Why Going Private Won’t Solve Farfetch’s Problems
The luxury e-tailer could be the latest e-commerce firm to go private amid its worst year as a public company. But Farfetch’s much scrutinised lack of focus could persist outside the public market.
Farfetch’s long, tumultuous quest for profitability is far from over, but whatever comes next will likely happen away from investors’ prying eyes.
On Tuesday, The Telegraph reported that Farfetch’s CEO Jose Neves, who founded the company in 2007 and holds the majority of its voting shares, was in discussion with top shareholders and JP Morgan to delist the luxury e-tailer. Farfetch then cancelled its quarterly earnings release, scheduled for Wednesday, an unusual move that strongly implied seismic changes were imminent.
The potential delisting caught the market by surprise, with Farfetch shares jumping more than 20 percent on Tuesday. While analysts and fashion insiders have been speculating about the marketplace’s trajectory for years, few had a Neves-led buyout on their list.
In retrospect, of course, this outcome feels almost inevitable. Since its IPO in 2018, Farfetch’s stock has lost more than 90 percent of its value, and its market capitalisation has plummeted from a high of $26 billion in February 2021 to just over $600 million today. The company has never turned an operating profit, prioritising marketing spend as it sought to dominate the online luxury e-commerce space. Worryingly, its momentum has also stalled, with sales declining in recent quarters. New businesses meant to drive sales and profits, including beauty and brand operator New Guards Group, have struggled.
As a private company, Farfetch would face less scrutiny as it looks to improve its bottom line. A take-private deal could also be an opportunity for Farfetch to go back to basics — selling high-end goods online from the curated inventories of local luxury boutiques — after years of chasing dominance beyond luxury e-commerce with a series of acquisitions: British department store Browns in 2015, sneaker reseller Stadium Goods in 2018, brand incubator New Guards Group in 2019 and niche beauty retailer Violet Grey in 2022.
Less clear is what such a deal would mean for Farfetch’s relationship with Richemont. The two companies have been working for over a year on a complex transaction that would see Farfetch acquire a 47.5 percent stake in YNAP, mostly for shares, with the intention it would buy the rest in a few years once its onetime rival becomes profitable. European Union regulators approved the deal in October, theoretically clearing the way for all parties to proceed.
Richemont is likely to be having second thoughts, analysts say. The Swiss luxury giant released a statement on Wednesday saying that it “does not envisage lending or investing into Farfetch.” The e-tailer’s stock more than reversed the gains made on Tuesday, plunging over 50 percent on the news, its steepest one-day drop this year.
The steep sell off reflects how the YNAP deal is widely seen as a potential lifeline. It could add over $3 billion in gross merchandise volume — a measure of sales on its core marketplace. Under the terms of the deal, Richemont would also replatform its brands using Farfetch’s technology, giving a boost to Farfetch’s white label software service.
Any other potential partner in taking Farfetch private (Chinese e-commerce giant Alibaba, which teamed up with Richemont in 2020 to invest over $1 billion in Farfetch through a joint venture could be a candidate) could be on the hook to foot the bill for the rest of its YNAP deal in the next few years, as Farfetch currently has $1 billion in debt.
Focussing on the core business may not be enough, with or without YNAP. Luxury spending generally is down as aspirational consumers see their spending power dwindle in a challenging macroeconomic environment, with even traditional luxury players like LVMH and Kering seeing softening demand.
Those challenges are even more pronounced in the luxury e-commerce sector, due in part to consumers returning to in-person shopping. YNAP has long struggled to turn a profit (the reason behind the sell-off plan in the first place), despite having the backing of a major luxury group. Canadian e-tailer Ssense reduced its workforce by 7 percent in January, citing stagnant sales growth, while Munich-based online destination Mytheresa reported a sales slowdown in September.
And then there’s the question of whether Farfetch actually would simplify its business if it was taken private. Neves has always taken big swings, whether in beauty, brand building or the “store of the future.” With a majority of voting shares he had the freedom to pursue his vision, even as CEO of a public company. Still, going private would free Farfetch from the need to issue public disclosures, and from the real-time feedback of its stock price.
“It could be José [Neves] saying, ‘well, if I’m not a publicly held entity, I can do all the initiatives that I want to do,” said Tom Nikic, an equity research analyst at Wedbush Securities. “He can’t be [backed] into a corner as far as voting rights are concerned.”
That’s certainly how things have played out at X, formerly known as Twitter, where Elon Musk has scared off users and advertisers since taking the company private last year.
Neves fortunately doesn’t share Musk’s penchant for courting controversy. But whether he has the discipline to stay laser-focused on making his marketplace profitable - and whether he’ll have the capital to implement his strategy - remains to be seen.