I don’t think this will last for long. I think this will turn into positive growth next year and potentially a strong positive growth.
The situation in China continues to be impacted by COVID-19 restrictions, especially for our cross-border businesses, as we’re having a long lead time to deliver to customers. There’s still quarantine process procedure for parcels, crossing the barter and in certain gateways, disinfection procedures for parcels, which we’re confident that probably there will be more comfort around cross-border logistics and packages, et cetera, given clearly the World Health Organization has said that there’s no risk of contagion from parcels. And that was relaxed in the West very, very quickly and China is taking a little longer. But I think that once we are able to service our customers, there is very strong engagement on the platform. The demand is there. The conversion rate obviously is affected by these longer lead times, but I think this is transitory, and there’s huge potential and pent-up demand in fact in that market that we will be able to seize.
Elliot Jordan
And just on your second question in regards to markdown, it is all driven by the level of inventory that our sellers are putting on to markdown and the depth of markdown they are taking. You might remember, we’ve spoken a couple of times now about the fact that we, for strategic purposes and making sure we align ourselves with how the industry is moving over the longer term, making sure that there is plenty of space for the brands to put stock on in the full price selling window. And they’re obviously using that to drive growth on Farfetch at full price and therefore, not need to put as much stock into the sales section and the markdown section, which absolutely the brands are wanting to do, as they try and drive their own full price mix and pull away from promotions across most channels.
I think also if you look at our mix, we’ve now got over 600 brands direct on the platform as e-commerce — sorry, e-concessions on the platform. So, direct relationships with us rather than going through the multi-brand boutiques. And where that’s the case, the brands, obviously, in control of pricing and levels of markdowns for that stock that they own. And so, they’re choosing to put less stock into the markdown section, because they’re getting more sales for full price through us. And that’s reflective really of the stock levels that we’ve got on the platform.
So overall, both direct stock and stock from multi-brand partners was up double digits in terms of value year-on-year as we exited Q2, but the stock direct from the brand, so 600 brand e-concessions direct was up something like 2.5 times as much growth as we are seeing from the multi-brand retailers. So lots of additional stock coming through from our direct partners. And that’s meaning our GMV mix is now firmly at above 30% of GMV coming through from those direct e-commerce partners. So really seeing the GMV shift towards those longer-term strategic partners and the stock is growing as a result, but that means more full price and less markdown on Farfetch.
Operator
Our next question comes from Stephen Ju from Credit Suisse.
Stephen Ju
Hey. Thank you. So, I guess a question on the Beauty and some of the other sort of adjacent categories, if I may. So, it seems like there’s about 600 to 700 SKUs, might be slightly more, available on Farfetch right now. And I think in the past, you guys have talked about the value of the merchandise you are currently showing on the platform. So, what percent of the total do you think Beauty is as a percentage of total now? And where do you think it should land as we think about the longer-term mix of the business? And also, do you think this is a category that will require, I guess, a greater participation from Farfetch as a first party? Thank you.
Stephanie Phair
Hi Stephen, I’ll take this question. So yes, I think looking at SKUs is one way of looking at it, but I don’t think it’s necessarily relevant and particularly in how we were previously talking about fashion just because the makeup is very different in terms of how the brands see their range. There’s a big focus on hero SKUs, depth, replenishment business. So our focus now really is on having the right mix and assortment, and making sure that we have the right mix of the heritage brands, the indie brands, and then really balancing the categories. So, hair care, wellness, skin care, makeup. So, we’re still very early on in that, and we’re still building up to the brands that are coming on board. But I think it really is about — we’ve always said we are a curated destination. And so, we think about the sort of level of Beauty brands and we do set a floor and make sure that we are above that.
But I think sort of more broadly in terms of you asked how big could this be as a percentage, Farfetch, I think as a guiding principle, we look at the fact that the beauty market, the addressable beauty market is sort of $70 billion out of the $350 billion personal luxury goods market. So, there’s a lot of room to grow there and a real opportunity for us to offer Beauty in a crossover way to a luxury fashion customer. And I think this leads on to your question about first party.
What is particularly valuable about our offering to brand partners is that this is the first time really that we’ve been able — the partners and the sort of large beauty conglomerates have been able to access an e-concession model for Beauty. So, as they are moving away from wholesale and wanting to go more direct-to-consumer, we’re offering them a solution that allows for that and which was not really previously available, possibly offline, but not online. So, we’ve got a lot of the big ones on board. And First Party, which we’re able to acquire through our Browns stores and Violet Grey, is really to complement with some of the indie brands which are just not set up for that concession model. But I think the way to think about it is that that will continue to really be complementary as opposed to a big piece of the pie.
Operator
The next question comes from Jason Helfstein from Oppenheimer.
Jason Helfstein
Thank you. I guess, I’ll just do one. It does seem that In-Store is gaining share year-to-date in U.S. and Europe versus offline. So is there anything you’re seeing in behavior or data that suggests that this is temporary and kind of after this, I guess, I don’t know normalization period, we go back to online gaining share for luxury? Thank you.
