Farfetch Limited [FTCH] Conference call transcript for 2023 q2
2023-08-17 20:19:05
Fiscal: 2023 q2
Operator: Good afternoon, and welcome to the Farfetch Q2 2023 Results Conference Call. My name is Luke, and I'll be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers’ 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.
Alice Ryder: Hello, and welcome to Farfetch's second quarter 2023 conference call. Today's update will include prepared remarks from Jose Neves, our Founder, Chairman and Chief Executive Officer; Elliot Jordan, our Chief Financial Officer; and Stephanie Phair, our Group President and Chair of NGG. Jose and Elliot will also be available to take questions following the remarks. Please note that unless otherwise stated, all comparisons on this call will be on a year-over-year basis. During today's call, we will also be displaying a slide present throughout our prepared remarks, which can be accessed as part of the live webcast at farfetchinvestor.com. Following the call, the presentation will also be uploaded to the site. 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 8, 2023. 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 materials which are available on our website at farfetchinvestors.com. And now, I'd like to turn the call over to Jose.
Jose Neves: Hello, and thank you for joining us today. I am delighted to be taking you through our Q2 results, a quarter which saw an acceleration of our digital platform growth as well as further progress across key strategic priorities for 2023. And thanks to the decisive actions we've already taken in terms of fixed costs, we are confident we remain on track to be adjusted EBITDA profitable and free cash flow positive for full year '23. Before we dive into the details about our results and outlook, I think it's important to take a step back and look at the long-term opportunity for Farfetch. As a Founder of Farfetch, I am proud to be celebrating our 15th anniversary in the coming weeks. Since our founding, our strategy has been to build Farfetch to become the global platform for luxury by developing a platform with unrivaled technology, logistics and data capabilities. And in parallel, we built a global community of boutiques, brands and customers across all major luxury markets in the world. This strategy remains our North Star. And thanks to our progress on all of these fronts, today, we occupy a unique leadership position in global luxury with an extremely exciting future ahead. Underpinning the strategy, Luxury has continued to demonstrate its resiliency and has become an integral part of culture, now more than ever before, which I believe will pave the way to many more years of industry expansion. Still, the digitization of luxury is in its early innings with digital sales just over 20% of the mix, but expected to expand to over 30% by 2030. This means Farfetch as a leader at the intersection of technology and Luxury is poised for significant growth and profitability. This reinforces our confidence in our previously stated plans to scale to a $10 billion GMV business, generating approximately $400 million in adjusted EBITDA and strong free cash flow by 2025. In spite of the unprecedented macro challenges since 2022, the decisive actions we've taken in light of these factors make me as confident as ever in our prospects for achieving these targets. The events of 2022, which led to the stoppage of our business in Russia, then our third largest market, a slowdown in China and adverse FX all amidst considerable macro volatility in U.S. and Europe, raised an imperative for decisive action. As a result, in 2022, we moved swiftly to implement a significant set of actions on costs and capital allocation, making profitability and cash generation and non-negotiable priority over growth after a 14-year stretch of rapid expansion. This is now set as our philosophy for cost and capital allocation moving forward. These decisive actions included not only reductions in head count and other fixed costs, but also a complete redesign of our organization structure and a significant bolstering of our leadership team. And this June and July, we went even further. We doubled down and executed the most significant cost rationalization in our history as a company. Specifically, the actions taken in the past two months are expected to eliminate $150 million of planned 2023 fixed costs through the remainder of the year. This means G&A and technology expenses are now expected to be a combined $800 million for full year 2023 as compared to the previous guided $950 million. This delivers $50 million in savings versus 2022 despite incremental resources to support the launch of Reebok and new FPS launches planned for 2023 and 2024. Just in this last round, we've removed approximately 800 roles are over 11% of starting head count in 2023. As a result of these reductions as well as other cost cuts, costs related to some of our key teams such as our marketplaces, technology, finance, legal and people teams will be back to 2020 spend levels. which means they have essentially rolled back three years of fixed cost expansion. And the cost of our operations, which provides end-to-end part of others are only expected to be 25% above 2020 levels whilst other volume is running 60% higher than three years ago. Finally, NGG and FPS costs were also rationalized. As these reductions are structural in nature, we expect even greater savings for full year 2024, which we believe increases our ability to achieve our stated 2025 profitability goals. This also means we have made a range of business