Earnings Call: Q2 2019

Aug 8, 2019

Good afternoon. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Farfetch Second Quarter 2019 Results Conference Call. 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. Thank you, Julie. Hello, and welcome to Farfetch's Q2 2019 conference call. Joining me today to discuss our results are Jose Neves, our Founder, Co Chair and Chief Executive Officer and Elliot Jordan, our Chief Financial Officer. Before we begin, we would like to remind you that our discussion today will include forward looking statements. Actual results could differ materially from those indicated the 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 risk factors that could cause actual results to differ, please see the Risk Factors section of our annual report on Form 20 F, which was filed with the SEC on March 1, 2019. In addition, we will refer to certain financial measures not recorded in accordance with IFRS on this call. Find reconciliations of these non IFRS financial measures to IFRS financial measures in our earnings press release and the slide presentation, both of which are available on our website at smartwrenchinvestors.com. And now, I will turn the call over to Jose. Thank you, Alice. Thank you all for joining us today for our earnings call and hear about the acquisition of New Gas Group that we have also announced. The other side is focusing on 3 important topics. First, our acquisition of New Balance Group on New Balance, a brand platform that is newly run. Orleans. Next, we'll walk you through our 2nd quarter financial results. And thirdly, to cover some of the key trends we are seeing in the market, including the tectonic shift of luxury brand online distribution. Let me start with the incredibly exciting acquisition of New Balance. As you know, this September marks 1 year since our IPO. And we said then that it was our strategy to be a key platform for global luxury industry, connecting curators, creators and consumers. We believe this sector is going to grow 100 dollars 1,000,000,000 in incremental online sales in the next few years. The next 10 years are what we call our chapter tool are going to see a revolution in how consumers engage and shop for luxury fashion, online and offline. Our landmark acquisition of Newgas expands our platform vision from a platform enabling transaction to a platform enabling a global culture of passion. Let me talk you through how this acquisition underlines our strategy. Nougat either owns or licenses, designs, manufactures and distributes some of the most sought after luxury brands, including Off White, Heron Preston, Farm Angel, Marcello Boulan among others. With these brands, New Gas has demonstrated it is the ultimate brand platform of today, incubating and growing emerging talent into highly sought after brands to a shared services model. The group operates an asset light model and strategically procures manufacturing based on other demands. In fact, inventory on hand in end of year fiscal 2018 was just 9% of revenues for the period, which provides for a low working capital usage and a profitable business with positive cash flow. Strategically, Newhouse brings a very exciting extension of Hartej's platform vision to connect the creators, curators and consumers of fashion, which I believe will transform the luxury industry. On top of our 3 existing platforms, technology, data and logistics, we now add the 4th, the brand platform. As a result, we can offer the creative visionaries in this industry, casting class design studio, industrial capabilities and global distribution channels. This is revolutionary for them. Caratash has the technology, expertise and vision to take their businesses to the next level and unleash the talent of the future. We believe this combination of our businesses will create what we call brands of the future. But what do I mean by that? In the past, luxury brands were built by a mix of investments in traditional media and significant CapEx investments in directly operated stores. Polar brands use the traditional wholesale model, which is capital efficient that disconnects them completely from the customer and transaction data and could lead to pricing discipline and brand solution. I believe the brains of the future around this model, but rather be made of 3 ingredients. 1, a creative taste maker that is also able to build a community digitally around her art exhibition. 2, best in class global e commerce direct to consumer capabilities, both multi brand via e concession and mono brand via brand.com, including critical capabilities to serve mainland China and 3, amplify physical store presence via a new type of wholesale, connected wholesale, where supply and demand are matched in near real time, providing discounting and great market people. We believe Farfetch and Newgas combined are uniquely positioned to empower the most exciting talents to develop their existing brands offering totally new concepts to life. I'd like to take a moment to talk you through how working with Farfetch Off White, one of Newgas' brands, has built this business and how it will continue to benefit significantly as part of this acquisition. Off White is the brainchild of Virgil Abloh, an American fashion designer and to mirror artist Sandichet, who has been the Assistant Director of Louis