Farfetch Limited (NYSE:FTCH) Q3 2022 Earnings Call Transcript

Farfetch Limited (NYSE:FTCH) Q3 2022 Earnings Call Transcript November 17, 2022

Farfetch Limited beats earnings expectations. Reported EPS is $-0.24, expectations were $-0.28.

Operator: Good afternoon, and welcome to Farfetch Q3 2022 Results Conference Call. My name is Olivia, and I’ll 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 now begin your conference.

Alice Ryder: Hello, and welcome to Farfetch’s third 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.

Photo by Hanson Lu on Unsplash

José Neves: Hello, everyone. Thank you for joining us today. Since 2019, we’ve navigated unprecedented world events and captured market share, placing us on track to broadly double our business over a three-year period, both in terms of GMV and revenue. Along the way, we cemented our ambition of becoming the global platform for luxury, advancing transformational partnerships that we believe will deliver strong growth and profitability in years to come. Luxury is an incredible industry, which has demonstrated its resiliency over the decades and is expected to grow from circa $350 billion in 2022 to over $500 billion by 2030. Farfetch has built a platform for this industry in pursuit of a unique mission that sees us more galvanized than ever as we continue to navigate the challenging macro environment.

I’m pleased to report that in Q3, we delivered year-on-year revenue growth of 14% and GMV growth of 4% on a constant currency basis with improved other contribution margins. This is in spite of the significant impact from our stoppage of operations in Russia and continued impacts of COVID restrictions in China, which were two of our three largest marketplace markets in 2021. In this year of macro headwinds, our focus has been on furthering the rationalization of our cost base. In this vein, we’ve taken the opportunity to redesign the entire Farfetch organization in order to seize the sizable enterprise milestones ahead with a sharpened focus on efficiency and profitability. And while this is ongoing, I’m pleased with the initial results and the performance of our energized leadership team under this new framework.

This reorganization is enabling us to fundamentally restructure our headcount allocation and cost base. And we are already seeing some initial benefits with SG&A costs declining quarter-over-quarter in Q3. The fact that this was achieved in parallel with our continued investments in our new FPS and NGG strategic initiatives, also demonstrates the scalability of our platform. And we’re doing all of this whilst remaining focused on our last time, as the incredible opportunity to build the global title for luxury becomes more relevant and attractive than ever. Another area of focus in the current environment has been on further expanding margins through greater emphasis on disciplined growth. As a result of this initiative, Q3 gross profit margin increased 160 basis points year-on-year to 45% and digital platform order contribution margin expanded 580 basis points year-on-year to 32.4%, and we plan to extend this trading strategy through Q4.

In the current global macro environment, we’re seeing continued digital media cost inflation for luxury, especially in the US as well as reports of higher inventories indicating we’re going to be heading to a very promotional environment. We’ve made the strategic decision of prioritizing margin profitability over growth in this promotional markets, which is reflected in our revised full-year 2022 guidance. Overall, our achievements in delivering disciplined underlying growth, expansion of margins and reduction of the fixed cost base position FARFETCH to emerge from this period as an even stronger business. As such, in 2023, we expect to return to solid growth while also delivering adjusted EBITDA profitability and positive free cash flow. And we will continue to focus on these top priorities while also supporting the strategic partnerships that we signed in 2022 for launch over the next two years.

Neiman Marcus Group, Ferragamo, Reebok and subject to regulatory approvals, Richemont and YNAP. We are tremendously excited about the future and are planning to share more details about our 2023 and long-term plans in our upcoming Capital Markets Day on December 1. And now, I’d like to let Stephanie update you on our audience and the strategic value we are bringing to brands.

Stephanie Phair: Thank you, José, and hello, everyone. Today, I would like to take you through some recent developments across our two key areas of focus. First, our outlook on the luxury customer; secondly, our brand partnerships and the opportunity to further elevate the strategic value we provide to them across our group. I’d like to begin by addressing the health of the luxury consumer. While global macro pressures of inflation and rising interest rates, we can grow consumer sentiment. In practice, luxury tends to be less impacted than the overall retail sector as we cater to an affluent consumer who is less reacted to these pressures. Our consumer continued to exhibit a strong interest in luxury in Q3, as evidenced by the year-on-year growth in active customers, driven by double-digit growth of existing customers as well as high single-digit growth in new customers.

Both new and existing customers also increased the number of items per basket, which is even more encouraging as this behavior over time has historically been correlated with higher repurchase rates. Overall, our customers are highly engaged and the demand generation leverage delivered during the quarter indicates that we have become more efficient in interacting with them. This is also a reflection of our investments in building our brand, which is particularly beneficial in times like these. Our private clients continue to outshine other customer cohorts and exemplify the resiliency of the industry. In line with last quarter, we maintained over 90% retention of our private clients, who delivered average order values of circa $1,100 on continued strong demand for high price point items, including a recent sale of a $930,000 Emerald’s Burberry ring.

