Headquartered in London, U.K. Farfetch Limited (FTCH) is an online luxury fashion goods seller. It operates internationally through three segments—Digital Platform; Brand Platform; and In-Store. Amid strong revenge spending, the company witnessed stellar revenue growth in its fiscal second quarter (ended June 30). Its revenues for the quarter increased 43% year-over-year to $523 million.

However, with the rapid spread of the COVID-19 Delta variant and decelerating economic growth, the demand for FTCH’s products is expected to decline. In July, retail sales in the U.S. declined 1.1% month-over-month, missing analysts’ estimates of a 0.3% retreat. In addition, online sales declined 3.1% from the prior month.

Consequently,  investors have been pulling out of this luxury goods stock. Shares of FTCH have declined 32.3% in price year-to-date and 9% over the past month. It is currently trading below its 50-day moving average of $46.53.

Here’s what could shape FTCH’s performance in the near term:

Increasing Costs

Brexit has significantly impacted FTCH’s operations. Its digital platform fulfillment revenue, which reflects the delivery and duties charges incurred by its global logistics services, increased 47.6% year-over-year in the fiscal second quarter,  ended June 30. This increase can be attributed to rising pass-through costs due to higher export duties owing to Brexit. Its operating costs rose 7.2% from the prior-year quarter to $150.30 million over this period. The company’s operational expenses are expected to remain high until it's warehouse in the Netherlands becomes functional.

FTCH’s basic EPS came in at $0.24 in its fiscal second quarter, due in-part to gains related to the Chalhoub liability. However, excluding such gains, its EPS stood at a negative $0.31.

Potential Headwinds

FTCH expects its digital platform and brand platform gross merchandise volumes (GMVs) to rise 30% and 40% , respectively, year-over-year in its  fiscal third quarter, ending September. However, the company lists several factors that might deter its growth in the near term. For example, the potential weakening of consumer sentiment and discretionary spending on luxury items, slowing e-commerce sales, and increased operating costs will most likely negatively affect FTCH’s financials in the coming months.

Bleak Financials

FTCH’s trailing-12-month revenues came in at $1.99 billion. Its $909.13 million gross profit  translates to a 45.77% margin, which is higher than the 35.18% industry average. However, the company’s EBITDA loss and net loss stood at $451.92 million and $2.23 billion, respectively. In addition, its trailing-12-month ROTC and ROA margins are negative 51.13% and 67.52%, respectively. Also, its 0.66% asset turnover ratio is 37.1% lower than the 1.05% industry average.

Liquidity Concerns

FTCH’s trailing-12-month net operating cash flow and levered free cash flow are negative $171.64 million and $40.28 million, respectively. Though the company has a $1.15 billion cash reserve, its poor cash inflows raise concerns regarding its ability to repay its $823.46 million in outstanding debt.

FTCH’s book value per share is negative $6.29, while its debt/free cash flow ratio is negative 15.22.

Stretched Valuation

In terms of forward P/E, FTCH is currently trading at 46.60x, which is 175.3% higher than the 16.93x industry average. Its 668.74 forward EV/EBITDA multiple is significantly higher than the 10.43 industry average.

Moreover, the stock’s 6.28 and 81.76  respective forward Price/Sales and Price/Cash Flow ratios compare with industry averages of 1.24 and 13.47.

POWR Ratings Reflect Bleak Prospects

FTCH has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

The stock has an F grade for Value, and a D for Quality and Stability. Its premium valuation and negative net profit margins are consistent with the Value and Quality grades. In addition, FTCH’s relatively high 3.31 beta justifies the Stability grade.

Of the 73 stocks in the F-rated Internet industry, FTCH is ranked #61.

In addition to the grades we’ve highlighted, one can view FTCH ratings for Momentum, Growth, and Sentiment here.

Bottom Line

FTCH is a leading luxury goods retailer with a strong market presence. However, its operational inefficiencies and resultant negative profit margins are a cause for concern. Given the current macroeconomic headwinds, and the potential for the Delta coronavirus variant to necessitate the reimposition of social distancing restrictions and lockdowns, FTCH is best avoided now.

How does Farfetch (FTCH) Stack Up Against its Peers?

While FTCH has an overall D (Sell) rating in our proprietary rating system, one  might want to consider its industry peers Travelzoo (TZOO) and Yelp Inc. (YELP), which have an A (Strong Buy) rating

FTCH shares were trading at $42.66 per share on Tuesday afternoon, up $1.78 (+4.35%). Year-to-date, FTCH has declined -33.15%, versus a 20.66% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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