Vuitton's menswear collection since March 2018. Off White signed exclusively with Newgas' founders and launched its 1st season in spring 2014. That same season, it had its debut on Farfetch.com via our community of content. Last quarter, it registered a tiny $1,000 in GMC and it ranked number 13.60 among our best selling brands. With Farfetch proprietary data and connections to all our boutiques around the world, we were immediately able to identify some customer intent in real time and alert boutiques to invest behind off light. In parallel, our machine learning leading algorithm boosted our demand generation budget to efficiently drive packaged power off light sales. The result, in just 3 years, Off White made its to our top 10 brand list, which has continued to be the case over the last 8 consecutive quarters. Next step is to take off flight from the majority wholesale brands, where direct to consumer online sales are less than 5% of the total gig to becoming a direct to consumer brand online. What does the new brand of the future strategy look like for Off White after our acquisition? 1st, relaunching offwhite.com on Fibersch platform solutions in Q4 2019 globally, including China. 2nd, launching an e concession on Farfetch marketplace in H2, boosting the inventory available on the platform and its revenue and margins as a result. And 3, evolve the wholesale model into connected wholesale, leveraging the network of more than 650 Farfetch connected retailers and the Farfetch data to match supply and demand in near real time. By 2020, Newgas expects to have changed the model to a much quicker inventory cycle where accounts get supply, our data shows the need of volume pricing or play market activities. We believe this strategy will see off price revenue grow considerably as well as significant improvement in margin, while still alone protecting the brand's position. This off white case study was just one example of many brands we hope to foster with the other 6 brands of the new brands showing incredible growth patterns in their short history and New Gas already has an exciting plan for new brands to be launched next year. The acquisition of New Gas will help to deliver our brands of the future strategy and will have significant benefits to other members of our community as well. Let me explain. For our value boutique partners, access to the brands of the future original content offers them differentiation from large scale retailers and the data driven supply model for a much faster inventory turn, which attractive economics as there will be much fewer markdowns needed. For Farfetch.com Consumers, brands of the future further enrich our broad luxury offering with more exclusive capsules and collaborations with existing brands. Plus, we plan to launch with Newgas some new content in the future that will be completely exclusive to Farfetch. We believe this creates a significant halo effect that will increase the engagement of our global customers around the Farfetch brand. And this means that for our cherished brand partners, Farfetch will become an even more strategic direct to consumer channel as we would expect to see even higher organic traffic, full price sales needs and the further elevation of brand adjacencies that are so key for luxury brands. However, it won't change the highly capital efficient nature of our model as we will remain for the most part an inventory light model with the added profitability from the vertical integration of the new brand platform. In summary, I believe the acquisition of new gas is a game changer for Carthage and I believe it is also a game changer for the luxury industry. As part of this evolution of our strategy, there is a key change in how we organize our team. Focusing on developing our brand around an unrivaled customer experience, we were excited with our decision to create the new role of Chief Customer Officer. This new role aggregates all consumer facing functions in our business, namely marketing, brand, consumer products, private clients as well as power of the future. I am delighted to share that Stephanie Fair, our current Chief Strategy Officer has accepted my invitation and will take this newly created role effective immediately. Stephanie will also be a named Executive Officer of Farfetch. Separately, Andrew Robb, our Chief Operating Officer has decided to step down in early 2020. Andrew has worked passionately alongside me over the past 9 years and I'm grateful for all he's done to help establish our market defining position and for leaving us with an incredibly talented team he has served over the years and we look forward to working with him to ensure a seamless transition. Turning now to our Q2 results. I am pleased to report that we again delivered strong performance in Q2 with platform GMV growth of 44 percent exceeding the high end of our platform GMV growth target. Adjusted for FX, platform GMV increased approximately 49%, almost 2.5 times to projected 20% CAGR of the online personal luxury group market through 2025, demonstrating the power of our marketplace model as we continue to take market share. In fact, our strong top line growth brings our GMV over the last 12 month period to approximately $1,700,000 which we believe makes Farfetch the largest single destination for our in season luxury fashion in