During the quarter, we expanded our services to facilitate similar types of transactions via Fashion Concierge, our proprietary and differentiated sourcing service with the launch of Fashion Concierge On Demand, extending the service to all private clients via the app. Q3 also marked a reemphasis on targeted in-person events, with a focus on private clients. In September, we hosted an event at Paris Fashion Week, which saw hundreds of press, influencers and guests visit our Farfetch House, which drove a social media reach of over 25 million, as well as incremental GMV directly linked to the event. Just last week, we cohosted an event with Ferragamo as part of the overall partnership, to introduce our private clients to the new Ferragamo offering at the London Bond Street store.

And later this month, we’ll partner with Art Basel in Miami, engaging with our private clients who have a strong affinity to art, while leveraging the targeted marketing efforts we are making in specific US regions where we see growth potential. On our industry partners, we continue to maintain strong relationships with brands and saw double-digit increases in supply from our top 20 non-NGG brands in Q3. Recently, José and I visited the CEOs of our top brands. Our conversations with them confirm that they are moving away from wholesale and believe in the power of multi-brand e-concessions, a model which we pioneered in luxury and are facilitating via our marketplace and our e-concessions as-a-service FPS offering. While luxury brands are focused on growing owned direct-to-consumer, they are also choosing partnerships and platforms that add value, not only from a distribution standpoint, but also as a marketing partner.

This is something which we have invested in over the past few years. As a result, we believe Farfetch is one of the destinations they are prioritizing. This is because Farfetch has the ability to provide value to brands through multiple services across our group, by leaning into our USPs. First, as the innovation partner in the industry, marrying fashion and tech. As we develop new features, we make them available to brands or we specifically launch new capabilities as part of broader partnerships. This quarter, for example, we are rolling out a 3D viewer for handbags across our platform, which will benefit our top accessories brands and improve the customer experience. Second, our global reach, where Farfetch overindexes in emerging markets, such as Mexico, Brazil and the Middle East and offers access to regions where brands may not have as strong D2C presence.

This is particularly the case in China, where despite the overall macro environment, we believe it is a long-term luxury opportunity. And our investment in localization and technology means we are the leading west introductory player in the strategic market. And third, our luxury audience. Though we’ve become known as the platform for Gen Z and millennials, as a marketplace, we can appeal to a variety of said aesthetics and demographics and can, therefore, offer access to a broader range of the brand’s collections, making us a more attractive partner for brands to work with who can choose to highlight parts of their collection by curation and personalization. This is valuable from an ongoing commercial perspective around supply and a broad base to support the continued growth of our media solutions business.

We were encouraged by our recent discussions with brands where they confirm that this aligns with how they would want to target our customers, as well as how they structure their distribution. We believe this further positions Farfetch as a partner who understands brands and their overall strategic goals from a commercial, audience and technology standpoint, further cementing our role as one of their most strategic partners in the industry. And now, I’ll hand the call over to Elliot to discuss our financial results and outlook.

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Elliot Jordan: Thank you, Stephanie, and hello to you all. I’m pleased to share with you our third quarter 2022 results. I wanted to start by addressing the impact of a stronger US dollar year-on-year, which materially distorts our underlying results, which I am very pleased with given the backdrop of a challenging economic environment. There are four numbers to focus on, all on a constant currency basis. First, our Q3 revenue grew 14% year-on-year. Our digital platform GMV grew 10%, excluding Russia. Our brand platform revenue grew 14% year-on-year. And our stores grew revenue 54% year-on-year. At the same time, our three business segments expanded gross margins year-on-year and we started to crystallize the financial benefits of our actions to rationalize the cost base.

These results indicate a business successfully adapting to the current environment, whilst continuing to deliver underlying growth. Our reported numbers deviate from these underlying results due to the continued strength of the US dollar year-on-year, coupled with the financial impact of closing our operations in Russia earlier this year as well as ongoing COVID restrictions across China. This means our reported GMV, revenue and EBITDA profitability are lower than we previously expected. Whilst these factors will continue to challenge us in the next two to three quarters, I am confident we will return to profitable growth in 2023. With respect to Q3 2022 profitability, order contribution margin was up 580 basis points year-on-year to 32.4%, reflecting ongoing efforts to drive margin improvements, and our cost of technology and operating overheads were lower quarter-on-quarter.

I’d like to walk you through the drivers behind our performance across our three business segments, starting with the Digital Platform. Digital Platform GMV was $787 million, a reported decrease of 5% year-on-year, but growth of 3% on a constant currency basis. GMV from the Farfetch marketplace, which represents the lion’s share of digital platform GMV, declined year-on-year across EMEA, largely due to the stronger US dollar and closure of Russia. GMV also declined year-on-year in Asia Pacific due to the stronger US dollar and ongoing COVID restrictions in China. And GMV was flat year-on-year in the Americas with GMV in the US down, the impact of a deliberate decision to reduce demand generation spend by 20% year-on-year to focus on higher margin profitability from this key market.

Despite these headline figures, I’m pleased to report underlying order growth of 13% ex-Russia and 9% year-on-year growth in active consumers. Active consumers increased quarter-on-quarter with gross adds up over $500,000, offset by circa 100,000 fewer active consumers due to the Russia market closure. In parallel, we have achieved significant efficiencies in our customer acquisition costs, which were down 18% year-on-year. Supply remains equally as strong with both brands and boutiques continuing to increase overall stock value on the marketplace, which was up 25% year-on-year at quarter end to a record $5.5 billion. I’d also highlight that average order value is circa 10% lower year-on-year at $530, which is predominantly due to currency translation to US dollars.