decisions, including discontinuing beauty as a category on the marketplace and exploring strategic options for Violet Grey, further reduction in our real estate footprint, closing several offices and profitable retail locations worldwide, and concentrating NGG's resources on key brands among several other actions across the Farfetch Group. I want to emphasize a very important point here. Our North Star remains absolutely intact. Amidst executing the strategy of decisive action we remain focused on delivering on all the strategic initiatives discussed in our Capital Markets Day. Our 2023 FES launches remain on track, including the continued global rollout of Ferragamo as well as Bergdorf Goodman, which is expected to launch in Q4. I am delighted to report that we launched three additional e-concessions as-a-service brand for Harrods. And that Harrods have also proactively initiated and signed an early renewal of their SPS contract, which extends our partnership into 2028. Additionally, our announced with Richemont continues to advance through the regulatory review process. We continue to work closely with regulators to obtain the final outstanding approvals for the transaction, following approvals in the UK, China and Italy among others. As a reminder, approval is not required in the U.S. I am confident the combination of our decisive actions in terms of focus on profitability and cash generation and our unwavering commitment for our long-term vision will result in more big wins across our key strategic initiatives while driving us towards achieving our stated 2025 profitability targets. Turning now to more recent trends. I'm pleased to report Farfetch continues to grow in Q2 with digital platform GMV up 7% and a stronger profitability profile. Total G&A and technology expense was 7% lower. And our focus on cash generation means free cash flow was positive for the quarter. I want to highlight that across most regions, our marketplace business is performing very strongly. In Q2, GMV in EMEA grew double-digits. And in the Americas, excluding the U.S., it grew more than 20%. Overall, active customer growth was 7% and other growth was 9%. Our margins remained stable with digital platform or the contribution margin of 31%, and brands and boutiques continue to double down on Farfetch with over 40% unit growth of supply. In U.S., GMV accelerated with Q2 performance sequentially better, although, still single-digit negative year-on-year together with a 10% reduction in demand generation spend. However, as in the case of many others in the luxury industry, we have seen a less buoyant luxury customer in the U.S. We have seen similar macro dynamics in Mainland China. Although, we are seeing improvements with Q2 performance sequentially higher, GMV was also in single-digit decline. The reality is that the recovery has not been as robust as we had expected when we reported our Q1 results. And as a consequence, we have also reduced demand generation investment in this region. Like in the U.S., we believe this is not Farfetch specific as other luxury brands have similarly indicated China is not growing as quickly as previously expected after its reopening in December. Whilst brands are reporting strong in-store growth against comps during the previous years, strict lockdowns, online sales have not recovered as quickly as expected by many in the luxury industry. The slower recovery in these two large markets, offsetting the strong momentum we continue to expect in most other regions leads us to moderate our second half 2023 growth expectations for the marketplace. Our group outlook for 2023 also factors in recent developments in NGG's business, which Stephanie will discuss. Overall, I am delighted to confirm Farfetch is growing. Our key strategic initiatives remain on track. And thanks to the decisive actions we've already taken in terms of fixed costs, we are confident about our objective to be profitable at the adjusted EBITDA level and generate positive free cash flow for full year 2023. Turning to our executive team and the evolution of our organization. Tim Stone has joined Farfetch to assume the CFO role as Elliot Jordan ends his more than eight-year tenure at the end of this month. We're delighted to welcome Tim to Farfetch. He has 20 years’ experience at Amazon and was also CFO of Ford. Tim brings extensive knowledge of best-in-class customer-centric marketplaces and e-commerce platforms, along with experience in scaling SaaS businesses, proficiency in both 3P and 1P businesses and has a deep understanding of digital as well as physical retail. He shares my vision of building Farfetch as a leading company at the intersection of tech and luxury with a very strong profit and free cash flow generation profile for the long term. Team is moving to London this month and will be a key member of the executive team taking Farfetch to its next level. And he has big shoes to fill. Elliott leaves with the fondest of memories and will always be an important part of the Farfetch history. Having joined Farfetch as our first CFO and partnering with me to multiply our revenue by 16 times during his tenure, transition the company from private to public and leading so many amazing teams and projects. We have significantly strengthened our organization and leadership over the last 12 months. Overall, these additions of exciting talent fill our ranks with an even wider skill set, hunger for success and huge amounts of energy as we approach a new very exciting chapter for the Farfetch Group. And now I'll turn over to Stephanie to update us on NGG.