Stephanie Phair
Hi. So, no, we’re not seeing any data necessarily tending one way or another. I think what we go back to is just the fact that there is a structural shift to online. We know that that will be 30% in 2025. I will take you back to survey we ran, I believe, in 2021, where our customers were saying sort of post-COVID environment, they would be shopping more online than they did before. And so, we are seeing that our retention metrics remain strong and actually are in line with 2019 numbers. We continue to see new customers coming to us quarter after quarter.
So certainly, we knew that there would be a normalization of behavior online, offline. We are big believers of that omnichannel approach. And in many ways, we are an online and offline business because we think about our connected retail approach and the way our partners work and we benefit from offline behavior as well. We really are at that platform that spans both. So it is certainly a bit of a normalization as you stated, but the structural shifts continue to be online.
Operator
And our next question comes from Lauren Schenk from Morgan Stanley.
Lauren Schenk
I just wanted to ask about Neiman Marcus. Maybe just if there’s any updated time line when you expect the Bergdorf Goodman and Marcus international GMV to hit your P&L? And then I know you mentioned the U.S. business would be using some of your modules, maybe just from an accounting perspective, will the U.S. GMV from that business hit your Digital Platform GMV as well? Thank you.
Elliot Jordan
Hi Lauren, great speaking with you. Look, it’s all in — at some point next year. We’re not sort of talking specific dates there. I think as José talked about in the pre prepared remarks, we’re now going to do our Capital Markets Day before the end of this year. That gives us a chance to clarify with investors where we see the opportunity for the various parts of the platform as we’ve structured the business. We’ve got marketplaces under Edward. We’re going to have FPS under Kelly, and we’re going to have David Day doing the Brand Platform as he already has been. And Kelly, who’s been running FPS since day 1 will be part of that Capital Markets Day, which she’ll be able to outline the exciting developments for clients moving forward, and we’ll be able to give you an update then on what we’re doing for these amazing transformational deals for the industry.
So, if you don’t mind waiting until then, we’ll provide more clarity. At this stage just sometime next year is the best estimate to give you right now.
Operator
Next question is from Blake Anderson from Jefferies.
Unidentified Analyst
I wanted to ask on the full price dynamic. Wondering I think you’ve talked about that as being the majority of your business now. I’m wondering if you could say how much of that is your business now and how much more to go, especially in the second half? And then, how should we think about as maybe your average price point increases due to that, should that impact your customer growth at all? How do we think about the impact of customer growth there and AOV? Thank you.
Elliot Jordan
Yes. I’ll take that one. So, we’re now in a very, very good place, I think, in terms of luxury peers for the markdown full price mix. Full price now is north of 70% of the overall GMV mix. So, I think that gives us more opportunity to continue to shift towards more full price, as I said earlier on with the strategic shift of the industry away from markdown. So plenty of room still to grow our full price offering.
I think it’s worth pointing out that there will always be a place in the industry for markdown. And not only do we see markdown on Farfetch, but there are other very highly competitive businesses out there that provide channels for the industry to provide clearance and markdown. And there’s certainly growth for them into the future.
For us, I think as we move into the second half, we’re still going to have markdown activity coming through, particularly from our first-party business. You will see that the gross margins on the first-party business still running down year-on-year. That’s because we had bought stock, assuming much higher levels of growth. We obviously completed most of the ordering for the season and next season before the macro challenges of Russia and China hit us.
We’ve tried to cancel as much as we could there. But obviously, we’re honoring contracts and taking stock in, and we’ll have to clear that stock throughout the rest of the year, which will continue to suppress the gross margins. We’ll be — that is built into my forecast for 30% plus order contribution on the Digital Platform for the rest of the year.
As it pertains to customers, I mean, I’m really pleased actually with the customer number, 3.8 million active consumers means we were stable quarter-on-quarter, slightly up actually, 13% growth year-on-year. That was across all of our categories. Fashion, in particular, was very strong in terms of new customer numbers. In the U.S., we had more active customers in Q2 than we did in Q1. China, we had more active customers in Q2 than we did in Q1. So seeing some really good stats coming out of those two key markets. And as José said earlier on, really good strong green shoots coming through for China as we move forward.
So, I think those customers tend to shop a broad range of products. We’re definitely seeing with 20% year-on-year growth of full price outside China and Russia that our customers clearly are buying into products at the start of the season. The extended European summer has seen very strong growth for our holiday and sort of travel categories, beachwear categories, where customers have continued to buy in at full price.
So, we are able to grow customers across the full price mix, but also we’re seeing customers buy into markdown now that we started the sale and we were in sale for the back end of the season. So a very broad ability to attract a number of different customers. I should point out it’s extremely competitive as well. Hence, why you’ve seen our demand generation costs increase year-on-year. We’ve seen cost inflation in terms of demand generation, but we are attracting a good mix of customers, over 500,000 new customers in the quarter.
In terms of AOV, actually, on an underlying basis, that was slightly up year-on-year. We’ve seen an increase in our average selling prices as customers buy into higher categories. That higher full price mix is driving a higher average selling price. We’re seeing slightly more items per order, which is fantastic, again on the marketplace. And that’s all offset by this currency impact. So when we’re translating euro baskets or renminbi baskets or sterling baskets into dollars to then calculate our average AOV, obviously, the stronger dollar is putting lots of pressure on that metric. So AOV was down 0.5% as a result of that significant pressure from currency. But on an underlying basis, AOV was up because of stronger selling prices.