Third-party take rate was 32.6%, 250 basis points higher year-on-year, the highest as a public company. This increase is attributable to our recent efforts to negotiate higher commissions, particularly from brand direct partners and continued growth in revenue of our high-margin Media Solutions product. First-party GMV grew 4% year-on-year to $139 million and represented 20% of digital platform GMV. Q3 2022 digital platform order contribution margin was 32.4%, an increase of 580 basis points year-on-year. This increase was achieved by; first, strong third-party gross margin of 70%, up 720 basis points year-on-year, which is predominantly being driven by efficiencies in our shipping duties and returns costs. Secondly, we achieved efficiencies in demand generation expense with a 400 basis point reduction year-on-year to 19% of digital platform services revenue this Q3, the lowest level in five quarters.

This improvement reflects initiatives to lower customer acquisition and engagement costs, including a reallocation of spend towards lower-cost markets, more profitable transactions and the annualization of the impacts of IDFA restrictions. These positive impacts were partially offset by clearance activity within our first-party business, producing lower gross margins year-on-year as a result. Moving to the brand platform, where we saw GMV of $148 million, a decrease of 10% year-on-year, but an increase of 5% on a constant currency basis. Brand platform revenue decreased 2% to $162 million. The difference between GMV and revenue being an addition of revenue from our partnership with Reebok, which commenced in March 2022. The brand platform generated gross profit of $81 million at a 49.8% margin, an increase of 120 basis points year-on-year, which was driven by the additional net economic benefit from the Reebok partnership.

Finally, in-store GMV grew 35% year-on-year to $32 million and achieved gross profit of $19 million at a 70% gross margin. In terms of our cost reduction initiatives, I’m pleased to report that we are starting to see that our efforts are taking effect. During the third quarter, these delivered savings across our operations platform, our retail network, marketing spend, and corporate people costs. Further cost saving opportunities will crystallize as we embed the new leaner and simpler operating structure and we expect to achieve operating cost leverage in 2023. Overall, adjusted EBITDA was minus $4 million. However, on a constant currency basis, adjusted EBITDA would have been circa $5 million. Loss after tax was $275 million, after the following non-cash items: an increase in financing costs year-on-year due to unrealized FX losses, an increase in depreciation and amortization year-on-year as we started to amortize the Reebok partnership licensing agreement in March, higher share-based payments due to 2022 equity grants and an impairment charge on our Browns business as a result of impacts of the macro environment.

Finally, we have taken measures to reinforce our liquidity position by issuing a $400 million five-year term loan instrument. This instrument can be repaid at par after 24 months, which provides valuable working capital over the near-term. Note that as part of this transaction, we also settled the remaining $50 million of our February 2020 convertible instrument with Tencent, with whom we continue to have a strong relationship. I’d now like to cover our outlook for the rest of the year. Our updated expectations for the full year 2022 on a reported basis are: Digital Platform GMV of $3.4 billion to $3.5 billion, a decline of 5% to 7% year-on-year. Brand platform GMV will be broadly flat year-on-year, Digital Platform order contribution margin in the range of 32% to 33% ahead of 2021.

Adjusted EBITDA margin of minus 3% to minus 5%, with a year-on-year impact from the FX translation of the brand platform operating entity. And cash on hand of $750 million to $800 million as of December 31, 2022. Once again, the stronger US dollar year-on-year has a significant impact on our expected reported figures. This view also reflects a deliberate decision to step away from what we believe will be a heightened promotional environment across key markets during Q4. This decision follows our previously stated strategy to drive a higher full price mix and maintain order contribution margin above 30% at the expense of GMV growth. Despite this, our actions to deliver operating cost efficiencies as well as our focus on short-term growth prospects remain in place, meaning we expect to see a return to GMV growth in 2023.

This growth will accelerate as we progress throughout the year. In addition, we expect to achieve low single-digit adjusted EBITDA margins and positive free cash flow in 2023. We will provide the building blocks of this guidance as well as medium-term expectations for each of our three platforms: marketplaces, FPS and brand platform on December 1 and our inaugural Capital Markets Day. And with that, I’ll turn it back over to José for some closing remarks.

José Neves: Thank you, Elliot. I am very pleased we are successfully navigating an unprecedented macro environment in 2022 with the following strategic responses: one, seizing this opportunity to redesign the entire Farfetch organization, creating stronger accountability around our three pillars, marketplaces, platform solutions and brand platform and furthering our enterprise readiness. Two, capitalizing on this reorganization to fundamentally transform the way we allocate headcount and restructure our fixed cost base. Three, exit 2022 with a much more efficient business and SG&A structure whilst. Four, continuing to build on our mission to become the global platform for luxury, which remains intact and in fact, reinforced as a tremendous opportunity.