the world, both in terms of transactions and in terms of traffic. In Q2, we observed an increasingly competitive environment, but we took advantage of our very healthy unit economics and attractive LTV to CAC dynamics and we decided to continue investing in our consumers to drive growth. We were able to do so while also maintaining adjusted EBITDA margin within our guided range. As a result of the strong operational leverage we continue to gain in Q2. Looking across our 3 geographic regions, Americas, APAC and EMEA, we saw sequential acceleration in both APAC and EMEA, primarily driven by China and the Middle East. U. S. Grew in line with the overall marketplace, which is a strong performance, given it is already our largest market, while our 2nd largest market, China, grew even faster. Specifically on China, we were pleased to have launched our Star on the JD platform towards the end of the quarter. What we observe at this early stage in our integration is that there is significant opportunity for further optimization. We are working closely with BridgeAD to boost both traffic and conversion. And as we had said on our last call, we remain focused on 2020 in terms of this new growth channel. Overall, we are extremely pleased with the performance of our China region. In addition to accelerating GMC growth, we continue to deliver to drive improvement to create a more localized experience on our native apps and website. With China continuing to be on top of everyone's plan days, I want to remind everyone that less than 5% of shipments in the mainland China comes from U. S. We currently have no exports from Mainland China, but we do have a growing luxury fashion supply within China to serve local customers from local suppliers. As such, the Farfetch model is extremely resilient to potential impact of U. S.-China trade tariffs. During Q2, we also made great strides on our supply initiatives. We ended the quarter with more than 1100 brand and video partners, which includes an additional 45 boutique partners in 20 4 countries. We have reached a new geography for our supply network, further increasing our ability to bring supply flow to power consumers. With brands, we were excited to launch Global Indicelum Academy and signed Unello Cucinelli, who made available an amazing collection to our global customer base, almost doubling our total SKU count of their collection. We now have about 6x the number of Onello Cucinelli SKUs as compared to our online competitors. We are also thrilled that Stadium Goods continues to reinforce their position as the luxury player in sneaker retail. Likewise, the recent auction together with Savvis, where 100 percent of red sneakers were sold to a single customer for a record $1,300,000 The same auction set another record, the 1972 Waffle Moon shoe designed by 90 cofounder, Joe Bowerman, was sold for $437,500 which we believe makes it the single most expensive carol meters ever sold. We are excited by the incredible potential of Stadium Group, and we will continue our integration plan, including our ambitious international rollout of this plan. In summary, Q2 was an incredible quarter, and I would like to congratulate the Farfetch team for their amazing performance. Turning to the 3rd key topic I wanted to cover today, Techonic's Chief in luxury brands' attitudes to online wholesale. During H1, we saw increasing discounting and promotions from the wholesale channel, especially from lash online retailers. For example, last season, the largest luxury retailer launched a 15% off new season promotion as early as March. Promotions from most other retailers followed, culminating in unprecedented promotional activities in June July. We believe this is happening because these players have not found a way to compete on range or match consumer devoting expectations in terms of technology and customer experience, especially in China and other key growth markets. Phase 3 is challenged wholesalers at first to compete higher prices, and this takes the shape of, a, generalized non adherence to your pricing b, aggressive promotions and c, early and higher markups. This phenomenon is leading to what we believe is a significant tectonic shift for our online luxury that will reshape the industry over the next few years. We believe the luxury brands have begun to take notice of the fact that large scale online wholesale leads to price volatility and adds little value in terms of building and preserving luxury brands image. All our conversations with major brands indicate they are starting to implement strategies to move to more directly control their overall distribution away from online wholesale and towards e confession. Major Luxury Haul, DSUCHF, Caring and Prada, who are focused on the long term health of their brands, have publicly articulated plans to reemphasize online retailers. At the same time, we have seen them doubling down on Farfetch. Tata Group's ambitious rollout on our marketplace has become Farfetch's most developed e concession in terms of geographical distribution of its inventory points. They now have more than 70 group inventory locations available on the Farfetch place across Europe, U. S, Japan and Hong Kong. And while Prada has been reducing wholesale supply to global retailers, we have seen the inventory of Prada's concessions grow 275% in