Stephanie Phair: Thank you, Jose, and hello, everyone. Four years ago, we acquired NGG because we saw great potential behind combining its culturally relevant content creation platform with the Farfetch technology platform, and it has been a successful combination. Having recently added responsibilities of Chair of New Guards Group to my existing role as Group President, I'd like to spend some time today updating you on the business. In particular, I'll focus on our Q2 performance, the recent organizational changes and update you on the brand portfolio and our recently launched Reebok business. Starting with Q2 performance. In Q2, Brand platform GMV decreased 41% to $63 million. This decline was driven by a phasing of deliveries from Q2 as wholesale accounts, predominantly department stores and retailers in the U.S. and UK, reduced intake deliveries due to heightened inventory positions, resulting from the challenging macro environment. The phasing of shipments was also due to some onboarding challenges with the launch of Reebok, which have resulted in a slower ramp-up. However, we expect a strong recovery of these deliveries to result in Q3 Brand platform GMV of over $150 million. For the remainder of the year, we expect wholesale to remain under pressure as we have seen retailers adjusting their open to buy for the spring/summer '24 season. This is reflected in our revised 2023 expectations for the brand platform, which Elliot will cover. It's important to note, however, that this dynamic is specific to wholesale. In NGG's digital direct-to-consumer channel, GMV grew double-digits during Q2. Moving on to NGG's organization changes. Since taking this role, following the recent transition of the NGG founders, I have been spending time with the team in Milan reviewing the business strategy and operations and have begun implementing actions to streamline NGG and allocate resources to optimize profitability. First, we have cemented a strong and capable leadership who have been at NGG over the past few years. We also restructured NGG to function more efficiently as an operating platform to service existing and future brands within the portfolio. This, along with our plans to further integrate NGG with the Farfetch platform has enabled us to reduce NGG's head count to 2021 levels. Going forward, we will also focus our resources and efforts on the brands with the greatest scale and profitability profile. As a result of these actions, direct G&A for full year 2023 at NGG is expected to decrease double-digit percentage as compared to our original expectations for the year. and we expect some of these savings to carry into 2024 for a stronger profitability profile. Moving to Reebok. We are pleased to have launched this brand across direct-to-consumer and wholesale channels in May. While there have been some initial challenges in transitioning the business from Adidas, with the process fully complete, we are focused on the underlying opportunity to tap into NGG's brand building talent and expertise to reinvigorate this heritage brand. We expect the initial transitional challenges to result in Reebok now delivering approximately $200 million across both the brand and digital platforms in 2023 and remain enthusiastic about the brand's prospects which is supported by the strong consumer and partner engagement since launch. We're also excited to have launched in July, the first iteration of Reebok premium line. This line is the prologue of the full launch of products and collaborations expected next year. Overall, we continue to see significant strength within NGG, a business that has contributed to the growth and profitability of Farfetch, delivering GMV growth at a 20% CAGR from 2018 to 2022, ahead of luxury industry growth of 7% over the same period. We believe that brands within the NGG portfolio will continue to be forces of culture in the industry and that our recent organizational changes led by a very strong management team will also allow NGG to operate more efficiently, drive profitable growth and unlock further synergies with the overall Farfetch Group. And now, I'd like to pass the call on to Elliott, who will discuss our financial results and outlook.
Elliot Jordan: Thank you, Stephanie, and hello to you all. I'd like to summarize what we have achieved across Q2 and then break out our expectations for the rest of the year. There are several key points to highlight from within the quarter. First, the digital platform is delivering growth with digital platform GMV up 7% and digital platform services revenue up 10%. In addition, digital platform order contribution margin remained strong at 31.2%, despite macroeconomic and promotional headwinds. The rationalization of the business since 2022 has delivered significant savings in the cost base, which is lower year-on-year and we'll continue to deliver financial benefit across H2, and we have achieved positive free cash flow driven from a stronger working capital position. Overall, our use of cash has improved by $316 million versus Q2 and we finished the quarter with $454 million in cash and cash equivalents. Finally, the brand platform experienced delays in shipping wholesale orders, meaning approximately $50 million in revenue at a circa 50% gross margin has moved from Q2 to the second half of the year. This movement had an associated impact on adjusted EBITDA and inventory levels. Looking at the P&L in Q2, we achieved GMV of $1 billion, a 1% increase on a reported and constant currency basis. This growth was driven from the digital platform, which accelerated growth to 7%. Brand platform GMV declined 41% due to delayed wholesale shipments as retailers phase back deliveries of fall winter '23, whilst