And five, demonstrating the scalability of our platform by reallocating headcount and investments to deliver on strategic initiatives such as Reebok, Neiman Marcus Group, Ferragamo and Richemont, YNAP, which we expect to complete in 2023 after regulatory approvals have been received. I am extremely confident that these ongoing measures will make Farfetch emerge in 2023 as an even more powerful, efficient and profitable business, which continues to lead the online luxury industry and on a mission to become its preeminent global platform. And with that, I’d like to open up for your questions. Thank you.

Q&A Session

Operator: We will now move into our Q&A session. Our first question is from Will Gardner from Wells Fargo. Please unmute your audio and ask your question.

Will Gardner: Good afternoon, guys. Just a couple for me. There’s a bunch of macro headwinds impacting the business currently. Maybe you could just frame out how the underlying business is performing now? And you gave some breadcrumbs for 2023. Maybe just discuss the underlying business heading into 2023 as well? Thanks.

José Neves: Hi. This is José. I’ll take that question. I think, first of all, it’s really important to take a step back here. And these have been very volatile three years with several world events, COVID, the war in Ukraine, strength of the dollar, inflation, et cetera. And we have been navigating these very volatile times very successfully. We broadly doubled the business in the last three years, both in terms of GMV and in terms of revenue. This is significantly higher than our peers, be it online luxury or even our luxury brands. So the comps are different. I just want to highlight that. And there were a few uncontrollables this year. Russia, the stoppage in Russia; China COVID restrictive policies; and FX to name the three most powerful macro factors impacting our performance.

The underlying business, to your question, is still growing. So if we exclude Russia, even if you leave all the other macro factors, China and FX, just excluding Russia, we will grow this year. And we have — if you look at the underlying business, we have very strong data points here. So we’ve added last quarter another 500,000 customers, so we can continue to add new customers to the platform with lower demand generation costs. We — in terms of orders, as Elliott pointed out, excluding Russia, others went up 13% last quarter. This is a good metric because, obviously, with others you want to abstract the impact of FX on the average order value. And our most valuable customers, our private clients, we keep above 90% in terms of retention, $1,100 average order value.

That’s including the FX impact. Without the FX impact would be even higher. So very, very solid underlying business in spite of the general macro environment, which is adverse. And then on the controllables, we are absolutely taking every action that we feel needs to be taken here. We are taking this year of macro volatility as an opportunity to reorganize the company. We’ve outlined that in May and then in more detail in August, we’ve done a complete reorganization and redesign of the Farfetch leadership and of the Farfetch company. And that allowed us to unveil strategic opportunities to shrink costs, prune initiatives, rebalanced headcount, reducing headcount in certain areas of the business and allowing us to rebalance that headcount to the new initiatives that we’ve signed that we’re going to launch in 2023 and 2024.

You already see that in the SG&A line, which is shrinking quarter-on-quarter. This is ongoing. So you will continue to see the results of this cost discipline. The other controllable is our strategy in terms of full price, and we are absolutely continuing to focus on our higher quality customers and higher quality sales. We’ve reduced the demand generation spend. We’ve increased margins. We have the highest stake rate on record since we were a public company, the highest on the contribution margin in the last five quarters, 580 basis points year-on-year. So this was a deliberate action to protect our margin profitability. And all of this really sets us up very well for 2023. We believe that we need to have our eyes firmly on our Northstar. The huge opportunity of building the global platform for luxury remains intact.

We have key initiatives that underpin our 2023 growth plans. To your question in 2023, we expect to be back to growth. That’s driven by the continuing strength of the car business as we lapse these macro factors, Russia is a mathematical equation. We will lapse it by March next year. China, it’s improving quarter-on-quarter. Of course, we don’t know exactly how the situation will pan out, but it’s in double-digit decline this year. Again, from Q2 to Q3, we already saw an improvement. Even if it goes into a flat territory next year, it will be a tailwind, but we need to have moderate expectations there, of course. But we will eventually lapse that China impact as well. And FX, obviously, the dollar is at historical levels, and we’re forecasting — we do our budgets, obviously, on a constant FX basis into 2023.

So we believe that we will have positive impact from these lapsing of the macro factors and the car business, where we have strong data points exiting 2022. And of course, we have these new signed deals. These are not castles in the air. These are signed deals that we’re on track to deliver Ferragamo, Reebok into the first half, Neiman Marcus Group in the second half and obviously, pending regulatory approval, completing the Richemont and YNAP deal and prepared and on track to deliver on those as well. And with all of that and the cost rationalization that we’re doing this year, we are very, very confident that we will go back to EBITDA profitability, which we achieved last year. And you can see by looking at 2020, where we had positive cash flow in this business, when we normalize 1P, and we will normalize 1P in 2023.

And when 3P grows, this business generates cash. And this has been the case historically, and we think very, very confident that we will go back to that cash positive scenario. And look, we’re well funded. To go through this macro volatility, we will end a year with $800 million in the bank, and with a very energized team and a new org to go after all these opportunities. And that — it’s on that basis that we are very confident about 2023 ahead of us. Thank you.

Operator: Our next question will be Doug Anmuth from JPMorgan. Please unmute your audio and ask your question.