Q2 on the Farfetch platform. Similarly, we've expanded our concessions with other major luxury groups and total direct supply from Klauder, Kering and LVMH brands on the Farfetch marketplace in spring summer 2019 grew 140% summer 2018. We are also very happy to have signed our 3rd LTMH and the flight FTSE COVID-nineteen after successful launch into the new inclusion of AWN. Our GlengPath account also continues to grow, now totaling more than 4 50. And we've had 100% retention of our top 100 brand passants over the past 3 years. These actions demonstrate that the industry is seeing Farfetch as a key path of a strategy to promote brand image and quality, providing a solution to direct from large scale retail into direct to consumer. I would like to highlight the fact that whilst this significant industry development benefit packaged in the region for long term, it does mean that until the branch reduces the supply made available to our line wholesalers, we expect these factors to the expansion of their pricing tactics, putting pressure on our marketplace based trading. Here, Farfetch has 2 options. Even our LTV to pay dynamics remain very favorable, and we still enjoy payback in less than 3. Farfetch could profitably react to those promotions symmetrically, which is what we have done in H1 to some extent. Or we could demonstrate our leadership in this industry support the brand in their efforts to move away from promotions and realize the full value of their creation. This means building down on the concessions, reducing our promotional activities as we boost our full price mix via exciting collaborations with our brand partners plus original content from New Garden. This also means accepting that we will often be more expensive compared to discounted prices from our competitors. We have decided to take the 2nd option for the remainder of this year and implement it as a long term strategy. As a leader in online luxury, we believe this is the right thing to do for the entire ecosystem. We are taking the long view. And while this may mean a deceleration of our aggressive market share capture in the short term, We believe it will cement our position as leaders in this industry and pay off in the medium to long term translating into continuous sustainable growth. Our acquisition of new brands also fits squarely within this strategy as it enables us to further elevate our brands, boost full price mix, reduce promotional activity and offer original and exclusive content. In the long run, In fact, Sean believes that in a world where brands move away from large scale online wholesale and the super brands move away from wholesale altogether, Farfetch wins faster. We are the only player offering a global e concession model with a true omnichannel platform and global operations, including mainland China. These capabilities have been built over 10 years through more than $1,000,000,000 investment and this is extremely hard to develop. As luxury embraces the concession vision, Farfetch stands as an enabler for the entire industry to return to full price sales and protect the value of our fleet. Turning now to Alex to cover Q2 performance and outlook. Thank you, Jose, and good evening, everyone. I will run through the results of Q2 and how we have continued to execute in line with our growth strategy. I will explain the impact of New Guard Group on the financials moving forward and then provide an update on guidance for H2. I'm pleased to report that Q2 grew ahead of our previous guidance and that Farfetch continues to lead the growth of the online luxury industry. Q2 was our biggest quarter ever with platform GMV of $484,000,000 up 44% year on year and 49% year on year on a constant currency basis. The key drivers to growth were the increasing number of active customers, higher orders per customer and a stable $600 average order value on the Farfetch marketplace. Since our last call, we have added 34 direct brand e concessions and 45 boutique partners to our marketplace, and we now service 18 clients from within our Farfetch platform solutions business. 3rd party take rate was 31.4%, demonstrating the value of the platform proposition to our broad client base. Our first party business grew at 108% year on year to 10% of the GMV mix, contributing to the platform services revenue of $177,000,000 up 53% year on year. This strong growth was achieved whilst leveraging the fixed cost base, which has allowed us to react to the changing promotional landscape within the industry, invest into our technology and data platforms and deliver Q2 underlying EBITDA margin of negative 20.8%, which is in line with the guidance I provided on our previous call, adjusted EPS loss of $0.15 per share is in line with consensus. What stands out from the results of the quarter is the platform gross margin of 48% and order contribution margin of 28%, a decline year on year as a result of 3 things. First, a decision to promote across the latter half of the quarter to remain price competitive and to retain our valuable customer base. This accounts for approximately half of the year on year decline in order contribution margin. Secondly, investing in longer term customer engagement strategies as Access, our loyalty program and Farfetch Communities plus additional paid digital media spend to drive long term