they clear through their spring/summer '23 inventory holdings. This decline in GMV had an impact on revenue which declined 1% year-on-year and gross profit, which declined 9%. Demand generation experience has improved year-on-year by 6% and total G&A and technology spend improved 7% to be $14 million lower than last year and $15 million lower than Q1. We achieved adjusted EBITDA of minus $31 million which was $4 million better than Q1 due to the growth of the digital platform and sequential reduction in G&A and technology spend. The decrease in EBITDA versus last year was due to the delayed brand platform shipments, which we are now expecting to recognize an H2 revenue. Let's look more closely at the performance of the digital platform, which has seen some momentum in Q2. As I said earlier, the digital platform GMV growth accelerated to 7%. This was driven by strong underlying growth from the marketplace and double-digit growth from Farfetch platform solutions with the addition of GMV from Reebok and Ferragamo, which took effect across Q2. The digital platform grew slower than expected, driven by the U.S. and China on the marketplace and as GMV from Reebok ramped up less quickly than anticipated. The marketplace performed well with a $0.07 increase in active consumers to $4.1 million as we added over 550,000 new consumers in the quarter, and orders per customer increased slightly to deliver 9% order growth. This growth was partially offset by a 6% decline in average order value to $562 due to a higher mark down mix year-on-year. Digital Platform Services revenue increased ahead of GMV at 10% due to an increased mix of first-party revenue and the addition of Reebok direct-to-consumer sales on the digital platform. In addition, we saw an increase in third-party take rate by 60 basis points to 31.8%, and which we believe reflects the value we are providing partners on the platform. Digital platform order contribution margin was 31.2%, down 50 basis points principally due to a reduction in first-party gross margin due to action we are taking to reduce inventory levels, plus the increased mix of first-party revenue at lower gross margin, offset by a significant reduction in demand generation expense to 18.1% of digital platform services revenue compared to 21.1% last Q2. We continue to improve new customer unit economics with lower customer acquisition costs year-on-year, and engagement costs on existing customers have also improved year-on-year. These savings are driving a higher LTV over CAC ratio with three-month LTV over CAC improving year-on-year for each of the last three quarters. Looking ahead, we are adjusting our near-term expectations across H2 to reflect an updated assessment of the luxury market in the U.S. and China. This means moderating our GMV growth expectations. However, our focus on operating the business off a lower cost base means we continue to expect to deliver profitability in 2023 with up to 1% adjusted EBITDA margin. GMV is now expected to be approximately $4.4 billion, up from $4 billion in 2022. On the digital platform, we are now expecting digital platform GMV to be approximately $3.85 billion, up 10% year-on-year. This assumes continued strong growth across most markets, offset by ongoing mid-single digit decline in the U.S. and China for the rest of 2023. On the brand platform, we are now guiding to GMV of approximately $450 million, broadly flat year-on-year. This estimate reflects ongoing macro headwinds affecting wholesale orders of existing brands offset by incremental GMV from the launch of Reebok this year. We continue to expect GMV growth to improve into Q3 and then Q4 supported by underlying growth in the marketplace and additional GMV as Reebok's direct-to-consumer channel strengthen and FPS starts to service Bergdorf Goodman in Q4. The guide of GMV also reflects the expected catch-up in delayed brand platform shipments from Q2. On G&A and technology costs, we're now guiding to circa $800 million this year, which is a $150 million saving compared to the initial guidance as we continue to drive cost savings across the business. This should result in cost $50 million lower than last year, which delivers a return to operating cost leverage. Revenue growth is expected at 8% to 10%. On margins, our forecast for digital platform order contribution margin remains higher year-on-year at 33% to 35%. This position is supported by anticipated improving gross margins and more efficiency in demand generation expense versus 2022. Inventory actions and a higher Reebok mix means gross margin on the brand platform is now expected at 46% to 48%. On cash, we expect to deliver positive free cash flow and have taken the opportunity to expand our existing term loan B facility with expected net proceeds of approximately $180 million boosting our overall liquidity. We now expect to deliver cash and cash equivalents of over $800 million at year-end. This position is driven from higher GMV growth and profitability compared to H1 and further improvements in our working capital position, particularly within Q4. It only leaves me to thank Jose, the Board and everyone at Farfetch for all of the memorable moments and fantastic achievements we've shared over the last 8.5 years. It has been an honor to be part of a business, which I believe is positioned at the center of gravity of growth in the luxury industry over the longer term. I'm delighted to be passing the CFO back into Tim, who has the experience and leadership skills to help guide the business through its next phase of profitable growth. I wish all my talented colleagues at Farfetch, all the best. And with that, I'd like to pass the call back to Jose for his closing remarks.