Doug Anmuth: Operator, thanks so much for taking the questions. I guess just first, thinking about Digital Platform order contribution, up sequentially and then up about 500 basis points year-over-year. Can you just talk about the potential to get further efficiency gains on your marketing spending and customer acquisition costs and further gains as well on take rate due to Media Solutions? And then secondly, just on China, any expectations kind of from what will look like as things hopefully open up more? And has this period given you more €“ more time to strengthen the offering in the TLP platform? Thanks.

Elliot Jordan: Hey, Doug, Elliot here, good speaking with you. Look, I think as I’ve spoken to investors a number of times, we see significant opportunities as we move forward on order contribution. There’s broadly sort of five levers to see the order contribution expand. You touched on two very big levers, obviously, improving our Media Solutions income, again, a record level of revenue this quarter, but still running below 1% of overall GMV. And we benchmark ourselves to other marketplaces that sit at sort of 4%, 5% of their own GMV. So we see significant upside there. We’ve got plans and very strong relationships with the brands across the industry. Clearly, the stock level as well to $5.5 billion. The relationships are strong and with record media income, they see our 3.9 million active consumers is very desirable to be in front of, and we would continue to see that grow.

That falls through the order contribution with significantly higher levels of margin and will take us towards our longer term targets of 60% over the long-term because it’s higher than that in terms of accretive to order contribution. In demand generation, again, great savings year-on-year. The team has done a fantastic job to spot areas of opportunity, to drive efficiencies. We were down 20% in terms of spend in the US. And the GMV impact on that was significantly less than that. So we were able to drive improving margin in that market and focus on really the high-end customer. We’ve seen great retention at the top end of the customer base. The private client is up 90% — over 90% retention. Good AOV within that group as well when you sort of — obviously, in the US, you don’t need to adjust that for currency, but more broadly, when you adjust for currency, the spending is strong in that client base.

And others that we target online, whether that’s our access customers at gold, platinum, silver, seeing good efficiencies from that higher LTV customer bracket, which we’re very, very focused on. And when you do remove your demand generation spend as we have done year-on-year, by bringing it down to the lowest level in five quarters at 19% of revenues, you’re effectively removing that marginal incremental customer that isn’t that valuable. And we’re seeing lots of promotions come into the next quarter. We’re not going to participate in that high level of promotional activity. Again, that will mean a will be weaker than previously planned, but we’d rather not invest in those customers and see our margin decrease. The plan is to hold our order contribution margins well-above 30% in the quarter ahead.

The other levers just to touch on, obviously, the first-party business, again, very heavy in clearance activity at the moment. So low levels of gross margin in the 20% range. That’s not where we want to be long-term. We would expect to be able to return that gross margin up to industry levels of 35% to 40% gross margin as we clear through this excess inventory. This inventory came about because of the slowdown in sales in Russia and China, which were unexpected. We have to clear through that stock over the seasons, but then would see that margin improve. Then as we move forward, and we’ll touch on this a bit more at the Capital Markets Day on December 1st. The plan is to move away from first-party stock and sales and more towards third-party driving our GMV growth moving forward.

The GMV on third-party, the gross margin, I should say, on that was 70% this quarter, very, very strong up 700 basis points year-on-year, thanks to shipping efficiencies. So a double whammy there of improving order contribution margin, shift away from first party to higher gross margin third-party business. And through the efficiencies, the fulfillment team delivering on our shipping model with improving relationships with a broader mix of carriers with more localized supply, routing, returns to consolidation centers where we can deliver more efficiency in terms of unpacking or helping to drive savings in our returns and our outbound shipping in our duties, which were down 700 basis points as a percentage of Digital Platform revenue this quarter.

Then I’ll touch on FPS. Again, a big feature of the Capital Markets Day, where we will be breaking out the economics of FPS for our investors to see. As we add incremental GMV of this part of the platform, we see very accretive order contribution margins flowing through and will expand order contribution margins over the near to longer — the medium to longer-term. And then lastly, of course, underlying commissions. You’ve seen our underlying commissions improve again to help boost the take rate up to 32.6%. That’s with renegotiations on brand partners. We’re bringing up the lower level take rates and commissions to help the overall blended mix, so lots of opportunities to continue to see that number move over the near-term. On China, maybe José?

José Neves: Yes. I’ll take the China question. Look, I think China is an amazing opportunity. It’s second largest luxury goods market in the world, around 30% of the luxury industry is expected to be as much as half in years to come. Here, we have a tremendous opportunity as we have a very unique competitive advantage. We’re really the only Western player that has invested many years and has a fully localized presence in the market, local apps driving the majority of our business there, an incredible team on the ground, incredible consumer proposition, both cross-border and domestic. And that’s very unique in the Western landscape. And then a partnership with the other game in town, which is Alibaba’s Luxury Pavilion. So really the two platforms that are driving the online luxury story in China.

Very happy with the Luxury Pavilion. It’s growing ahead of our marketplace and hitting the milestones and the goals that we had set with Alibaba and Richemont, when we did the joint venture. And overall, we’re very bullish about the long-term. We think this is a current situation. Consumer sentiment is temporary. We’re vigilant on the situation and monitoring, but this is not a reason to retreat at all from that market. We will continue to invest in an incredibly localized experience for our customers and capitalize on our unique competitive position in that market.

