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Proprietary Data Insights Financial Pros Top Internet Retail Stock Searches in the Last Month
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Internet Retail |
A Stock at the Forefront of the Richcession |
Most downturns hit the poorest among the hardest. This time may be different. Last week, The Wall Street Journal laid out a case for the “richcession.” It expects inflation to ease on commodities, with demand for basic labor maintaining high employment levels. But the ability and desire to build luxury items could keep inflation marching higher for high-end goods. Plus, general market malaise could keep the rich from reaching for their wallets. This idea brought us to Farfetch Limited (FTCH), a luxury fashion platform that’s been financial pros’ top internet retail stock search over the last month, according to our proprietary Trackstar database. Shares dropped more than 85% last year. Now, financial pros are taking a serious look at the stock. Its recent search volume is higher than that of Etsy (ETSY), Overstock.com (OSTK), Poshmark (POSH), and Revolve Group (RVLV) combined. That’s pretty unusual considering the popularity of these other companies. Maybe FTCH’s high search volume is because shares jumped during the first week of 2023, gaining 12.2% on January 4. But was it just a dead-cat bounce, or can FTCH continue its momentum past January? Farfetch’s Business Farfetch runs the largest global luxury fashion platform. At the end of Q3 2022, it had over 1,400 luxury sellers on its platform and 3.9 million active consumers. Its gross merchandise value in 2021 was $4.2 billion. The company operates a modular end-to-end technology platform built to connect the luxury fashion ecosystem worldwide. It divides its business into three segments: Digital Platform, Brand Platform, and In-Store. Source: Farfetch The Digital Platform segment includes the Farfetch marketplace, Farfetch Platform Solutions, Browns Fashion, Stadium Goods, Farfetch Future Retail, direct-to-consumer sales of its owned products, and other online channels the company operates. Farfetch suspended trade in Russia in March 2022 after the country’s invasion of Ukraine. It also suspended trade in mainland China due to COVID restrictions that were impacting it. The Brand Platform segment comprises the production and wholesale distribution of brands the New Guards Group owns and licenses. It includes franchised store operations. In Q3 2022, this segment’s gross merchandise value declined 10.4% from the same quarter the year before, mainly due to changes in foreign exchange rates. The In-Store segment’s gross merchandise value spiked 35.3% in Q3 from the same quarter the year prior. The company credits the boost to the opening of more New Guards stores. Financials Source: Stock Analysis
Plus, the company doesn’t generate any cash flow from its operations. In fact, its operating cash flow is -$338.6 million. But it believes it can achieve low-single-digit adjusted EBITDA margins and positive free cash flow in this year by reducing its fixed costs. The company’s financing costs rose year-over-year due to unrealized foreign exchange losses. But FTCH has reinforced its liquidity position by issuing a $400 million five-year term loan instrument. Farfetch has no near-term liquidity concerns. It has a current ratio of 1.5x. Still, 2020 was the only year it generated positive cash flow. Cash has bled from the business every other year. Valuation Source: Seeking Alpha FTCH has yet to reach profitability and, therefore, has no P/E GAAP ratio. The same is true for internet retailers Poshmark and Etsy. But some have been profitable, like Revolve Group, which has a P/E GAAP ratio of 21.0x, and Overstock, which is at 88.6x. FTCH trades at a price-to-sales ratio of 0.7x, notably lower than RVLV at 1.5x, POSH at about 4.0x, and ETSY at 5.8x. Only OSTK is lower, with a price-to-sales ratio of 0.4x. Farfetch’s outlook through 2025 is for $10 billion gross merchandise value and a 10% EBITDA margin. Profitability
FTCH has a net income margin of 71.4%, significantly higher than RVLV at 7.4%, POSH at -21.3%, ETSY at -25.9%, and OSTK at 0.6%. Its EBIT margin of -22.3% is not as strong, notably weaker than RVLV at 9.3%, POSH at -21.7%, ETSY at 15.9%, and OSTK at 2.3%. As we mentioned, the company believes it can return to EBITDA profitability by reducing costs and becoming more efficient. In Q3 2022, the Farfetch’s gross profit margin rose 160 basis points YoY to 45%, and the digital platform order contribution margin grew 580 basis points YoY to 32.4%. Farfetch is prioritizing margin profitability over growth. Its cash from operations of -$339 million isn’t ideal, and it’s weaker than other internet retailers like RVLV at $28.4 million, POSH at -$963K, ETSY at $682 million, and OSTK at $15.6 million. And it’s a major concern for investors. Growth Source: Seeking Alpha If nothing else, FTCH has seen fantastic growth rates, with a five-year average growth of 56.3%. That’s slowed down, as FTCH hit 17.9% revenue growth YoY. That’s notably higher than ETSY at 11.0%, POSH at 13.5%, and OSTK at -24.0%. Only RVLV grew more at 36.5%. In Q3, FTCH delivered revenue growth of 14% YoY and gross merchandise value growth of 4% on a constant-currency basis with improved other contribution margins. Our Opinion 3/10 While FTCH isn’t profitable yet, it has exceptional assets in the luxury fashion space. Shares fell over 85% last year, and there are serious concerns about cash. If management can reduce SG&A and input costs, it stands a chance of turning things around. But we’d wait and see before jumping into the stock. |
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