Jose Neves: Thank you, Elliot. Over the past 15 years, we have built a leader at the intersection of luxury and technology, with incredible competitive advantages and huge opportunities for growth. Nonetheless, the current macro environment requires decisive action. We have shifted our paradigm of cost and capital allocation to prioritize profit and cash generation as non-negotiables, while still maintaining our North Star intact. We've redesigned our organization and strengthened our leadership team. And in the last two months, have doubled down by further rationalizing our business, all whilst delivering against our key strategic initiatives, which makes me more confident than ever in achieving our previously stated 2025 goals of scaling to a $10 billion GMV business, generating approximately $400 million in adjusted EBITDA and strong free cash flow and continuing to make progress in our mission to be the global platform for luxury. I want to extend a huge thank you to all our Farfetch, who built the amazing company we are today and who have embraced the need for decisive action and are working relentlessly to build an incredible future for this company. Thank you, and we will now open the call for questions.
Operator: We will now move on to our Q&A session. [Operator Instructions] Our first question comes from Doug Anmuth from JPMorgan. You may unmute and ask you question.
Douglas Anmuth: Thanks for taking my question. I just wanted to ask, is the $150 million in savings that you talked about, is that fully incremental or is that including the previous cost reductions that you just [indiscernible]? And then when you think about the declines in the U.S. and China, is there anything that really tied to macro and inventories [indiscernible]. Thank you.
Alice Ryder: Hey, Doug. Would you mind repeating your second question? It didn't come through?
Douglas Anmuth: Sorry, I apologize. Is there anything structural in the declines in the U.S. and China or purely related to macro [indiscernible]
Jose Neves: Hi, Doug. This is Jose. Great to talk to you. So in terms of the actions that we've taken, we always said 2023 was our year of execution. And I'm glad that we are delivering against the strategic initiatives and the ones we haven't delivered the are on track, Bergdorf Goodman for Q4, cartier.com (ph) [indiscernible] et cetera., slated for 2024, regulatory approval pending, but with good news from UK, China, Italy and others. And to your question, as part of the execution focus, we have taken action in the last two months, which is a continuation of the decisive actions that we've taken starting in 2022. The $150 million cut is versus our guidance. So we guided the market to $950 million from $850 million in 2022 to support the new initiatives and launches. So I think what is very pleasing to see is that we are absolutely delivering these new launches and on track whilst being able to actually reduce the planned SG&A to $800 million this year, which is $50 million less than last year. So that's the plan. And you can see already sequentially the SG&A line from Q4 into Q1, into Q2. You can see already the results of the actions we've taken last year. Now the actions we've taken in June and July will continue to obviously be reflective. So we're on track to that $800 million, which really demonstrates a relentless focus on execution and efficiency. And all in all, I think it's important to take a step back and I'll touch on U.S. and China which is your second part of the question. To take a step back, and Farfetch is going to grow this year. The digital platform, our car business is going to grow double-digits, 10% to be precise. The -- it's going to be a record year in terms of GMV at $4.4 billion GMV, the highest in our history as a business, a record year in terms of adjusted EBITDA, a year of positive free cash flow. And therefore, whilst the macro headwinds in the U.S. and China are definitely making us more prudent in terms of the outlook for the second half of the year. There is a lot of health in our car business and an incredible advantage in terms of delivering on our strategic initiatives. The U.S., I don't think this is Farfetch specific. You've seen the luxury industry, many luxury companies in double-digit negative in the U.S., wholesale doing worse than direct-to-consumer. And that's what we see also in our business. In fact, the good news is that the U.S. is accelerating sequentially and we are in single-digit negative. It's still a negative. And therefore, this is obviously less buoyant than what we would have hoped for. And a very similar picture in China. I think it's well publicized. The Chinese economy didn't bounce back to the extent that everyone expected after the lockdowns. In-store growth for luxury is strong. But of course, it's not apples-to-apples, because these stores were all closed last year. And what we hear in the industry and what we're seeing in our own platform is that the recovery is not as explosive as everyone thought it would be. We had some green shoots. We were in positive growth partner (ph) to date when we spoke to you last time, which was encouraging, but we're now on single-digit negative. So we believe that the right thing to do is there for to be prudent and adjust our plans and also adjust our spending with reduced demand generation spending double digits in the U.S. We've reduced it in China as well in face of the macro environment, which is across the industry, it's not Farfetch specific. So China is improving and with a sequential improvement. We believe it will be in single-digit negative based on everything we're seeing and taking a balanced outlook for the rest of the year, long-term tremendous opportunity. Obviously, second largest luxury goods market, and we have an impressive consumer proposition when we continue to see incredible potential in that business and in the partnerships we have in that country. Short term, there’s these movements that need to be navigated. But we’ve – as a business, I believe that we’ve taken the decisive actions in face of the current macro environment. And again, we’re going to be on double-digit growth for the car business, a record year in terms of GMV profitability, generating cash. And therefore, whilst not as fast growth as we originally expected in face of the macro environment. It’s still going to be a strong year for Farfetch.