Operator: Our next question is from Lauren Schenk from Morgan Stanley. Please unmute your audio and ask your question.

Lauren Schenk: Great. Thanks. I wanted to ask about the reorganization and expense discipline. When do you expect the full effects of that to be seen? And is there any quantification around the gross savings that you’re expecting there? And then are there any sort of further actions that you think can be taken, or are all the changes are behind us and now it’s just about them flowing through the P&L? Thank you.

Elliot Jordan: Hi, Lauren, Yes. I mean we’ve — as José said earlier on, we’ve done a top to bottom review of the overall structure of the business. And the first output of that is effectively the new reporting structure, the new ownership of the various aspects of the platform. So we have clear ownership over FPAs, the marketplaces and the brand platform. And then in terms of the supporting platforms to deliver against those profitable and growing units, we have arranged ourselves around the operations, the technology and our business services, all again with clear ownerships. And what that’s delivered is significant opportunities for cost savings, particularly around streamlining those various aspects of the business globally.

Some of those are already in you’ve seen a decline in terms of spend quarter-on-quarter of $8 million. Risks continue to flow through over the next few quarters as we work through the continued changes across the business and aligning ourselves around those structures. I think what’s important is if you look at our numbers, we are driving a leverage in some areas of the business again this quarter. And as we move into next year, we will be driving leverage across all areas of our spend through 2023. So if you look at technology year-on-year for Q3, including the capitalized element, only up 1.6% in terms of spend, driving operating leverage. Platform operations, spend was down quarter-on-quarter at driving operating leverage year-on-year. Our brand spend came down year-on-year — sorry — it came down quarter-on-quarter, and again, driving operating leverage year-on-year.

Spend on warehousing because of the efficiencies driven from the logistics team down quarter-on-quarter and driving leverage year-on-year. And, of course, I touched on our customer acquisition spend down 18% year-on-year, driving significant operating leverage and demand generation savings driving order contribution up there as well. So we’re seeing the effects come through. There will be more to flow through. There are actions that are ongoing to see that flow through and savings step up as we move through the next few quarters. I don’t want to quantify that exact number because we are using some of those savings to reinvest we’re seeing near-term growth. Clearly, the partnership with Reebok has started off well, and we will start to see trade from that relationship across Q2 next year.

And we’re also, obviously, focused very heavily on the fantastic new clients that FPS will be going live with starting across H1 and into H2 next year as well. So there is some reinvestment of the savings. There is — but there is leverage coming through now and very pleasing to see.

Lauren Schenk: Thank you.

Operator: Our next question is from Abhinav Sinha from Societe Generale. Please unmute your audio and ask your question.

Abhinav Sinha: Thanks for taking my question. Any comment on the current trading, please? How you are seeing in terms of the customers, the categories and geographies? Thanks.

Elliot Jordan: Yeah, I’ll take that. So as we said earlier on, the three main geographical groupings that we present to investors is Europe, Middle East and Africa. That was in decline year-on-year, largely due to the translation from US dollars and, of course, the closure of the Russian market. Important to note and remind everyone that Russia was about 7% of GMV on the marketplace for 2021, so a significant removal of GMV across 2022. We’ll annualize that negative headwind in the back end of Q1. So from March onwards, we will be like-for-like, again, across Europe, Middle East and Africa. On Asia Pacific, China, actually, the main sort of driving factor there in terms of decline year-on-year. Again, this is due to the ongoing restrictions around COVID.

We are seeing slightly better results though, as in the year-on-year decline was less severe in Q3 than it was in Q2. So that’s promising in terms of green shoots of growth the demand clearly there. And when our business model of cross-border packages frees up in terms of trade, we would expect to see a good level of pickup. As José touched on earlier around China being a significant market opportunity for us in the near-term. In the Americas, what we’re seeing overall, the grouping is flat, broadly flat year-on-year. It’s being brought down a little bit by the US, our number one market. What we started to see across Q3 was a heightened level of promotional activity from the competitive set. I would note a number of other players in the space have had the gross margins impacted.

They’ve been reporting negative gross margins, not Farfetch. Our gross margin is up significantly year-on-year because we’re not following this heavy promotional activity. What we’re seeing and would expect now is that Q4 is going to get worse. There’s lots of stock out there at the moment in terms of inventory of product. And that only has to be cleared across the next quarter. We would expect that to be promotions and Farfetch won’t be following those promotions will be maintaining of value of margin and customer value, and that will come at the expense of GMV in the US across the quarter ahead. It’s a deliberate decision to maintain a focus on full price for our participants on the platform and drive our own margins. The other thing we’re seeing is very high media inflation year-on-year.

So there’s significant growth in costs. Again, because of the competitive environment. We’ve again successfully navigated that with an 18% reduction year-on-year in custom acquisition costs. That’s led to this demand generation reduction year-on-year of 17%, which is driving the order contribution margin up by 580 basis points as well as, obviously, the strength of the third-party gross margins, as I touched on before. So we’re navigating lots of moving parts out there. The global business, there’s lots to deal with, but Farfetch, I think, is faring up better than most. I think the key number here why I say that is the constant currency revenue growth of 14% year-on-year. That matches very well with other players in the space who, of course, get the benefit of reporting in euros with a stronger dollar.