So, I hope that answers your question. We’re very happy where we are with customers. And as we move into the second half, I think lots of opportunities for us to be able to deliver growth for consumers and really amaze customers on the marketplace.
Operator
And our final question today will come from Louise Singlehurst from Goldman Sachs.
Louise Singlehurst
If I can have a quick follow-up on the underlying growth rates. Obviously, the 22,000 net customer additions, but you’ve obviously been materially impacted by Russia and China. And just firstly, on China, I know that the luxury peers have been down anywhere between minus 30% minus 40% in the quarter. Is there anything on the regional color that you can just give us about the other regions? Because obviously, that is a big impediment to the underlying growth number.
And then, Elliot, just to check, you did indicate in some of the commentary regarding the impact of Russia and what that will have on the full year in terms of the numbers. But I wonder if you can just help us think about that underlying dynamic? And if it’s possible to talk to us about the number of gross new additions in the period as well, if you could give us that number? And then just one quick follow-up. José, I can’t help but notice your extremely bullish comment for 2023. Just circling back on the China comments earlier. Can I just check in the size of Ferragamo, Neimans, et cetera. I guess we can derive that China is the biggest delta from what we’re seeing today in the business to drive that very positive outlook for ‘23. Thank you.
Elliot Jordan
I think we did ask for one question each, but just because you’re last, we will go through them all for you. Customers, yes, as I said, very, very happy where we are. The gross new additions was again, 500,000 in the quarter. We lost about 50,000 — just north of 50,000 active consumers, because of Russia. That’s a number that’s going to exist now each quarter as we start to annualize the shutdown of the Russia business. It will peak in terms of just over 100,000 customers dropping out in Q4.
So, when we previously spoke, I actually thought the active customer number might drop back year-on-year. So, the fact that we’ve been able to hold it slightly positive, as you say, because of the strong gross additions is very, very good in my view.
In terms of China, the numbers you talked about, we’re in that ballpark in terms of GMV year-on-year in decline. So obviously, being our second largest market with such significant year-on-year decline in GMV is a significant headwind for us. And obviously, Russia, we talked about this on the last call, as our third largest market, around about 7% of GMV last year for the marketplace, again, a significant headwind in terms of the numbers. And that was the main reason why we took our growth down last quarter.
The reason that the growth rates for the rest of the year have been revised slightly down is all down to currency. You can do the math yourself in terms of the impact of the stronger dollar against where the GMV would have been across Q3 and Q4. And the shift in terms of the growth rates is all down to the appreciation of the U.S. dollar. Underlying, we’re still seeing very, very strong position in terms of order and customer growth.
And I’ll pass over to José with regards to 2023.
José Neves
Louise, and thank you for asking that question, because I definitely think that 2023 is shaping up to be a fantastic year for us. We will lapse Russia, which, as Elliot just said, was a significant part of our business. We do have all these exciting launches, Reebok. Reebok, we actually gave a time line is around end of Q1. The others, we will provide more clarity in our Capital Markets Day, but definitely, they will be revenue generators and growth generators. And I’m talking here Salvatore Ferragamo, Neiman Marcus Group in 2023.
But then there is the underlying growth of the business, which is very strong. When we consider the FX headwinds that we’re seeing, we’re really seeing very, very strong in terms of the underlying business outside Russia and China.
In terms of China, the minus 30 that you say that luxury houses are reporting and Elliot confirmed, we’re ballparking in that sort of figure. You can see how China returning to growth, even if it’s not the outsized growth, very fast-paced growth that we historically have seen recently in that market, is a significant reversal of our trading dynamics.
And I’m confident we are — that market is going to return to growth. My confidence comes from reports from other players in the industry. You’ve heard luxury brands one after the other saying that they’re confident about the market. There is pent-up demand. We see the data in terms of engagement of customers, they haven’t stopped downloading and opening our app and engaging with us. Conversion rate is lower because of transit times and lead times due to cross-border COVID-19 issues. But we believe that the demand is there, the engagement is there. And we have a unique competitive position in that market with unique sales for many, many designers and brands that see in the Farfetch platform the gateway to China. Even in the big brands, we have unique SKUs and product because of that cross-border the nature of our business. And so, we believe that it’s going to be a great year for Farfetch China as well.
So, if you add up all of that, we see strong top line growth in 2023. But this is not just about top line. The streamlining of the business and the reorganization that we were able to take advantage of, of a slower year this year, will mean that we will exit 2022 a leaner business with profitability in 2023 and cash generation at heightened levels as soon as we capture that growth that we know is latent and these new initiatives are going to bring to Farfetch.
So, I think 2023 shaping up to the return to growth as well as heightened levels of profitability, taking advantage of the rationalization that we were able to do this year in the business.
Alice Ryder
I think concludes our call. Thank you, everyone, for joining us. We look forward to speaking to you next quarter. Have a good night.
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