Farfetch Announces Third Quarter 2022 Results

• Q3 2022 Revenue increases 1.9% year-over-year (or increases 14.1% year-over-year at constant currency) to $593.4 million
• Q3 2022 Gross Merchandise Value (“GMV”) decreases 4.9% year-over-year (or increases 4.2% year-over-year at constant currency) to $967.4 million
• Q3 2022 Digital Platform GMV decreases 5.0% year-over-year (or increases 2.6% year-over-year at constant currency) to $787.4 million
• Q3 2022 Brand Platform GMV decline of 10.4% year-over-year (or increases 4.9% year-over-year at constant currency) to $148.1 million
• Q3 2022 Gross Profit Margin of 44.9% (an increase of 160 bps year-over-year) and Digital Platform Order Contribution Margin of 32.4% (an increase of 580 bps year-over-year)
• Q3 2022 Loss after Tax of $274.9 million (includes non-cash loss on items held at fair value and remeasurements)
• Q3 2022 Adjusted EBITDA of $(4.1) million
• Cash and Cash Equivalents of $487.4 million as of September 30, 2022

Farfetch Limited (NYSE: FTCH), the leading global platform for the luxury fashion industry, today reported financial results for the third quarter ended September 30, 2022.

José Neves, Farfetch Founder, Chairman and CEO, said: “Luxury is an incredible industry that has proven to be resilient, and Farfetch’s global platform for luxury is on pace to broadly double its size over three years, despite navigating an unprecedented series of global events. Through it all, our focus has remained on our mission to be the global platform for luxury while also taking the opportunity to fundamentally re-structure our organization and streamline our cost base. As a result, Farfetch is further positioned to seize the significant announced milestones and future opportunities ahead, and emerge from this period as an even stronger business set to deliver profitability and free cash flow.”

Elliot Jordan, CFO of Farfetch, said: “Our third quarter results show Farfetch is successfully navigating an unprecedented macro environment, with constant currency GMV and Revenue growth, significant gross margin and order contribution margin improvements year-on-year and the early financial benefits from our recent initiatives to rationalize our cost base, which are ongoing. Whilst we continue to manage through the current environment, we remain well capitalized to execute on our long-term vision, and I am confident we will return to profitable growth in 2023.”

Consolidated Financial Summary and Key Operating Metrics (in $ thousands, except per share data, Average Order Value, Active Consumers or as otherwise stated):

1. See “Non-IFRS and Other Financial and Operating Metrics” on Page 19 for reconciliations of non-IFRS measures to IFRS measures.

Recent Business Highlights

Digital Platform

• Third-party transactions generated 80% of Digital Platform GMV in third quarter 2022 with Third-party Take Rate of 32.6%, which was supported by record media solutions revenue
• First-party transactions, including First-Party Original, which generated 4% of Digital Platform GMV in third quarter 2022, grew 4% year-over-year
• The Farfetch Marketplace continued to offer customers the most extensive selection of in-season luxury fashion on a global platform from over 1,400 sellers, as supply from both multi-brand retailers and e-concession partners increased 25% year-over-year to a record $5.5 billion
• Continued to position the Farfetch brand as a champion of personal style across fashion and beauty, offering unrivalled supply with the launch of a #YourChoiceYourFARFETCH brand campaign featuring modern icons Leighton Meester, Paloma Elsesser, Omar Apollo, and Bakar
• Continued to partner with brands on Farfetch Marketplace campaigns highlighting:
  • Acne Studios Fall Winter 2022 collection of ready-to-wear and bags
  • Marc Jacobs denim monogram launch
  • Stolen Girlfriends Club focused on men's knitwear and women's jewelry in the brand's first Farfetch media solutions partnership
• Expanded reach of Fashion Concierge services to help Private Clients source some of the world’s most unique luxury items with the launch of Fashion Concierge On Demand, an online tool enabling clients to submit requests through the Farfetch app, and in October 2022, extended Fashion Concierge access to all Farfetch Private Client customers
• Released new installments of Farfetch BEAT including the world’s first sneaker safe from expert safe manufacturer Döttling, in partnership with Stadium Goods, bespoke sleepwear sets from Tekla, and original Contax T2 cameras restored and customized by MAD

