TheChek News Flow

On Monday, the European Commission is expected to give its official approval for Cartier owner and Swiss luxury conglomerate Richemont to sell a 47.5 percent stake in Yoox-Net-A-Porter to Farfetch and a 3.2 percent holding in the online fashion retailer to Dubai real estate entrepreneur Mohamed Ali Alabbar. The regulatory clearance will throw the spotlight yet again on Farfetch’s perceived frail financial position and put pressure on Richemont to clarify its position vis-à-vis the British company, as Miss Tweed reported last week.

As part of the complex deal, Farfetch is to become the main provider of e-commerce technology for all of Richemont’s brands including Cartier jewelry, Chloé fashion and IWC watches and sell their products on its online marketplace.

Brussel’s green light comes as alarm bells are ringing about Farfetch. The company’s shares lost another 5 percent this week. There has also been a sell-off in luxury stocks since the summer, accentuated by industry leader LVMH earlier this month calling the end of a three-year post-pandemic boom. Concern is also growing about other multi-brand fashion retailers. What will happen to London’s MatchesFashion and Net-A-Porter? To Milan’s LuisaViaRoma? And to Montreal’s Ssense? These companies have been lossmaking for years and are nowhere near profitability.

Even New York-listed Mytheresa which has the best business model with its curated offering and affluent customer base is now down to being close to break even. It is also stuck with nearly one year’s worth of unsold stock on its balance sheet worth €360.2 million, its last set of results showed.

Can you really make money selling pricey clothes, bags and shoes on the Internet in a multi-brand environment? Mytheresa will firmly answer yes. The Munich-based company argues that it’s going through a rough patch as aspirational customers have tightened their purse strings, but profits will be back again. For the year ending June 2024, it expects its underlying profitability margin (adjusted Ebitda margin) to be 3-5 percent (against 5.3 percent in the year to June 2023 and 9.6 percent in the year to June 2022) even if in the quarter to September, it will report a margin that is only “marginally positive.”

“This level of profitability makes us unique,” Mytheresa CEO Michael Kliger told Miss Tweed. And the fact that it has so much stock is not that of much of a concern, he added. “We are managing our inventory levels for profit maximization,” Kliger explained. “We are not forced into short-term cash generation as we have no debt on the balance sheet. The big majority of our inventory sits with the current and upcoming seasons. We are selling all our inventories through our own website including older seasons. With this approach and actions, we expect to return to normal levels of days inventory outstanding of around 260 days from the current 302 days end in June in the medium term,” the German executive said.

That said, Mytheresa’s share price has plunged. The shares, which reached a high of $35.85 in January 2021 after its initial public offering, are now at $2.88. The company’s market capitalization is $233.4 million, compared with $2.3 billion shortly after it floated. With a valuation so low, Mytheresa looks like another strong candidate for a de-listing, industry insiders say. It may be a private equity firm or family office that makes the bet that the company’s profitability will return to its historical high levels.

Mytheresa, which started with a multi-brand boutique in Munich in 1987, launched online in 2006. It has been profitable since 2010. Industry experts hope that it will not be merged with another player as it’s the only company that has figured out how to make money in the sector. It’s become clear selling luxury online is a totally different story to selling mass-market products. Online retailers Zalando and Asos, which are more into accessible and fast fashion, make money partly because but they handle much bigger volumes and cover fewer geographies. It’s also worth noting Bernard Arnault, Europe’s richest man and CEO of LVMH, has never believed online is a fit for luxury.

One of Mytheresa’s secrets is that it carefully selects what it sells. As opposed to Farfetch and other online retailers that carry hundreds of different brands and try to widen their offering as much as possible, Mytheresa stocks only a little over 200 luxury brands. It also offers a selection that is appealing for the current season and for certain occasions. And it focuses on hot brands. The brand’s CEO Michael Kliger goes to as many shows as possible during fashion weeks. It’s an exacting marathon, but it gives him a good sense of which brands will be strong next season and which ones will be weaker. He’s probably the only CEO of an online multiband retailer of this size who attends so many fashion shows in Paris, Milan and elsewhere.

Mytheresa is also very good at marketing luxury brands and producing high-quality editorial content. It’s currently promoting Brunello Cucinelli with a video of actress and model Greta Bellamacina and her artist husband Robert Montgomery in their Georgian house in the UK talking about their life and what they like to wear and why.

Natalie Massenet, who founded Net-A-Porter (NAP) in 2000, created the concept of retail entertainment. Her website was the first to propose cool looks and give suggestions of what to wear and how to mix and match styles and brands. She made online shopping fun. When she launched Porter magazine in 2014, it became the first shoppable printed fashion publication. The former fashion journalist, who worked for WWD and Tatler, understood that women wanted not only advice on how to look good but also inspiration. Porter’s editorial line was clear: celebrate exceptional women. After Richemont sold NAP in her back to Italian discounter Yoox in 2015, Massenet left the company, and the printed version of Porter magazine was later shut down. Today, only its digital version still exists. NAP’s editorial content is a shadow of what it once was under Massenet. Like many other websites, including Farfetch, it gives you long lists of products you can choose from. NAP has also lost key brands such as Prada in Europe.

Part of the reason why NAP did not make money is that it failed to build an e-commerce platform that was sustainable from a technological point of view, as Miss Tweed was the first to report in 2020. Also, it did not keep certain costs under control such as the “costs of serve,” as they are called in the trade. These are related to the cost of uploading items on the website, taking photos, storing in warehouses, shipping and returns. Brexit also complicated things since most stock came from continental Europe. That triggered a major reorganization and the opening of a €47 million distribution center near Milan in 2021.