retention. This accounts for approximately 1 quarter of the year on year change in order contribution margin. And finally, a charge we have taken to write down and clear excess end of season inventory within the 1st party business. We execute our strategy by constantly assessing the lifetime value and customer acquisition costs on a cohort by cohort basis. These metrics are in a very strong position. The 2016 customer cohort life time value now accumulated over 24 months is 3 times the cohorts original customer acquisition spend, which is an increase over the lifetime value of the 2015 cohort, which was just under 3 times CAC at the 24 month point. The Q4 2018 cohort is now in positive lifetime value with payback achieved within the initial 6 month period and the Q1 2019 cohort remains on track for payback within the 1st 6 months as well. Our more established customer cohorts continue to deliver stronger profitability. Orders from customers that first shopped on Farfetch 5 years ago in Q2 2014 achieved a 55% order contribution across the last quarter, which is approaching the 60% long term order contribution target we have established despite the promotional environment. This strong position means we have room to invest in our customers, driving loyalty and substantial lifetime values and means we are well positioned to deliver profitable growth over the longer term. In light of the external environment, we have actively managed the growth of the fixed cost base with technology spend and G and A at 11% and 38% of group adjusted revenue respectively. This compares favorably to last year and demonstrates our ability to drive significant operational leverage from the fixed cost base. The investments of previous years are paying back, delivering higher revenue per employee, improved operational metrics in our production and customer service teams and substantial increases in our capabilities across our technology infrastructure. As a result, our 2nd quarter underlying adjusted EBITDA was minus $38,000,000 and our operating cash outflow was minus $28,000,000 reflecting the negative working capital profile of the marketplace. Depreciation and amortization was $14,000,000 across Q2, in line with Q1 2019, although $9,000,000 higher year on year, reflecting an additional $4,000,000 of amortization of right of use assets, dollars 2,000,000 in relation to acquired intangibles and $3,000,000 extra amortization of capitalized development costs. The Q2 2019 share based payments charge is $46,000,000 reflecting an ongoing quarterly charge of $40,000,000 which has increased from Q1 because of additional grants and a one off charge within Q2. Loss after tax was $90,000,000 resulting in a loss per share of $0.29 or loss of $0.15 per share at the adjusted level when reversing out the impact of share based payments and the amortization of acquired intangibles that are fair valued. Our cash and cash equivalents reduced by $116,000,000 in the quarter, which reflects the operating cash outflow of $28,000,000 and payments in relation to the acquisitions of Toplife and Curiosity China, which both completed in the quarter. The purchase of land for our new Porto Campus and various smaller investments and innovation projects under our Dream Assembly Accelerator. Turning to the acquisition of New Guards Group for an enterprise value of $675,000,000 In addition to the strategic value to the group, New Guard will be immediately accretive to Farfetch revenue, profitability and operating cash flow. As Jose was outlining, the new Guards business model has attractive financial characteristics similar to the Farfetch model, including minimal inventory holdings, low CapEx requirements and strong operating cash flows. Revenues over the 6 months to April 30, 2019 were $189,000,000 up 59% year on year. Earnings before tax over the equivalent period was $57,000,000 and operational cash inflow was $48,000,000 Looking over the last 12 months to April 30, 2019, New Guard's revenue was $345,000,000 and earnings before tax was $95,000,000 With this new acquisition, in addition to the granular reporting on performance within our stores and on the platform, Farfetch will now report GMV revenue, gross margins and order contribution delivered from the brand platform, the connected wholesale business. Going forward, the Farfetch Group will have 5 revenue streams. First, the primary revenue stream of the group today, 3rd party transactions on the platform. Revenue is based on our take rate, the long term target being 30%, including underlying commissions and fees for value added services such as media solutions. We achieved a 60% to 70% gross margin on this revenue today. Secondly, 1st party sales on the platform and in our stores. This revenue carries inventory risk, but we believe our wide reaching data insight will enable us to deliver approximately 45% gross margins in the near term. 3rd, our connected wholesale revenue from the new brand platform. We expect to achieve approximately 40% gross margins from the wholesale revenue going forward. Our brand platform and existing commercial teams will work together to tap into the rich data set of social media trends, search and demand indicators, inventory movements and online and offline transactions to identify fashion trends, help forecast production levels and pinpoint