So the reported number is obviously inflated versus underlying numbers, whereas ours are impacted. So overall, we’re doing well. And again, as José touched on before, on a three-year basis, pre-pandemic to now basically doubled the business and accelerating the growth of that because of a strong Q3 in the last couple of years. So we’re doing very, very well to navigate the moving tied here across the industry.

Abhinav Sinha: Thank you.

Operator: Our next question is from Kunal Madhukar from UBS. Please unmute your audio and ask your question.

Kunal Madhukar: Hi. Thank you for taking my questions. One on the accounting part, especially in terms of the cost reduction. When I add the G&A expense and the stock-based comp expense, I don’t see a downward trend on a Q-o-Q basis. So I must be missing something? That’s one. And then the second thing is on FPS timing. And José, you mentioned FPS, especially Neiman Marcus expect in the second half. So that would mean a transition time of close to maybe a year after the deal was signed, or after the deal was completed. When we think of YNAP, how long do you think that transition time could take? Thank you.

Elliot Jordan: Hi. I’ll take the first one. Good speaking with you, Kunal. The share-based comp is the reason why you’re not seeing the savings quarter-on-quarter when you add the two together. Share-based comp is, obviously, something we’ve spoken about with investors quite a bit over the year-to-date. We, like most other technology players in the industry, have seen a volatile stock price. And that has meant that we’ve had to increase the number of units that we’re issuing to our key talent in terms of the contributed grants for 2022 because of the lower share price. The volatility also in terms of how those options are valued means that there’s a year-on-year increase in terms of the IFRS charge for that share-based compensation that’s obviously non-cash.

And the dilution effect of those shares well-understood by investors in terms of my conversations with them and are very comparable with others in the market, as I see at other tech companies facing the same issues around share price reduction. The burn overall is below 10%. Last couple of years, it’s been circa 5% in line with our target, and we would expect our share-based burn in terms of issued shares to get back down towards 5% and lower over the near-term as most other players are as well. But in terms of adjusted EBITDA, the key focus of what is happening underlying in the business, i.e., the costs that we can control. That is where quarter-on-quarter, we’ve seen these savings of $8 million. Again, as I said, widespread changes across the organization to drive efficiencies, clear accountability of the deliverable results as we move into 2023 and leverage year-on-year across key platforms within the organization.

Kunal Madhukar: Thanks Elliot. And maybe on the timing for FPS

José Neves: Yeah, I’ll take that question. Thank you. So I think the timing for Neiman Marcus Group is compatible with the size of this client. I mean, we’re talking about a multibillion dollar company, one of the largest players in luxury with a very sizable online operation, and therefore, complex operations, as you would imagine. So we think that the time line is actually very, very good compared with similar enterprise offerings from other large size enterprise grade companies. And we would expect that to be the case also with YNAP. We’re engaging with regulators. As we said, we would in several restrictions upon announcement, and we will keep you at pace in terms of the timings.

Kunal Madhukar: Thank you so much, José.

José Neves: You’re welcome. Thank you.

Operator: Our next question is from Louise Singlehurst from Goldman Sachs. Please unmute your audio and ask your question.

Louise Singlehurst: Hi, good afternoon, everyone. I will stick to my one question diligently. If I could just ask a question back on demand generation. It was quite a big cut, I guess, year-on-year. And I realize it’s obviously ways that you’re finding more efficiency in that cost line. But there at the assurance that we can give us that there’s no risk of cutting the cost and having that impact on the customer acquisition. I hear the point about the retention, I think, Stephanie, you talked about the 90% retention across the private clients. But I guess how many customers go straight to the highest tiers? Is there another risk of reducing the inflow of new customers at the entry — at the entry level, or does the data tell you something that it’s actually obviously much more efficiently to miss out on some of that entry-level base? Thank you.

Stephanie Phair: Hi, Louise, I’ll take some of that. So I think, look, taking us back a couple of quarters and where we’ve discussed our strategy. We’ve always said, look, we have the capabilities, thanks to our investments in marketing tech to really acquire a lot of customers, and we did over the COVID period. We really leaned in and acquired a lot of customers. That hasn’t stopped. We continue to acquire those customers to the tune of 500,000. We retain a solid number of those. But I think this is also a deliberate strategy to really lean into our most valuable customers and valuable targets in terms of new customers. And we’re starting to see that. We’ve seen it particularly in the US. You saw Elliot stated that our drop in media spend doesn’t correlate to the exact drop in sales, so we’re really seeing efficiencies there.

So I think where we’re really leaning in is our retention efforts. And we’ve been talking about retention and our efforts. It’s just what we do, but we’ve really been leaning into that over the last year or so, everything from increasing personalization, curation, driving sales from the app, where you really see strong retention and really focusing on those higher cohorts. So speeding up, you talked about the move into higher cohorts, speeding them up our access levels, which we’re doing and then really focusing on that private client. It’s something that the industry in general does, and we are doing. We have a very large private client business to work with. In fact, our private client business is actually as big a business as the entirety of some of our competitors.