Operator: Our next question comes from Jason Helfstein at Oppenheimer. Please unmute your audio and ask your question.
Jason Helfstein: Thanks. So the guidance suggests significant second half share improvement versus your luxury peers relative to street numbers even though you've lost here (ph) for now like something like six or seven quarters. So I assume some of the catalysts is some of the inorganic stuff around brand platform. But I mean, can you unpack how much of the -- of that second half is brand platform versus, we'll call it like organic share gains and why investors should have the confidence that you can execute on those kind of share gains just given recent performance and kind of the new guide down, et cetera. Thanks.
Jose Neves: Thanks. Hi. I think we should take a step back and really look at the performance in terms of slight a longer-term perspective. In terms of the brand platform, for example, the brand platform, NGG, as a business, we grew 20% CAGR between 2018 and 2022, that's 3 times faster than the rest of the luxury industry, which grew at 7%. If we look at Farfetch, the digital, the car business, you have a very similar picture. So this is a business that consistently over a three, four year period has gained market share. Of course, 2022 was a challenging year. We stopped business in Russia, which was 8% of our marketplace sales, our third largest market. And China went into a negative territory, which was a widespread phenomenon in the luxury industry. And therefore, I think what we're seeing is strength in terms of our car business outside the U.S. and China, the car business is growing double-digits. In the Americas, we grew 20%, excluding U.S. In EMEA, we grew double-digits with some markets in Southern Europe growing faster than 20%. Overall, even including the U.S. and China, we grew customers 7%, others 9%. We grew supply, which is a supply that brands and boutiques make available curated luxury supply on our platform by 40%, year-on-year. These are absolutely demonstrative our very strong competitive advantages, which will continue to drive market share capture over the next three years. And with the decisive actions we’ve taken in terms of the cost and the fixed cost base in a much stronger profile in terms of profitability as well.
Operator: Our next question comes from Ashley Helgans from Jefferies. You may unmute and ask your question.
Ashley Helgans: Hey. Thanks for taking our question. I just wanted to touch on the beauty business. There's been a couple of headlines in the press lately that you guys are looking to wind it down. Just any comments there? Thanks.
Jose Neves: Yes, that was the decision. We -- in face of the current macro environment and in fact, we started this set of decisive actions in 2022, you will remember in 2022, we've done headcount reductions. We've also reorganized the business, redesigned our organization, we strengthened our leadership team with several new executive additions to the team. And this year, we are doubling down on that new paradigm of prioritizing profitability and prioritizing cash flow generation as a non-negotiable. Beauty was a decision based on that new approach. We have been incredibly successful at category expansion. I just want to remind everyone who's listening to this call. We have the largest menswear luxury destination in the world. We are the largest kids luxury destination in the world, a category, we started from zero just a few years ago. We have a very healthy and profitable and fast-growing, have luxury category. We've recently announced sales of watches about $2.5 million, fine jewelry sets for $1 million. So we're really servicing the high jewelry category in an incredible way. We're adding to that with Richemont partnership with Cartier, Vantiv and all the watch brands joining our marketplace, obviously, as soon as the deal completes and we do the necessary integrations. So we have to make strategic decisions here. And when we have categories which are paying off and categories such as high luxury with incredibly high AUVs and higher profitability, versus investing the same dollars in beauty, which has a lower -- obviously lower AUV and more challenging profitability and unit economics. It was a decision that we've made. It was, in my view, absolutely the right decision to discontinue the beauty category on the marketplace to focus on all the other categories, which we have launched and where we're seeing a lot of success.
Operator: Our next question comes from Stephen Ju at Credit Suisse. Please unmute and ask your question.
Stephen Ju: Great. Thank you. So Jose, I guess, more of a very big picture question. So I think one of the bullet points in the release was highlighting your supply growth of 40% year-over-year, but your active customers grew, I believe, 7% and order growth was around a similar amount. So maybe these latter two metrics are a horrible proxy for demand growth, but this also, at the same time, makes us worry about what might be rising in balance between supply and demand on your marketplace, particularly as you've turned off demand gen (ph) and spend in the U.S. So can you talk about whether you feel like Farfetch is still a materially better channel for brands as well as retailers to market the merchandise or is this demand something that we should be thinking about and worry about for the future? Thanks.