Richemont was hoping that NAP would be better managed once it would be run by Farfetch. The only problem is that there has been an exodus of talent from Farfetch, just like there was from NAP after Massenet left eight years ago. Cipriano Sousa, the engineer who built Farfetch from scratch with CEO and founder José Neves, has just left the company and is now an advisor. Many key staff, including members of the executive committee, have departed in recent months. And now there is a crisis of confidence in Neves’ ability to steer the company through the current storm, shareholders say. Investors’ worst nightmare is that Richemont, which has shown with NAP that it cannot run an e-commerce business, will now run Farfetch. You can expect more news on that front in the coming weeks.

So, what about other Internet players such as LuisaViaRoma, Ssense and MatchesFashion? They are all backed by private equity firms who invested in the companies at high multiples, making the bet that they would be highly profitable one day. They thought they could either float the company or sell their controlling stake to another investment firm. Ssense and MatchesFashion have progressively moved out of the luxury space to focus on premium labels and avant-garde brands for consumers aged 15-35.They have also branched out into homeware - a booming sector since the pandemic.

There is talk that Ssense may have to shed more staff after having laid off seven percent of its workforce earlier this year. Ssense and its private equity backer Sequoia Capital China have not replied to several requests for comment. Ssense has lost most LVMH and Kering brands. Several small labels have complained that they were struggling to get paid by the online retailer. Similar grievances have been heard about Farfetch’s Browns multi-brand store in London which also does business online.

LuisaViaRoma and its private equity investor Style Capital have also not replied to questions on how the company was faring.

For over a year now, MatchesFashion has been under the leadership of Nick Beighton who joined from UK retailer Asos where he stayed 12 years and ran the company for six. Since he arrived, he’s been trying to fix MatchesFashion’s business model. Beighton drastically cut down the number of brands sold on the website from more than 800 to 400 with 100 of them in homeware.

It also now offers more accessible brands such as Polo Ralph Lauren and sportswear labels such as Sweaty Betty and Asics. Beighton has also increased the number of items it buys of a given model. He understood that if, for example, you bought only four items of a bag or a dress, the costs associated with uploading them on the site, handling and shipping them, make it very difficult to make money. Returns can be very costly. Germans, for example, on average return 70 per cent of what they buy compared with 40 percent in Great Britain and France.

“The key to succeeding in fashion e-commerce is having the right talent in your organisation and unit economics and contribution per order and keeping under control your cost of serve, or how much it costs for a product to go through the business,” Beighton told Miss Tweed.Beighton is also focusing on profitable geographies such as the UK, the United States and continental Europe. He has scaled back the company’s shipping to Asia.

Like NAP, Brexit and rampant inflation have taken their toll. Around 70 percent of the clothes and accessories Matches sells in the UK come from the EU. It has opened a logistics centre in the Netherlands to facilitate shipping outside the UK. However, import duties Britain slapped on EU fashion products mean MatchesFashion has been forced to lower its margin on every product sold to remain competitive. Also, customs checks and clearances have slowed the process of shipping products in and out of Britain.

Like Ssense and other online retailers, MatchesFashion has lost some luxury brands. Recently, Richemont’s Chloé and LVMH’s Fendi decided to stop working with the British retailer. The world’s top 15 luxury brands have been cutting back on wholesale accounts and on the amount of stock they give multi-brand shops whether online or in bricks-and-mortar boutiques. They prefer to keep the business in-house to control price, image and stock. Also, many don’t see much added value in selling items in a multi-brand environment. Yet, that’s often how customers discover new products. For many years, big fashion and luxury brands represented the bulk of wholesalers’ online business. Today, they have make do with smaller, less-known brands which customers are not so keen on buying and which are more expensive to stock and promote due to lower volumes.

Big brands tend to work with multi-brand retailers mainly for marketing purposes. They keep their best products for their own website and boutiques. LVMH’s Loewe for example, one of the hottest brands sold by MatchesFashion, will not allow it to sell its popular chocolate brown Squeeze bag. That’s reserved for the brand’s own website and boutiques.

Kering’s Gucci for example will not allow any discounting by multi-brand online wholesalers but they will do private sales at their boutiques, senior industry sources say. “That is not a very healthy attitude,” an executive at a multi-brand retailer told Miss Tweed on condition of anonymity. “And surely one day, it will backfire.”

Industry insiders say that most big brands owned by Kering, Richemont and LVMH have adopted such policy of keeping the best models for their own network. Richemont has been doing the same with watch retailers. Many of its top brands refuse to give them their most popular and attractive new models, preferring to keep them for their own boutiques. In fashion, independent labels such as Valentino, Balmain, Moncler, Dolce & Gabbana and Tom Ford are amongst the easiest to work with, online wholesalers say.

It's not clear what will happen to MatchesFashion. Private equity firm Apax Partners, its controlling shareholder, injected yet another £60 million into the loss-making online British fashion retailer earlier this year. Its losses totaled £35 million last year and it still expects to lose money in 2023, albeit a smaller amount. The business last year generated around £400 million in sales. In terms of cash, Matches has now a little over a year in funding. It’s likely Apax will have to inject further cash into the business unless it can find a buyer, which looks unlikely in the current environment.

Market conditions are tough. Retailers are overstocked and many of them started slashing prices for the current fall/winter season already in September. That has put even more pressure on margins and made it more difficult to sell at full price.

The U.S. department store chain Saks Fifth Avenue has continued to postpone payments to brands in August and September, industry sources have said. The company declined to comment. Miss Tweed was the first to report in July that the American retailer was delaying payments to supplying brands to preserve cash. The company stressed at the time that this did not concern Saks.com. Its controlling shareholder Hudson’s Bay Company is expected to announce soon a capital injection that should ease pressure on its cash and facilitate payments to brand, the sources said. Stay tuned for more.