So we really have a huge base to work with. And we’re doing — now that live events are back, we’re doing targeted events with private clients. We talked about Art Basel. We’ve done in-store events. We’ve really focused on particular markets in the US where we’re seeing that, whether it was LA with our beauty launch or Miami, Houston, Atlanta. So yes, I think what you will see is a drop-off in the lower value but with a real focus on the long-term value.

Louise Singlehurst: And can I just ask, if we exclude bronze and silver, are you seeing the retention rates increasing above? I know the 90%, but we don’t have a reference point in terms of historical levels. Is there anything that you can share with us just numerically on those retention rates?

Stephanie Phair: Yes. So look, retention rates, given all of the macro factors, given the volatility, we would love to see them higher. They’re broadly flat, mostly brought down by the lower tiers, as you might expect. Again, we acquired a huge number of those customers, but we’re seeing some encouraging facts. So more items per basket from those lower tiers. That’s a very good indicator of future loyalty and future repurchase. So even with those lower tiers, it’s not that we’re not focusing on them. We are driving that. But, of course, we’re seeing better ROI from our efforts on the higher tiers.

Operator: We have time for one more question. The final question will be from Stephen Ju from Credit Suisse. Please unmute your audio and ask your question.

Stephen Ju: Okay. Thank you so much. So sorry to belabor the point on the demand generation costs here, but it does sound like the CAC in North America and maybe the US has ratcheted higher, and very rarely does the cost of media ever come down. So should we be thinking about a slower pace of customer growth overall? And also, should we be thinking that the prevailing environment in the US will spread to what may be currently your lower cost regions as your competitors also look for those customers as well? Thanks.

Elliot Jordan: Hi, Stephen, yeah, it’s worth focusing on this. What we’re seeing, obviously, is the media inflation is very high in the US, because of the competitive environment. We are, though, been able to bring our customer acquisition spend, so the dollar per unit of customer acquired or per acquired customer is down 18% year-on-year. So we’ve been able to drive efficiencies despite that media inflation by effectively expanding our mix of channels. We’re using a lot more social media and influencer and other channels to move away from paid search or search engine marketing spend. And that’s helping us to alleviate some of this increased inflation and bring down the actual absolute per order CAC. And, obviously, that’s brought down overall demand generation spend in terms of overall dollars as well.

So far, that’s not impacted on new customer acquisition. We had over 500,000 new customers in the quarter. Again, we’re 9% up year-on-year in terms of active consumers despite the fact that Russia has impacted us by about 100,000 customers in this quarter in terms of negative impact. So, overall, we feel like we had the right balance in Q3, and the team is doing a great job, not to chase those last marginal customers that ultimately aren’t going to deliver the lifetime value that we want to achieve from the customer cohorts that we’re acquiring. I think importantly, we are seeing that drive, particularly given the gross margins are up and the take rate is up, we’re seeing the stronger level of three-month LTV for the customers that we’re bringing in quarter-on-quarter.

So that’s very good, and as I say, the CAC down for Q3. So I would expect to see an improvement again on three-month LTV versus the first half. Whilst we’re adding these customers, and as Stephanie touched on, driving retention as good as we have, I think there’s significant upside in retention. If you look at our numbers, and we will go through a bit more in terms of cohort information on December 1st at the Capital Markets Day, significant upside there in terms of frequency of shop and being able to retain customers as we move forward. So I think we’ve got it right. It’s one of the highlights for me out of Q3. The bit about the US, clearly, it’s very promotional going into Q4. Will it spread elsewhere? Look, I think there’s maybe a slight chance that we see some highly competitive environment across Europe.

I would probably reference other retailers that have said there’s been this return to store. There’s been this wave of US tourism into Europe because of the strong dollar and the weak euro maybe that will reverse as we move forward, and that could cause a little bit of promotion. But now I am really starting to gaze deep into the crystal ball here. So hard to put numbers on it. But I think we just have to trade through. Clearly, we’ve set up with these numbers at Q4 that will be in decline year-on-year. But as we move into 2023, the underlying numbers prove we’ll be able to grow. As we move forward, the FPS clients that will go live will add that growth onto the underlying marketplace and FPS like-for-like growth. We’ll annualize some of these negative headwinds.

At some point through the year, the US dollar strength — too much into the future. But at some point, we will be less of a headwind, and we’ll see the reported number, really return to strong growth and profitability back again next year as we trade through this exciting opportunity ahead of us. So yes, all eyes now on what we can do to set ourselves up right for 2023. And we look forward to taking you through the building blocks of that guidance on December 1, and we also want to take you through a little bit more around medium-term expectations of each of the platforms FPS broken out from marketplaces, broken out from our first-party original brand platform business. So can’t wait to that, and I’m sure investors will be looking forward to that as well.

I think on that, we’ll probably say good night and look forward to speaking to you over the next couple of weeks.

José Neves: See you on Capital Markets Day, everyone. Thank you.