replenishment requirements across the Farfetch community. Revenue number 4, selling new Guards brands directly on the platform, which is our 1st party original or 1 PO business. This revenue carries inventory risk, but as the creator, producer and retailer of this product, we can expect to deliver 70% gross margin from this revenue stream. And finally, 3rd party original. This is the combination of brand platform revenue and take rate. When original product is produced by new guards sold to 3rd party retailers who in turn sell this product on our platform. We expect this revenue stream to be a key aspect of the overall partnership with our boutique partners. As we look to H2, we will be consolidating less than 5 months of operations from New Guards, which we expect will add approximately $150,000,000 to $160,000,000 in group revenues and GMV and approximately $30,000,000 to $35,000,000 in operating profits. On the marketplace, we believe the highly promotional stance taken across the industry is set to stay across the next 2 to 4 quarters. In assessing the short term outlook and setting growth targets for Q3 and Q4, we have decided to focus on delivering solid, but not overly aggressive market share gains, remaining competitive, but stepping back from excessive use of promotions, stabilizing order contribution metrics, tailoring our customer engagement strategy, focusing on the LTV over CAC of cohorts and creating enough bandwidth internally to integrate our newer businesses and to focus on executing on our long term sustainable GMV growth targets. This means we will be be actively managing our platform GMV growth to 30% to 35% year on year for the rest of 2019. As a result, platform GMV for the year is now expected to be between $1,910,000,000 $1,950,000,000 which represents 37% to 40% growth year on year, well ahead of the market overall. Group GMV is expected to be approximately $2,100,000,000 with the addition of brand platform GMV from New Guards. In terms of underlying EBITDA, after reflecting the updated GMV growth across the second half and consolidating our new acquisition, we are now expecting a full year loss of $135,000,000 to $145,000,000 which is expected to be approximately negative 15% to 17% of adjusted revenue. For Q3, that means platform GMV growth of 30% to 35% and EBITDA margin of negative 18% percent to 20% of adjusted revenue. We would expect approximately $30,000,000 of depreciation and amortization charges in Q3, including an increase in the amortization of acquired intangibles following the NewGuard acquisition, and we expect the Q3 share based payment charge will be approximately $45,000,000 Looking further afield, we remain focused on our medium to long term sustainable growth strategy with group GMV growth above 30% per annum. Our path to profitability, which is boosted by the New Guards acquisition and our 30% long term group EBITDA margin target. This financial strategy is underpinned by our strong positioning within the industry, the rapidly growing direct brand e concession business, the strong underlying customer cohort performance, the growing platform services business unit launching Harrods in H1 2020, our superior distribution network and now our new brand platform. Jose? Thank you, Elliot. This time 1 year ago, I remember writing my song of letters, reflecting my love for this industry, how I saw it evolving and the role of Apache in its transformation. When you're on, I am incredibly proud of what our teams achieved and the progress we've made in what identical Chapter 2, the 2nd decade of Farfetch ahead of us. Today, 1 year into Sharpen Tool, this beautiful industry faces incredible opportunities, but at the same time some recent challenges. We've recently seen the difficulties of some brands, department styles and retailers to adapt to what is an industry influx. Yet, this is a huge global industry, growing resiliently and strongly. With the 3 secular trends of China, millennial consumers and digitalization, gaining speed and shaping it right in front of us. This industry is very special, very different. Luxury has to revolve around emotions, not price. Farfetch has now cemented its position as the leading technology platform for the global luxury fashion industry. In traffic and sales, we are now the largest single destination for in season luxury, growing at twice the speed of the overall online market. This comes with a huge responsibility to do the right thing for the industry we love. But it also comes with thrill and excitement. We are reinventing its future. We're doing it for a global passion. Of course, the ready to wear model has an inherent mismatch between supply and demand and the small level of markdowns and promotions could actually help the environment. But when participants start to focus mainly on price, I believe the luxury ecosystem will surface long term harm. After a long period of reflection and conversations with our exec, our Board and our community, I am incredibly excited with the evolution of our strategy. Our platform vision has now expanded from a platform enabling transactions to a platform enabling a global culture of fashion. This means empowering individuality, not just for consumers and for curators, but also for the creators of passion. This industry needs to go back to inspiration and