New Guards Group

• New Guards brands continued to focus on its direct-to-consumer channels while creating culturally relevant collections:
  • Ibrahim Kamara celebrated his first fashion show as Off-White’s Art & Image Director at Paris Fashion Week. The collection theme ‘Celebration’ articulated the brand language developed by Virgil Abloh while adding a distinctively different accent to it, according to Vogue.
  • Off-White signed a 3-year partnership with Italian football club AC Milan to become AC Milan’s Official Style & Culture Creator
  • In commemoration of Moncler’s 70th anniversary Palm Angels was invited to reimagine the Moncler Maya jacket, creating a limited edition of the coat, covered in optic fibers to convey the notions of light and the future
  • There Was One, the first brand jointly created by New Guards and Farfetch, launched its first Unisex collection

Third Quarter 2022 Results Summary

Gross Merchandise Value (in thousands):

GMV decreased $49.9 million from $1,017.3 million in third quarter 2021 to $967.4 million in third quarter 2022, representing a year-over-year decline of 4.9%. Excluding the impact of changes in foreign exchange rates, GMV would have increased 4.2% year-over-year. Digital Platform GMV decreased $41.1 million from $828.5 million in third quarter 2021 to $787.4 million in third quarter 2022, representing a year-over-year decline of 5.0%. Excluding the impact of changes in foreign exchange rates, Digital Platform GMV would have increased 2.6% year-over-year.

Digital Platform GMV performance in third quarter 2022 reflects continuing headwinds from the suspension of trade in Russia, where trade has been ceased since March 2022, and mainland China, where regional COVID-19 restrictions continue to impact trade. Digital Platform GMV performance also reflects a decrease in Marketplace AOV from $593 to $530 due to the translation impact of the strengthening of the US Dollar, as well as a decline in average selling price, which was partially offset by an increase in the number of items per order.

Brand Platform GMV decreased 10.4% year-over-year to $148.1 million. Excluding the impact of changes in foreign exchange rates, Brand Platform GMV would have increased 4.9% year-over-year. The increase on a constant currency basis was driven by continued demand for our New Guards' brands' Autumn-Winter 2022 collections.

In-Store GMV increased 35.3% year-over-year to $31.9 million. Excluding the impact of changes in foreign exchange rates, In-Store GMV would have increased 54.1% year-over-year. The increase on a constant currency basis was driven by additional openings of New Guards brands' stores in the last twelve months as well as strong like-for-like growth from key existing stores.

Revenue (in thousands):

Revenue increased $10.8 million year-over-year from $582.6 million in third quarter 2021 to $593.4 million in third quarter 2022, representing year-over-year growth of 1.9%. The increase was driven by an increase in Digital Platform Revenue of 1.6%, a 39.7% growth in In-Store Revenue, offset by a 2.1% decrease in Brand Platform Revenue to $161.8 million. Excluding the impact of changes in foreign exchange rates, revenue would have increased 14.1% year-over-year.

Digital Platform Services Revenue increased 1.7% year-over-year driven by first-party revenue. Digital Platform Services first-party revenue increased 4.0% as compared to the previous year, primarily driven by increased sales of Browns' products on the marketplace, supported by increased clearance activity. Digital Platform Services third-party revenue remained flat year-over-year, at an increase of 0.1% impacted by the same factors driving GMV, offset by growth in advertising revenue. Excluding the impact of changes in foreign exchange rates, Digital Platform Services Revenue would have increased 11.9% year-over-year.

Digital Platform Fulfilment Revenue represents the pass-through to consumers of delivery and duties charges incurred by our global logistics solutions, net of any Farfetch-funded consumer promotions, subsidized shipping and incentives. Digital Platform Fulfilment Revenue increased 1.0% year-over-year, above the overall Digital Platform GMV decline of 5.0%, resulting from an increased pass-through of such costs to consumers in third quarter 2022.

