Farfetch Q3: Below-Par Results; Guidance Disappointing (NYSE:FTCH)

A few months ago it looked like Farfetch Limited (NYSE:FTCH) was going to come roaring back after its last quarter. However, the market remained horrific in September and was weak to start October. Despite a recent rally, FTCH stock is still in the single-digits, having given back so much of the gains we saw in late summer. Now the stock is searching for direction. We think that the stock could make a move following the just reported Q3 earnings. The stock is getting crushed on these results initially after an hour. The results were below expectations and the outlook leaves something to be desired. There remains international stock concerns, and this is a tech type stock that does not make any money. There is also general retail stock weakness which suggests reduced demand for Farfetch’s goods. While there have seemingly been positive operational developments, these results were mixed at best.

Customer count falling and currency hurts

Despite recent acquisitions and a long period of growth, the company saw reductions in all key metrics. That is horrible. Customer count had long continued to grow, but suddenly fell from last year with a 7.9% drop in active customers on the platform to 3,593,000. Ouch. Q3 2022 gross merchandise value followed customer counts lower. Gross merchandise value dropped 4.9% year-over-year. Making adjustments for currency exchange, gross merchandise volumes were up 4.2% year-over-year to $967 million, but this is down from Q2. Despite the customer count, revenue still managed to grow. Revenues increased 1.9% year-over-year to $593.4 million. It is worth noting that this was a big miss versus consensus estimates of nearly $658 million. Yikes.

Margins strong and this was a positive

While volumes were mixed based on currency issues, and revenues were up a bit, the big positive we thought was margins. There was also a nice take rate on third party sales. Third-party transactions generated 80% of Digital Platform gross merchandise value, and came in at take rate of 32.6%. This was supported by record media solutions revenue. The take rate was also up from the sequential quarter.

There was an overall 44.9% gross profit margin for the business. This was up nicely from a year ago when gross profit margins were 43.3%. This is definitely a win on a year-over-year basis, however, it must be stated that margins fell from Q2. Very mixed results, and the market is selling it off as the company continues to lose money.

Still losing money

Despite the better revenues and better margins from last year, the company lost more money this year. Their profit after tax was $1.04 billion less than a year ago. A year ago there was a profit of $769 million and now there was a $275 million loss, much of this driven by poor investments. Adjusted EBITDA swung to a loss as well, at -$4.1 million, down $9.4 million from a year ago. It was worse than expected on the bottom line too. The company lost $0.71 per share. So, it burned cash. Coming into the quarter they had liquidity of short-term investments totaling $99.6 million, along with cash and cash equivalents of $575.6 million on the balance sheet. Now it was down to $487.4 million. That said, a couple weeks ago they entered into a credit agreement for a 6.5% $400 million term loan due 2027. Debt is becoming more expensive, and there could be more debt taken on.

Outlook mixed

Folks, the outlook was sliced massively. Coming into Q3, for the entire year, the company was 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. After Q3, they are now expecting digital platform gross merchandise value to drop 5% to 7%, while brand platform gross merchandise value will be flat. On top of that adjusted EBITDA margin will now be negative 3%-5%, where it looked like it would be positive earlier in the year.

Take home

The thing is the company is taking steps to grow in this luxury space. Their platform will have doubled in size over the last three years, even though there are some difficult series of global events, now dealing with massive inflation and higher rates. There is war in Ukraine, and tensions rising in Asia with the west. The company is getting crushed by a strong dollar. We do like the strong margins here, and if it was not for currency gross merchandise value is still on the rise some. They are well-capitalized, but the stock action has been poor on continued EBITDA losses and big net losses. The company is setting itself up for success, if it can navigate this climate. However, the stock is not the company. Giving back all of the bumps it saw after Q2 is painful. The stock is too speculative for our tastes, outside of rapid-return swing trades.