Farfetch Q2 Earnings: Epic Short Squeeze (NYSE:FTCH)

We have not checked in on Farfetch Limited (NYSE:FTCH) in many quarters but it was a hot topic of discussion today for speculative Friday. It was last a topic of discussion over a year ago, and back then shares were substantially higher than the $12 they are at today. And that $12 level comes off of a 26% monster day for the stock following the just reported Q2 earnings. In fact even after this monster rally, shares are down 71% over the last year. This even comes after a 20% rally Wednesday. Ouch. The reasons are many, including international stock concerns, all things tech being battered if they did not make any money (innovative high growth tech, for example), retail stock weakness, and a questionable wealthy class and subsequent demand for Farfetch’s goods. It has certainly been ugly, and some may call this bounce a deadcat. They may be correct, but there are bullish developments here, despite the lack of real earnings, which is headwind number one.

Epic short squeeze

Today’s rally was an epic short squeeze in our opinion. In fact there were over 17 million short shares traded today. When you couple this with a 65 million share volume day when the average volume is about 10 million shares, and that is a recipe for a massive move. On Wednesday, another big up day, 12 million short shares were traded according to Fintel data. Indeed the move was massive to the upside on a day where the tech heavy NASDAQ fell nearly 4%. We believe shares may have more room in the tank short-term on this squeeze, however, longer-term there is a lot to prove here. Still, we like what we are seeing in terms of new developments.

Acquiring YNAP

The squeeze was first started Wednesday, though to a lesser degree when it was learned Farfetch reached a deal with Richemont to acquire a 47.5% in Italian online fashion retailer Yoox Net-A-Porter, or YNAP. Analysts also spoke highly of this move. If Richemont brands moves all of their offerings onto the Farfetch platform and much of YNAP to e-concession, gross merchandise value could explode higher, perhaps by $3 billion. Could be significant for the company.

Volumes rising

While the acquisition of this stake is driving a lot of immediate action the reported earnings were strong and growth continues. Customer count continues to grow, with a 13.3% growth in active customers on the platform to 3,844,000. Impressive. Q2 2022 gross merchandise value increased 1.3% year-over-year. Making adjustments for currency exchange, gross merchandise volumes were up 7.6% year-over-year to $1 billion. That is strong. This drove revenues to increase 11% year-over-year to $579.3 million. It is worth noting that this was a beat versus consensus estimates of nearly $13 million.

Margins strong

While volumes and revenues were up nicely, it is important to note a solid take rate on third party sales, and margins for the business.

Third-party transactions generated 81% of Digital Platform gross merchandise volumes, and came in at take rate of 31.2%. This was supported by record media solutions revenue.

There was an overall 46.2% gross profit margin for the business. This was up nicely from a year ago when gross profit margins were 44.0%. This is definitely a win.

Still losing money

Despite the better revenues and better margins the company lost more money this year. Their profit after tax was $20 million less, which is nice to see on a GAAP basis, but adjusted EBITDA losses widened this year to $24.2 million, up from $20.6 million a year ago. It was still better than expected on the bottom line however. The company lost $0.21 per share on an adjusted basis, widening from $0.17 per share a year ago. While they are losing money they have ample liquidity. Liquidity at the end of the quarter was made up of short-term investments totaling $99.6 million, along with cash and cash equivalents of $575.6 million on the balance sheet.

This is why the stock struggles to find footing. Ongoing losses. While the news is positive on volumes, despite not selling in Russia, and issues with selling in China due to COVID, the earnings have to be better. We were pleased with one of the guidance items for breakeven EBITDA, and this is likely what helped trigger today’s action.

Outlook positive

We think a strong outlook helped to spark what we are seeing. First and foremost the company as alluded to earlier targeted breaking even on adjusted EBITDA. Sure positive EBITDA would be lovely. But this is a step in the right direction, and would be the second year in a row of breakeven EBITDA. We get it, many were hoping the cost savings initiatives could lead to positive EBITDA no doubt, but this is still welcomed.

For the entire year, the company is expecting digital platform gross merchandise volume to be flat to up 5%, with its brand platform gross merchandise volume being in the range of flat to up 10% from last year. While a strong dollar that we have seen since Q3 began will likely weigh on profitability, the company is getting there. Further on the conference call we also learned that “…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.” That is solid guidance, seeing the balance sheet cash expand at year end.

Take home

The quarterly results and outlook probably would have been good enough to trigger a rally, but this news on the back of the stake in YNAP continued to squeeze the shorts. There may be more to go. So, breakeven again on EBITDA will be good news, even better if it’s positive. Over the next year, YNAP can contribute a lot to Farfetch. It can help gross merchandise volumes heavily. We like the cash guidance as well. Ultimately, sales to Russia will eventually be back. Might not be this quarter, or this year, but eventually Russia in some form will be back participating in the world economy. The issues with COVID-19 will eventually be in the past, and should return to growth. The growth beyond this year should also be driven on the recession in the U.S. coming to an end. The stock action will be tough to predict, but there are more shorts to cover, and bulls may be willing to bid the name higher on this new momentum. In any event, traders can do well here, but the bulls are in control.