Brand Platform Revenue decreased 2.1% year-over-year, which was slower than the decline in GMV, due to the addition to revenue of $13.7 million generated by the net economic benefit from the Reebok partnership that commenced in March 2022. Excluding the impact of changes in foreign exchange rates, Brand Platform Revenue would have increased 14.3% year-over-year.

Cost of Revenue (in thousands):

Cost of revenue decreased $3.6 million, or 1.1%, year-over-year from $330.4 million in third quarter 2021 to $326.8 million in third quarter 2022. This decrease was driven by declines in Brand Platform and Digital Platform Services cost of revenues, partially offset by an increase in In-Store cost of goods sold.

Digital Platform Services cost of revenue decreased year-over-year, primarily due to a decrease in third-party Digital Platform Services cost of revenue, partially offset by an increased mix of first-party revenue.

Gross profit (in thousands):

Gross profit increased $14.4 million, or 5.7%, year-over-year, to $266.6 million in third quarter 2022. Gross profit margin increased 160 bps year-over-year to 44.9%, driven by margin improvements in all three segments.

Digital Platform Gross Profit Margin increased 160 bps to 51.4% in third quarter 2022, from 49.8% in third quarter 2021, as Digital Platform Services revenue increased at a higher rate than Digital Platform Services costs of revenue. The increase in Digital Platform third-party gross profit margin was partially offset by a decrease in Digital Platform first-party gross profit margin, as a result of continued stock clearance activity on Browns products.

Brand Platform Gross Profit Margin increased 120 bps year-over-year to 49.8%, driven by the recognition of the Reebok net economic benefit and the impact of changes in foreign exchange rates.

Selling, general and administrative expenses by type (in thousands):

Selling, general and administrative expenses increased $88.8 million or 24.8%, year-over-year, from $357.9 million in third quarter 2021 to $446.8 million in third quarter 2022.

Demand generation expense decreased $12.3 million, or 16.7%, year-over-year to $61.8 million in third quarter 2022. As a percentage of Digital Platform Services Revenue, Demand generation expense was 19.0% compared to 23.2% in third quarter 2021. This decrease was driven by increased marketing efficiencies, having annualized the impacts of the actions taken to address Apple's iOS privacy measures, and including a redistribution of spend between territories during third quarter 2022.

Our total investment in technology, which includes technology expense and our investments in longer term development projects which are treated as capital items, remained flat at 12.5% of Adjusted Revenue in third quarter 2022 and third quarter 2021.

Technology expense primarily relates to maintenance and operations of our platform features and services, as well as software, hosting and infrastructure expenses, which include three globally distributed data centers, including one in Shanghai, which support the processing of our growing base of transactions. Technology expense decreased $4.2 million in third quarter 2022 year-over-year, or 12.9%. This was driven by an increase in investments into capitalizable longer term development projects, including marketplace initiatives and re-platforming projects.

Depreciation and amortization expense increased $19.9 million, or 30.8%, year-over-year from $64.8 million in third quarter 2021 to $84.8 million in third quarter 2022. Amortization expense increased primarily due to increased technology investments, where qualifying technology development costs are capitalized and amortized over their useful lives, as well as amortization of the $364.1 million intangible asset recognized in relation to the Reebok partnership in March 2022. Depreciation expense increased primarily as a result of new leases entered into within the last twelve months.

Share-based payments increased $38.2 million, or 82.7% year-over-year in third quarter 2022 due to increased equity-settled grants in 2022 driving a higher equity-settled share-based payment expense and the lower impact of share price movements on employment-related taxes and cash-settled awards in third quarter 2022 compared to third quarter 2021.

General and administrative expense increased $40.3 million, or 28.8%, year-over-year in third quarter 2022, reflecting our investment in New Guards Group including increased warehouse costs. This was alongside the consolidation of acquired businesses and the continued impact of salary increases, which also impacted our technology expense.

General and administrative expense increased as a percentage of Adjusted Revenue to 35.1% compared to 27.8% in third quarter 2021. This increase was primarily driven by slower growth in Adjusted Revenue.

