Farfetch: Uncertainty Turns Extreme as Company Fails to Provide Third-Quarter Financials

Key Morningstar Metrics for Farfetch

• Fair Value Estimate: $11.40
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Extreme

What We Thought of Farfetch’s Update

We are increasing our Uncertainty Rating for Farfetch FTCH to Extreme after the company suspended publication of its quarterly results and abandoned its full-year outlook until further notice. The lack of financial data transparency makes forecasting a daunting task. Given the company’s debt of over $1 billion versus its $734 million in cash at the end of the second quarter and cash burn of $287 million in the first half of the year, liquidity issues or bankruptcy should be considered possible scenarios. The prior outlook, abandoned by the company, factored in positive free cash flow for the year. We believe Farfetch has been further hit in the quarter by weakening global luxury demand, alongside company-specific headwinds (debt load, cash burn, and less-prominent brands of the New Guards group suffering more in a downturn).

Media outlets have claimed founder Jose Neves is in talks to take Farfetch private after its stock’s 95% collapse since the company’s IPO. Alibaba Group Holding BABA and Richemont were floated as potential co-investors; however, Richemont issued a press release claiming no financial obligations to Farfetch and no intention to invest in it or lend to it. After its unsuccessful investment in Yoox Net-a-Porter, we believe Richemont is understandably cautious about bailing out another online luxury platform. We believe Farfetch’s extensive connections with luxury boutiques and brands across Europe could be valuable to a big Chinese online player, especially if it’s purchased at a distressed valuation (less than $500 million in market cap).