This is Part 2 of our retail stock series, read parts 1 and 3 here:

 

While House of Fraser was being narrowly saved from collapse by Sport Direct founder Mike Ashley, Farfetch, another UK-based retailer of luxury goods, was preparing for a $6.2bn IPO on the NYSE.

The key difference? Farfetch predominately sells online. 

In fact, almost all of the biggest fashion e-commerce companies in the world were founded in London, from luxury retailers Net-a-Porter and Matches to high-street alternatives Asos and Boohoo.com (which took over the biggest US equivalent in 2017). 

 

Luxury takeover

Founded by a fashion journalist in London in 2000 as a shoppable online magazine (and since launching a complementary print product) Net-a-Porter grew to become one of the word’s biggest online luxury retailers, with offices in the US, Hong Kong and Shanghai. 

In 2015 it merged with Yoox, an Italian online fashion retailer, which started out selling left-over stock from fashion houses at discounted prices. The resulting company became Europe’s biggest online luxury-fashion website by revenue, netting £1.8bn in 2017. 

Richemont, the world’s third-biggest luxury group and owner of high-end brands such as Cartier and Dunhill, took full control of the business in May. Increasing its stake to 95% val-ued Yoox Net-a-Porter [YNAP] at €5.3bn ($6bn).
 
“Powered by Richemont we will accelerate our global growth and guarantee YNAP’s long-term leadership,” said Federico Marchetti, the chief executive of YNAP following the takeover. “We started the business long before anyone else believed luxury could move online.” 

The takeover was a winner for YNAP investors: Richemont paid €38 per share, a 30% increase since it initially announced its plan to launch a full takeover. 

But, despite the hype and growth around YNAP, Richemont has so far refused to provide many details of how it will make use of the acquisition, while the takeover has done little for the Swiss company’s investors so far. 

 

$6bn - Value of Yoox Net-a-Porter at takeover

 

The high cost of the takeover – along with a drop in sales triggering huge excess watch buy-backs from third-party retailers – seems to have done more damage than good. Since the takeover Richemont’s price has fallen from an all-time high of $99.70 in May to around $80. 

However, the extra sales from Net-a-Porter, along with those from WatchFinder, a British website selling luxury second-hand watches that Richemont acquired shortly after YNAP, have provided a much-needed boost for the retailer.Group sales, excluding those made through Net-a-Porter and WatchFinder, were up just 7% for the five months up to September. When the acquisitions are included, sales soared by 22%, with Net-a-Porter and WatchFinder contributing €720m to the group’s total sales. 

 

$44bn - Market cap of Richemont 

 

With that amount being a fraction of the €5.7bn of total group sales, investors will be keen to see how the recent digital acquisitions fit into the company’s wider strategy.

 

Equal matching?

Another online retailer to flourish alongside Net-a- Porter is MatchesFashion.com, a London based global luxury retailer selling brands such as APC and Chloé. 

Matches was acquired in 2017 by the private equity giant Apax for a controlling stake of £800m, despite a £600m estimation shortly before. It posted soaring revenues of £293m last year, a 43.7% increase from the year before.

 

“We started the business long before anyone else believed luxury could move online” – Federico Marchetti, Yoox Net-a-Porter Group CEO

 

The company has a hybrid store and online model, with online making up 95% of its business; the other 5% being made up by three London shops, which function more like showrooms. Its e-commerce sales in 2017 jumped 50% above 2016’s figures and website visits increased by 36% to 75 million. All in, sales jumped by 44%. 

 

Retail meets logistics

Still, Farfetch remains YNAP’s biggest competitor. And in what was a spectacular piece of timing, considering that pretty much every luxury stocks has reached an all-time-high in 2018, the tech-focused retailer went public in New York on 20 September for $20 per share. 

It raised $885m at a valuation of $6.2bn – $1.2bn higher than the initially expected $17-$19 range was set to bring in. 

Founded in 2008 and run by José Neves, Farfetch takes the form of a glorified listings site, meaning that, unlike its competitors, it doesn’t have to hold any stock of its own. 

Essentially creating a technology-enabled logistics company, Neves started out by aggregating products from independent fashion boutiques around the world that could be delivered to anywhere.

 

Online vs in-store clothing purchases in the US in 2017:

68% - In-store 

32% - Online 
 

 

His company has since gone on to sign deals with Burberry and Harvey Nichols, while Chanel took a share of the company in February. The French couture house has also teamed up with Farfetch to develop a branded app to help create a personalised in-store experience.