Gains/(losses) on items held at fair value and remeasurements (in thousands):

The $2.7 million of remeasurement losses on put and call option liabilities in third quarter 2022 are related to a $7.9 million loss on the remeasurement of the put and call option resulting from the November 2020 strategic agreement with Alibaba Group Holding Limited (“Alibaba Group”) and Compagnie Financiere Richemont SA (“Richemont”), a $0.1 million remeasurement loss in connection with Chalhoub Group’s put option over their non-controlling interest in Farfetch International Limited, partially offset by a $3.7 million gain on the remeasurement of the put and call option over the 40% of Palm Angels' share capital not owned by New Guards and a $1.6 million gain on the remeasurement of the put option over Alanui S.r.l.

The remeasurement gains on put and call option liabilities in third quarter 2021 were related to a $81.3 million remeasurement gain in connection with the Chalhoub Group’s put option over the non-controlling interest in Farfetch International Limited and a $185.0 million gain on the put and call option resulting from the November 2020 strategic agreement with Alibaba Group and Richemont, partially offset by a $4.6 million loss on the put and call option over the non-controlling interest in Alanui S.r.l. and a $4.2 million loss on the put and call over the 40% share capital in Palm Angels not owned by New Guards.

The $7.6 million of fair value losses on embedded derivative liabilities in third quarter 2022 were primarily driven by the increase in our share price during the period. The fair value losses on embedded derivative liabilities in third quarter 2022 were comprised of the following revaluation losses on our convertible senior notes: (i) $1.1 million fair value losses related to $250 million 5.00% notes due in 2025 (the “February 2020 Notes”); (ii) $4.3 million fair value losses related to $400 million 3.75% notes due in 2027 (the “April 2020 Notes”); and, (iii) $2.3 million fair value losses related to $600 million 0.00% notes due in 2030 (the “November 2020 Notes”). These notes have provided strong liquidity to fund ongoing capital needs and invest in various growth initiatives.

The $643.6 million fair value gains on embedded derivative liabilities in third quarter 2021 were primarily driven by the decrease in our share price during the period. The fair value gains on embedded derivative liabilities in third quarter 2021 were comprised of $159.4 million fair value gains related to the February 2020 Notes; $307.1 million fair value gains related to the April 2020 Notes; and $177.2 million fair value gains related to the November 2020 Notes.

Impairment losses on tangible and intangible assets (in thousands)

The impairment charge of $38.3 million in third quarter 2022 is comprised of $23.0 million relating to intangible assets, including goodwill, and $15.1 million relating to tangible assets allocated to our Browns - Platform cash-generating unit ("CGU") and $0.2 million of other tangible asset impairments. The Browns - Platform impairment resulted from our quarterly impairment assessment, primarily reflecting the macroeconomic environment and devaluation of the Pound Sterling against the U.S. dollar. No impairment triggers were noted on other CGUs.

Profit/(Loss) After Tax

Profit/(loss) after tax decreased $1,044.0 million year-over-year from a $769.1 million profit in third quarter 2021 to a $(274.9) million loss in third quarter 2022, primarily driven by the gains/(losses) on items held at fair value and remeasurements of $901.2 million in third quarter 2021 compared to losses on items held at fair value and remeasurements of $(8.9) million in third quarter 2022, as well as the $38.3 million impairment charge in third quarter 2022.

EPS and Diluted EPS

Third quarter 2022 basic EPS was $(0.71) and diluted EPS was $(0.71) as the effect of all potentially dilutive instruments was antidilutive.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA declined by $9.4 million to $(4.1) million and Adjusted EBITDA Margin declined from 1.1% to (0.8)% in third quarter 2022, primarily due to higher growth in general and administrative expenses as compared to growth in Adjusted Revenue.

Liquidity

Liquidity as of September 30, 2022 was comprised of cash and cash equivalents of $487.4 million. The decrease in cash and cash equivalents of $875.7 million for the nine months ended September 30, 2022 from $1,363.1 million at December 31, 2021 is primarily related to funding working capital of $336.4 million, of which $256.4 million related to first quarter 2022 reflecting the seasonality of the Marketplace cashflows, the strategic minority common equity investment of $200.0 million in the Neiman Marcus Group in May 2022, and cash payments for business combinations and intangible assets.