Jose Neves: Thank you. It's a really good question and allows me to talk about the strengths of the Farfetch business model. Farfetch is unique in the luxury industry. When you don't -- you really don't see the luxury industry adopting other marketplaces such as Amazon or Etsy or eBay or other platform, so this is an industry that remains and penetrated by the giants in terms of the marketplace space. And two, the multi-brand online luxury destinations that compete for eyeballs with us, they're all retailers, are 80%, 90% retailers with a very small component of e-concessions, we're exactly the opposite. We're around 80%, 85% 3P. So this unique marketplace drop-shipping model, which is unique in this industry. This is what brands want. And brands have said it time and time again, they are divesting from wholesale, especially online wholesale and wanting to conduct sales direct-to-consumer in curated, elevated multi-brand platforms such as Farfetch. And this is what's driving the 40%. And also because of the drop shipping model, we are connecting to the inventory pipeline, if you want, of the brands for example, with carrying, we've launched a revolutionary integration, where we are now integrated with the carrying distribution centers, which power brand.com as well as either direct channels in a fully automated way. We already have dozens of integrations with the carrying brands across the group in various ways. This integration is driving part of that 40% growth, for example, but it's really across our top brands. But this means that there is no incremental inventory risk. So we're tapping on inventory which is part of the brand's ecosystem, if you want. And this allows us to scale up very, very fast as the demand ramps back up again. So the fact that the supply is there, means that we have ample supply without taking any inventory risk or burdening our brand partners with inventory risk. We're able as a marketplace to adjust very quickly and boost our revenue and GMV once the macro environment becomes more favorable in some of our key geographies.
Stephen Ju: Thank you.
Operator: Our next question is from Oliver Chen at Cowen. Please unmute and ask your question.
Oliver Chen: Hi. Thanks a lot. And Elliot, it's has been great working with you. Regarding the brand platform, what's ahead with inventory management and inventory relative to sales and how should we think about merchandise margins and promotions there, given less than expected revenues there? And on the digital platform order contribution margins, how are you thinking about demand generation and also the headwinds as we model that going forward? Thank you.
Elliot Jordan: Hey, Oliver. Thanks very much. It's been a pleasure to work with all the analysts as well. Just diving into your questions. So on the brand platform, there's a couple of things happening here. Obviously, the delayed shipments from Q2 going into the second half has had an impact on revenue, a flow-through down to profitability and, of course, on our inventory balance at the end of June, which is higher than that would have been had we shipped those orders. So once those orders clear through across Q3, we would expect that balance to come down plus also as we ramp up our sales for Reebok, the initial inventory that we brought in as part of the handover from the previous operators of Reebok, we will start to sell through that inventory and push through shipments of that inventory, bringing down the balance. Also, that's on hand at the end of June is that position starts to build. On top of that, we are having to do a little bit of additional provisioning and clearance. And you can see that in the adjusted guidance with the gross margins for the brand platform having now come down. We are expecting those -- that position now to be that sort of 46% to 48% gross margin versus the 49% we delivered last year. So that is already factored in our forecast in terms of the profitability of the brand platform. The expectation is that, that balance of inventory will be significantly reduced as we trade into the end of the year, which obviously helps drive some of the working capital benefit that you see in the forecast for the second half as well. So all sort of points to much tighter inventory going into next year. Obviously, with the reduction in expected orders for the brand platform, we are also producing less and getting factories to produce less as we start to fulfill those orders going into next year. So that again helps bring our inventory position down by December. In terms of the digital platform, still very pleased with the overall position of order contribution margins there, just down 50 basis points year-on-year. And for the full year expectations, we are maintaining guidance there of 33% to 35% order contribution margin, which will be a step up from 32% last year. And that is down to savings within demand generation. We're becoming significantly more efficient within our demand generation engine. We have pulled back, of course, as you would expect, in the two markets that we’re seeing broader macro challenges. So in the U.S. and China, we continue to retreat in terms of spend. That drives efficiency in our ability to deploy money elsewhere. And demand generation for Q2 just gone, you saw that number come down by $4 million on an absolute basis despite the fact that the GMV on the digital platform was up 7%. And for the rest of the year, we’re expecting this sort of 7.5% of GMV level, which is what we achieved in Q2 to carry on, which means a saving versus last year. Last year, the demand generation was 7.8% and of GMV. So we’re driving this 10% growth for the full year with a lower level of demand generation spend as a percentage of GMV, which is coming through from the efficiencies. The offset here, of course, Is the first-party gross margins. Again, that’s under pressure year-on-year in Q2 as we clear through some inventory. We’re starting to see that improve towards the back end of the year, and it helps drive up our overall order contribution margin. And then lastly, as the clients on Farfetch platform solutions ramp up Ferragamo already live, Bergdorf Goodman coming later this year. Of course, that product, the business-to-business product runs at a higher gross margin, and a higher order contribution margin on the digital platform, driving that 33% to 35% overall for the full year. So very confident in those numbers.