“We are not a retailer,” Neves said in 2017. “We are here to help brands and retailers find what the luxury experience is in 2020 and beyond. We want to be the platform for the global fashion industry.” 

Despite being an e-commerce provider, the company is interested in bricks-and-mortar, aware that in the US, for instance, 68% of clothing and footwear, and 71% of jewellery, was bought in person last year. 

Farfetch’s inventory still predominantly comes from some 500 physical partner boutiques and, in 2017, the company made its own move into physical retail, buying the British department store Browns. 

 

Store of the future 

In an attempt to merge the online and offline worlds, and breathe new life into the shopping experience, the company has developed a ‘Store of the Future’ concept using mobile phone apps, virtual reality and smart screens to personalise the consumer experience. 

First introduced as an installation in London’s Design Museum last year, the tech has since been rolled out in a new Browns store in Shoreditch.

The system identifies customers by their phones, then pools information about their online buying habits with real-time in-shop behaviour and preferences, facilitating a refined, curated shopping experience. 

Clothes racks track items, changing room mirrors let customers request different sizes or colours while mobile apps allow assistants to sell products anywhere within the store.

The idea is that the tech will also be used by the boutiques whose products Farfetch sells; so far, the concept has also been rolled out in the New York flagship store of US brand  Thom Browne.Going public

Momentum in the luxury industry certainly played a big part in Farfetch’s mammoth valuation. The company is not yet profitable: it lost $112m in 2017 after tax on sales of $386m, up from $81m lost on $242m of revenue in 2016, which the company justified by investment in online infrastructure. 

It was valued at just $1bn during its last big investment round in 2015. The company did double the number of active customers to almost 1 million through 2017, has signed a number of high-profile deals with big-name retailers, and has been quick to point out in its filing that the global market for luxury goods is set to reach $446bn by 2025. 

Many observers do nevertheless feel that Farfetch is a pricey investment. “I think it’s over-valued,” says Sean Jadoon, a luxury e-commerce specialist who recently launched his own luxury goods listing site, pulling in prices and availability from products across the world. 

“It’s growing, but the business model isn’t proven. We’ve had great growth from the likes of Lululemon and Gucci this year. The market sentiment and momentum is pushing in the right direction, but it looks like sentiment could be taking over logic here.”

The momentum does seem for the most part to be with Farfetch – for now. On its first day of trading, it surged by more than 50%, with the shares reaching $30 a piece and the company market cap exceeding $8bn. 

It’s a staggering number, considering that many analysts considered the company overvalued at $5.8bn, the price it was expected to float at. The stock has, incidental, since gradually slipped to the $20 mark, bringing its market cap to $5.75bn.

“Farfetch’s frenzied pricing and early trading action further cements my view that this is an overhyped IPO with little room for upside,” technology-focused trader Gary Alexander wrote on Seeking Alpha following the float. “With the stock already so frothy, the risk-reward profile is tilted heavily in favour of the bears.”

 

China 

Like the luxury brands it lists, Farfetch sees China as a key area of growth. To increase its presence there, it has acquired a digital-marketing agency to target consumers via the country’s main social media channels such as WeChat and Sina Weibo.
 
In what is seen as a key mark of its potential, JD.com, China’s second-largest e-commerce site, has also invested $397m in Farfetch, with the pair partnering with British retailer Burberry to lead a renewed push into the country by the brand.

 

$7bn - Value of Fartech following IPO 

 

In China, Farfetch faces stiff competition from Alibaba [BABA]. The giant has launched Luxury Pavilion, a special section within its business-to-consumer site Tmall for premium and luxury brands. 

JD.com had also launched its own luxury offering, Toplife, last year – with packages being delivered by young suited men wearing a bow tie and white gloves. 

 

$112m - Fartech losses in 2017

 

Where’s Amazon?

JD.com and Alibaba are often called the ‘Amazons of China’, but unlike its Chinese counter-parts (and, increasingly, its competitors) Amazon has not broken into the luxury space. 

The brands don’t like the accessibility of the platform – there’s little that is exclusive about being listed alongside everything from light bulbs to hoovers, while, positively for the likes of Farfetch, Amazon doesn’t seem to be overly concerned with courting luxury brands. After all, the market for everyday products is much higher than that for luxury goods. 

And Amazon is locked in a growing battle for continued dominance in this everyday-goods sector – both online and in the physical space – not only with its Chinese competitors, but with traditional US big-box retailers such as Walmart, Target and Costco. It’s nowhere near as glamorous as the world of luxury fashion, but the numbers at stake are far greater.