Farfetch Limited

Good afternoon. My name is Christine Miller, and I will be your conference operator today. At this time, I would like to welcome everyone to the far-fetched first quarter 2022 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 begin your conference.

Hello and welcome to Farfetch's first quarter 2022 conference call. Joining me today to discuss our results are Jose Neves, our Founder, Chairman, and Chief Executive Officer, Elliot Jordan, our Chief Financial Officer, and Stephanie Fair, our Chief Customer Officer. 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 Jose.

Hello, everyone. Thank you for joining us today. Our underlying business remains incredibly robust, in spite of our Q1 results being impacted by significant changes in the macro and geopolitical environment since our Q4 2021 call in February. Specifically, there are three key developments that impacted our Q1 results and outlook. One, the war in Ukraine and our suspension of operations in Russia. Two, the recent COVID-19 outbreaks and related restrictions in mainland China. And three, a double-digit decline in markdown GMV as the transition of the marketplace towards being predominantly full price accelerated. Outside of these factors, our underlying business remains very strong. In Q1, our full-price marketplace GMV, excluding the China and Russia regions, clocked an excellent year-on-year increase of circa 20%. This is particularly impressive considering the marketplace grew more than twice that rate in Q1 2021. And despite these headwinds, we continue to deliver digital platform GMV growth on top of one of our highest ever growth quarters in Q1 2021, for two-year digital platform GMV growth of 64%. Additionally, several key performance factors further highlight the strong underlying dynamics of our core business. We saw 100% retention of our top 100 brands and boutique partners. We achieved a take rate of 32%, our highest as a public company, having renegotiated 74% of our e-concession contracts. And saw these brands lean further into the marketplace, uploading 69% more inventory year-on-year and... Our full price business, which is the significant majority of our business, remains a growth engine powered by, among other factors, private clients, where we enjoyed over 90% customer retention and AOVs of $1,200. Taking a holistic view of our business, including our platform capabilities behind our luxury new retail vision to revolutionize the $300 billion luxury industry through the seamless merger of both offline and online shopping, our journey to become the global platform for luxury continues to make steady progress. Before I update you on the various businesses within Farfetch, let me address the three main factors we faced in Q1 in further detail. Starting with Russia. By the end of 2021, Russia had grown to become our third largest marketplace market, representing 6% of total GMV and an even higher share of the marketplace, where it posted more than 70% year-on-year growth. Naturally, we expected a continuation of robust growth from this market, and our stoppage in Russia considerably impeded GMV growth. We also believe the conflict had a spillover effect in Europe and CIS countries, where we have seen less buoyant demand than expected. Based on the current status of this conflict, we have no expectations of reinitiating operations in Russia for the foreseeable future. Moving to China, our second largest market, the rise of COVID-19 cases against the backdrop of a zero-COVID policy increasingly impacted our growth trajectory. The majority of our mainland China business consists of cross-border sales from Europe to Tier 1 cities such as Shanghai, which serves as a major cross-border hub. And as such, we experienced significant disruptions in our delivery operations for the China market. These recent lockdowns have been very different from those we've seen previously because of the impact on logistics. That said, our long-term thesis on China has not changed. As the second largest luxury goods market in the world, which is expected to become the largest by 2025, we continue to see tremendous opportunity in China and remain committed to building on our differentiated positioning as the leading Western luxury fashion platform in China. Towards this, despite the more challenging environment, we are continuing our efforts to activate and engage customers, and we are happy to see that they are generally accepting delayed orders. More recently, we have also seen green shoots of a reopening, with orders being delivered to customers across more than 80% of the region on a GMV-weighted basis, and shorter delays in cross-border customs clearance. Over the medium term, when COVID restrictions are eased, we also see an opportunity for Farfetch to capture pent-up demand, which we expect will shift more towards online channels, as customers will be more likely to avoid crowded stores, shopping malls and flights to other shopping destinations. But as we do not know how the COVID infections and associated restrictions will evolve, we remain cautious on growth from China in the coming quarters. Finally, in 2019, we articulated a strategy to support the values of the luxury industry by transitioning the business to become primarily a destination for full price sales. Since then, we have seen some super brands accelerate their transition and completely remove markdowns from our marketplace. This is absolutely a welcome trend, and we are pleased to report continued progress on this front, with full price mix at highest ever levels in Q1, However, the significant degree of full price transition did not make up for a greater than expected deceleration of Markdown listings and a 17% decline in Markdown GMV. This was partly offset by full price GMV which grew 13% and over 70% on a 2-year basis. Excluding Russia and the China region, full price GMV increased a very strong circa 20%, which reflects the strong underlying growth of