Oliver Chen: Thanks so much, Elliot.
Operator: Our next question is from Ed Yruma at Piper Sandler. You may unmute and ask your question.
Edward Yruma: Yeah. Thanks for taking the question. Two for me first. I guess, on Off-White, kind of any comments on the performance of the brand, the health of the brand, now that we're a couple of years past the untimely passing. And then just as a follow-up on YNAP. I know that there is a mechanism to reduce the dilution from the transaction? I guess given that the stock is at a very different point and when the transaction is announced, does that still hold? Is there a certain time that deal needs to be closed by to make sure that those mechanisms hold in place? Thanks.
Jose Neves: Yeah. I'll take both questions. We don't break out performance on the brand by brand, but the consumer demand around Off-White and Palm Angels remains very strong. What we see is two different pictures in terms of wholesale vessels, direct-to-consumer, so wholesale always overshoot in both directions. So we saw a very fast expansion of our wholesale business, as we said, 20% CAGR from '18 to '22. The brands are very popular in the U.S. and in the UK So we have great customers in the American department stores and also boutiques in the UK and Europe. And with the macro headwinds hitting U.S. department stores and UK, naturally, these customers are reducing their orders across the entire luxury spectrum. And you saw this in multiple commentary from practically all luxury players in terms of the health of the wholesale segment, especially in the U.S. but also in the UK. So if you look at direct to consumer, the in aggregate, the NGG direct-to-consumer digital sales are up double-digits. And I think this shows that there are two stories here. There's one story in terms of the consumer appetite for these brands, which remains strong. They continue to be in the list of top our rents. And also the new direction has been evolving with [indiscernible] now firmly installed as Creative Director activating his community, obviously Palm Angels nothing changes, we have Francesco Ragazzi and Stefano who created a brand really from scratch to what is one of the success stories in past years. So the portfolio is very strong. Reebok, we're very excited with Reebok. We did a small preview of Reebok luxury collections to some luxury boutiques this summer and was extremely well received. This is a brand that hasn't done anything really in the premium space. So it's greenfield and is greenfield for 2024 and beyond. And NGG with Cristiano having been over 20 years at Nike in their premium luxury, Nike collaboration department and now over three years at NGG, he's the right guy to really make Reebok make sneaker history here. And therefore, we remain very confident over the long-term plans for NGG and for the brand platform. And we're going to navigate this very short-term in the case of Reebok, one-off transition issues from Adidas and in the case of Off-White Palm Angels and other brands really a wholesale headwind, which we were always -- we always say that the future of the brands is more direct-to-consumer than wholesale. So our focus is really on ongoing direct consumer precisely because wholesale always has these movements of overshooting in one direction and another. So this continues to be the strategic direction for the group. On YNAP, I can absolutely confirm the share price has -- and the share count has been fixed. So we don't have any extra dilution and it's around 11% of dilution for Farfetch for 47.5% of share capital at YNAP, that's what's been -- that's what's on the deal, and that's what's going to be executed independently of where the share price is as soon as we get regulatory approval. And of course, you have other guardrails in this transaction in terms of the ability to -- the option to require the remaining of the company over five years with the requirement for the company to be profitable for full consolidation in terms of a [indiscernible] year and five. So those strong guardrails absolutely remain in place. We think this is a great partnership, and we're very excited with launching -- replatforming, not just [indiscernible] but also cartier.com which are going to be the two first launches where the teams are working around the clock, building these great new platforms for these flagship brands. And after that, we'll continue with the rest of the Richemont and YNAP portfolios which, obviously, this time next year means that Farfetch -- the Farfetch platform will power the largest online destination in luxury, that's Farfetch. The second largest online destination in luxury, that's YNAP, one of the three largest luxury conglomerates in the world that's Richemont and two of the most iconic luxury department stores in the U.S. and Europe as Harrods and Bergdorf Goodman. So this is an incredible roster of clients for best-in-class luxury SaaS platform and that's what we're excited to be delivering against.
Elliot Jordan: Thanks, everybody. That's time on the call. So we'll have to wrap up there. Thanks for joining the call and it's a pleasure to hand over to Tim, who will be with Jose next time. So for me, it's good evening, good afternoon, and good night.
