7 Things to Know About Farfetch’s Buzzy IPO: A Jing Daily Luxury Analysis

Updated: Farfetch has sharply increased the size of its IPO. It now plans to raise 796 million by offering 44.2 million shares at 17 to 19 per share. Luxury titan Groupe Artemis plans to purchase up to 50 million of the IPO and JD.com, already a stakeholder, will invest 25 million in a private placement. Farfetch’s initial public offering is the biggest potential disruptor in the luxury online retail world in years. The 10-year-old U.K.-based company, something of a bustling Amazon for luxury fashion houses from Alexander McQueen through Zac Posen, is expected to go public this Friday, Sept. 21. It will list its shares on the New York Stock Exchange under the ticker symbol FTCH. E-commerce platforms are the current darling of Wall Street, as they offer a way to play the warming economy without the risk of massive inventory, a so-called “asset-light business model.” The IPO sets the company at a hefty 4.5 billion valuation, at an opening price of 15 to 17 per share. (Updated above.) Some Seeking Alpha analysts, among others, argue the pricing edges towards an overvaluation. But don’t be surprised by a blowout: the bookmakers for the IPO are a Wall Street dream team that includes Goldman Sachs, UBS, Allen & Co., and JP Morgan. A lot of excitement (and worry among competitors) surrounds the offering, in both the tech and fashion businesses. Fashion United magazine notes, “This is a highly anticipated float, the first of this magnitude for the apparel industry in years. Its big focus on technology, as well as the fact Farfetch serves luxury, an area where Amazon.com has yet to make major inroads,” are particular attractions. A careful reading of the 63-page prospectus, filed with the Securities and Exchange Commission, is illuminating. Here’s what we learned: Farfetch customers are growing at a furious rate… “As of June 30, 2018, we had 1,118,047 Active Consumers, up from 796,297 as of June 30, 2017,” the company brags—with good reason. “The number of orders for the six months ended June 30, 2018 was 1,305,297, up from 853,195” in the same period in 2017. But those numbers are downright tiny compared to Amazon and Alibaba’s market penetration. Amazon brags of 100-million plus Amazon Prime members alone, a small portion of its client base, and online titan Alibaba has about 600 million active users. Plus, both Alibaba (a rival of JD.com, which has a stake in Fafetch) and Amazon have significant revenue from unrelated businesses, like cloud computing and Amazon’s video and music operations. Emerging markets, China, in particular, are key to Farfetch’s success. “The demand for luxury fashion is truly global,” notes Farfetch. “Consumers of luxury fashion have “traditionally been from Europe, the Americas, and Japan… Over the next decade, the growth of the global luxury fashion market is expected to be significantly driven by demand from emerging markets, including China, the Middle East, and Eastern Europe.” Bain & Co. predicts China’s share of the personal luxury goods market will grow to 35 percent from 30 percent (as of 2016) by 2025. Farfetch is reliant on the one percent, literally. For the year ended December 31, 2017, the top one percent of Farfetch consumers accounted for approximately 20 percent of its marketplace gross merchandise volume. “Accordingly, our revenue, financial condition or results of operations may be unduly affected by fluctuations in the buying patterns of these consumers. If we were to lose the business of some or all of these consumers, it could materially adversely affect our business, results of operations, financial condition and prospects,” the company warns. Many of Farfetch’s business relationships are particularly valuable because they are exclusive. “Of our 614 retailers, 98 percent have entered into an exclusive relationship with us,” the prospectus brags. Moreover, the luxury brands that sell through Farfetch are mostly family-owned, making existing relationships personal. For good or ill, Farfetch’s current CEO and founder Jose Neves will retain voting control of the company. The Class-A shares being offered in the IPO have limited voting rights compared to the Class B that Neves, an experienced coder and fashionista, will hold. The ratio of votes is 20-to-1. So the prospectus warns investors that “Our dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control.” It seems meant to. And, it still hasn’t made a profit.

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7 Things to Know About Farfetch’s Buzzy IPO: A Jing Daily Luxury Analysis