this high quality demand, particularly in light of a tough compare in 2021. Our full price performance highlights our successful execution of the strategy to build the largest global online luxury fashion business while operating it as predominantly full price. While this transition has caused some variability in our results, the silver lining here is that this is precisely the type of growth we want to invest in. Not only will this drive sustainable growth of higher margin revenue over the long run, but it also aligns us closely with the values of the luxury industry. Once the full price transition stabilizes and begins to fully comp, we believe we'll have the foundations for returning to the 30% CAGRs we have historically targeted. I am delighted by the fact that our underlying customer and brand relationships are going from strength to strength, our leadership position continues unassailed, and the tremendous opportunity to build the global platform for luxury is intact. In fact, there are many achievements to celebrate across the group, turning out to our platform, marketplace and brand platform. Starting with our platform, we are thrilled to have Neiman Marcus Group as our newest FPS client. NMG represents the largest US online business for full-price luxury fashion, and we are excited to partner with them to digitally transform their businesses. The broad scope of the partnership highlights our expansive platform capabilities. FPS will re-platform Bergdorf Goodman's website and mobile app. Neiman Marcus will use select FPS modules, including foundational international services. And both Bergdorf Goodman and Neiman Marcus will join the Farfetch marketplace. Given the vast majority of Neiman Marcus online business is in the US, for Bergdorf it is 100%, the international enablement of this powerful player in our industry is a significant opportunity for both businesses. complementing the strong online growth NMG has seen in US sales. Additionally, we will invest $200 million in NMG to help expand its innovation and digital capabilities and enable us to participate in the equity upside we believe our digital capabilities will help achieve. I'm truly energized by the prospects of partnering with the most prestigious luxury department store in the US, which is the largest luxury market in the world. On the heels of this announcement and ongoing conversations with potential clients, momentum behind FPS is robust and we are aiming to announce other enterprise clients in what I believe is going to be a great year for FPS. Finally, we confirm that we remain in discussions with Richemont about a potential deal, which includes the leveraging of FPS to power Richemont's Maisons and IUCS Net-à-Porter , the participation of Richemont's Maisons in Farfetch's marketplace, and a minority investment in YNAB by Farfetch. However, there can be no guarantee that we will be able to sign this deal or any of the options under consideration. We will make further announcements if and when required. Turning to the Marketplace. The Marketplace continues to have tremendous growth potential and Stephanie will discuss the exciting launch of our new category, Beauty. We continue to focus on offering our brands a global exposure and aim to be number one in all major luxury markets in the world. In Q1, GMV for our Americas region grew 20%, driven by higher customer engagement, full price sales and increased local supply. This reflects investments we have made into markets like Brazil, Mexico and Canada, but also continued strong growth in the US, where we delivered 70% two-year growth. In our EMEA region, our bet in the Middle East continues to pay off, with GMV growth in Q1 of 20%, partly offsetting a more muted growth in the rest of EMEA, which declined slightly driven by Russia. We also continue to see tremendous engagement with our brands, and this extends to media solutions, which grew revenue by a powerful 89% in Q1. The third component of our platform strategy is within Newguards, our brand platform. In Q4 2021, we embarked on a project to change our B2B brand platform warehouse provider in Italy. This transition did not go as we anticipated, resulting in delayed deliveries of first-party original stock to NGG brand retail partners in Q1. I am pleased to share that the transition is now complete and with shipments beginning to flow again to our retail partners, we expect a partial catch-up on delayed orders to contribute towards more than 50% brand platform GMV growth in Q2. Beyond this, new gas continues to drive newness and excitement behind our brand portfolio. With the fashion industry returning to the catwalk in person after two years, Palm Angels, Ambush and Off-White each held highly acclaimed shows to showcase their Autumn Winter 22 collections. And Off-White became the first firefetch business unit to begin accepting cryptocurrency, which is now live in the Paris, London and Milan flagships. The brand also announced the appointment of Ibrahim Kamara in the new role of Art and Image Director, where he will support image design and styling for the brand. Ibrahim is also the Editor-in-Chief of Dazed, and his years of experience working with Virgil Abloul and the Off-White team to style their shows ideally position him to take the brand forward. In March, Newguards also completed its Reebok agreement with ABG and kicked off the year-long collaboration with ABG and Adidas to transition the brand under Newguards. We believe this to be a profitable multi-hundred million dollar deal for NGG and also a great addition to our digital platform since we will prioritize a digital DTC strategy going forward. With our warehouse transition now resolved, we are expecting our brand platform to deliver stronger results through full year 2022 and continue to be a strategic driver of buzz, organic customer acquisition and unique offerings on our marketplace. And now I'd like to pass the call to Stephanie for all things brand and customer.