move away from a process of the modernization of luxury, where dozens of online shops sell the same products competing on price. We're past where the various online destination differentiates by inspiring customers and shaping culture in their own ways. Our marriage to NuGas fits perfectly in this strategy, and I am thrilled that NuGas Chairman and CEO, David Digilio and Chief Commercial Officer, Andrea Geely, absolutely share my vision of transforming the way creators, curators and consumers interact over the years to come. We believe it will be revolutionary for existing and new creative profession, but it will benefit tremendously the entire ecosystem. As our global and growing consumer base comes to us organically for inspiration, our regional conduct and the unrivaled experiences, all our participants benefit. Boutiques and brands will see their brand adjacencies elevated and again enjoying the full economic benefit of their creation. Our franchises are also more excited than ever in how we are leading as a positive force for this global industry for the love of fashion. Thank you all. And I will now open for questions. Thank you. We will now begin the question and answer session. Louise Singlehurst with Goldman Sachs. Your line is open. Hi, good evening, everyone. Jose, Elliot, thank you very much. Jose, just in terms of the acquisition of New Guards Group, let's start with that. You talked about the new dimension of strategy. Can you just highlight what that actually means in principle? We're lucky to have you on the call. So if you could think about how we should consider the multiyear strategy and what's really changed over the past kind of 12 months to really focus our attention on the first party expansion? And then just associated with that, if you talk about the timing of the acquisition, there's obviously a lot going on in terms of the core business. Obviously, the drive to really focus on the rollout of Access and the core platform. But if you just talk about the platform and the timing of that acquisition. And then thirdly, just in terms of Off White and And I may have misheard this on the call in terms of the commentary, but is that to have the brands exclusive to Farfetch plus the boutiques, I. E, it will not be on NET A PORTER, Matti's Fashion, etcetera, going forward? And then my last question for Elliot, just in terms of guidance. I think we talked about that 50% GMV growth for the full year, but if you could just clarify what that would be excluding New Guard Group. Thank you. Hi, Louise. Thanks for your question. So I think, first of all, our strategy has not changed. So we want to be the global platform for luxury. I think this acquisition expands the platform vision upstream. So this means that we add a brand platform to our existing infrastructure. And the new guys really works as a platform, and this is actually important to note that this is not a warranty business. So they do not take for the majority of their business, they do not take inventory risk. So they closed with 9% of inventory as a percentage of total revenues. Most of it was in transit to retailers that have already placed orders. So the risk is around 5 percent in terms of our 1T exposure. So this really doesn't change much the 1T exposure that we already had with ground once you add all things up and take the ratio. So it is a platform play. It is a platform play that brings our capabilities upstream. And I think what's really exciting for us is this ability to elevate the Farfetch brand with exclusive collaborations, exclusive capsules and in the future with totally exclude these brands to our boutiques and the platform. So to answer one of your questions regarding the current distribution of Off White, we will respect these contracts, and this will be ultimately a decision by the Energy Management. And of course, it's very clear what we believe. We believe in direct to consumer. We believe in econcession. We believe in connected wholesale, so wholesale that is truly omni channel and with real time visibility of transactions and data. This is the way the industry is going. This is the way the big groups are going. This is the way new guys will be going. As well as those patents, those historical commercial patents of NGG follow that path. I think they are tremendous times higher for those brands And therefore, I don't see any need to change that. And Louise, just in terms of guidance, so the 50 percent year on year including New Guard, that's at the group GMV level to $2,100,000,000 The New Guard is roughly $150,000,000 That's my estimate for the GMV that will come through after the consolidation period starts. So if I take that off, we're at around 39% year on year, excluding New Gardens. And that ties into the platform GMV growth. As I say, 37% to 40% is the updated guidance for the full year. Obviously, 44% over the first half and 30% to 35% growth across the second half. Great. Thank you. Our next question That's still well ahead of all of our competitors. And our And our next question comes from Douglas Anmuth with JPMorgan. Your line is open. Great. Thanks for taking the questions. Elliot, can we stick with guidance? Just trying to understand the platform GMV better, the 30% to 35% that you're talking about for 3Q and the 37% to 40% for 2019, particularly when you