Post Balance Sheet Events

On October 20, 2022, Farfetch US Holdings, Inc. entered into a credit agreement with certain banks and financial institutions, amongst others, for a syndicated $400.0 million term loan facility (the “Term Loan”). The Term Loan was issued with a 6.50% original issue discount and fully drawn upon issuance, resulting in net cash proceeds to Farfetch of approximately $369.1 million after certain fees. The Term Loan is due and payable on October 20, 2027, with early repayment permitted. The Term Loan amortizes in quarterly installments of 0.25% and the Company has initially elected to make quarterly interest payments at a rate equal to Term SOFR (as defined in the credit agreement) plus 6.25% per annum, subject to a 0.50% floor.

The Term Loan includes customary affirmative covenants as well as those that restrict the ability of certain entities in the Farfetch group to, amongst other things, incur additional indebtedness, sell certain assets, guarantee obligations of third parties, declare dividends or make certain distributions, undergo a merger or consolidation, or certain other transactions. The Term Loan is secured against specified assets of the Farfetch group and guaranteed by certain material subsidiaries. The Term Loan does not include maintenance covenants. For further information, refer to the Form 6-K furnished with the SEC on October 20, 2022, also available at http://farfetchinvestors.com.

As a result of the Term Loan closing, the Company agreed with Tencent to settle the February 2020 Notes held by Tencent that were due in 2025. On October 27, 2022, the outstanding principal of $50.0 million on the February 2020 Notes was settled for cash consideration of $32.5 million and by the issuance of 4,611,848 Farfetch Class A ordinary shares.

Foreign Exchange Rate Fluctuations

"Constant currency" means translating current period financial data at the prior year average exchange rates applicable to the local currency in which the transactions are denominated.

Our financial information is presented in U.S. dollars, which differs from the underlying functional currencies of certain of our subsidiaries (including New Guards whose functional currency is the euro), exposing us to foreign exchange translation risk on consolidation. This risk is currently not hedged and therefore our results of operations have in the past, and will in the future, fluctuate due to movements in exchange rates when currencies are translated into U.S. dollars.

At a subsidiary level we are also exposed to transactional foreign exchange risk because we earn revenues and incur expenses in a number of different foreign currencies relative to the relevant subsidiary’s functional currency, mainly the pound sterling and the euro. Movements in exchange rates therefore impact our subsidiaries and thus, our consolidated results and cash flows. We hedge a portion of our core transactional exposures using forward foreign exchange contracts and foreign exchange option contracts; however, we are exposed to fluctuations in exchange rates on the unhedged portion of the exposures.

Outlook

Uncertainties resulting from the impact of the COVID-19 pandemic, macroeconomic factors and geopolitical turmoil, including the war in Ukraine, could have material impacts on our future performance and projections. The factors that could potentially impact our future performance include, among others:

• disruptions to our operations, fulfilment network, and shipments;
• fluctuations in foreign exchange rates;
• weakened consumer sentiment and discretionary income arising from macro-economic conditions;
• increased costs to support our operations;
• slowing e-commerce consumer activity as vaccinations gain acceptance and populations resume to pre-pandemic activities and lifestyles; and
• reduced demand for our offerings and services.

The following reflects Farfetch’s expectations for Full Year 2022 as of November 17, 2022:

• Digital Platform GMV decline of 5% to 7% year-over-year
• Brand Platform GMV broadly flat
• Targeting Adjusted EBITDA margin of (3)% to (5)%

Conference Call Information

Farfetch Limited will host a conference call today, November 17, 2022, at 4:30 p.m. Eastern Time to discuss the Company’s results as well as expectations about Farfetch’s business. Listeners may access the live conference call via audio webcast at http://farfetchinvestors.com, where listeners can also access Farfetch’s earnings press release and slide presentation. Following the call, a replay of the webcast will be available at the same website for at least 30 days.