have Stadium Goods and China earlier integration than expected in there as well. So just trying to understand the pressures that are there. And then you talked about as being a managed probably a managed outcome as well or managing the growth. Help us understand that better. And then just second and it may be related, if you could help us understand the backdrop around the increased competitive pressure more, the geographies where you're seeing that and the types of retailers, some more detail there would be helpful. Thanks. Sure. Sure. Hi, Doug. Let's start with that because that I think drives everything we're talking about. Really over the June period, sort of the second half of the quarter, we saw a substantial step up in the promotional environment from, I guess, traditional offline retailers and also online e tailers. Traditional offline retailers, we suspect is because the traffic is not there, so they're having to promote. They're going earlier in terms of sale. They're going into mid season sale. They're going quite deep in terms of discounting and basket level promotions on a sort of a blanket approach. That then flowed into the e tailers. So our major competitors online, they're growing low single digits. To prevent themselves going into negative growth, they've had to promote quite heavily to remain competitive. And that all flows into our business in some respects that we've got very valuable customers. As I said, those customers that have been with us for a few years now driving strong order contribution, we don't want them being tempted away by these competitors' promotions. So we decided to promote across the latter half of the quarter as well. And that's obviously what's taken the order contribution margin down. So what we did sort of looking at Q3, Q4, given that we've been growing at 44% and everybody else is growing substantially lower than that, the view is, yes, we could keep growing faster than 40%, but that incremental growth would come at the cost of very, very heavy promotions. We don't think that's the right thing to do. We'd much rather work with our boutique partners to find a full price strategy. And so what we've decided to do is actively manage the P and L and the growth rates to 30% to 35% across the second half and take off that need to promote. That will still be substantial market share gains, which obviously is the key point, but also allows us the breathing room to set up for next year and the year after that and the year after that with Stadium Goods, Toplife and New Guards Now being integrated into the business. So very active decision, very intentional decision. We could keep growing if we wanted to, but we decided 30% to 35% is a much better place to be at. And then in terms of the full year, obviously, when you do the math, it's sort of 44% across Q1 and Q2, 30% to 35% across Q3 and Q4. That gets to 37% to 40% for the full year at the platform. And then as I said on the back of Louise's call, adding new guards, wholesale connected GMV gets us up to $2,100,000,000 which is the 50% year on year. Sorry, Doug asked about other parts of the market. I think in China, as Jose said, we're extremely pleased with how China is going. It accelerated from Q1 into Q2. So Q2 China growth was faster year on year than Q1. It's closing the gap on the U. S. As our number one market. I think the key thing to point out though with Toplife is we've always said it's a 2020 and beyond opportunity. There's still opportunities or integration and aspects of tailoring the model fully working with JD to target the right customer base. And so we're looking forward to that coming as a major part of the growth story next year rather than this year. And Stadium Goods, as we've always said, are much smaller than the platform overall, contributing growth, of course, but we're not breaking it out at this stage. And our next question comes from Ike Boruchow with Wells Fargo. Your line is open. Hey, good afternoon, everyone. So first, just to piggyback off Doug's question. I understand kind of what played out at the end of the quarter and the commentary on the plan in the back half of the year. But Elliot, is there a reason why I think you said you expect the competitive pressures in the market to last the next 2 to 4 quarters? I'm just curious where the analysis came from and where the thought process on that is? And then just on the acquisition of NuGuard, how does that impact the long term targets on profitability that you guys have talked about in the past? And does it impact the timing of your ability to scale or eventually hit breakeven? Great questions. Hi, Ike. So the 2 to 4 quarters, as you know, the luxury industry works relatively slowly and is season over season type sort of basis. And I'm sure you've heard the fashion houses, Prada have said this publicly, Kering have said this publicly. They will be looking to pull back on the distribution in some of the traditional retailers and the etail model and focusing more on e concessions, which Farfetch is the only e concession. So we expect that will take a couple of seasons to work its way through. In the meantime, those retailers are going to be overstocked versus the demand they're going to experience. And so they're going to presumably continue to mark down and promote to try and drive top line growth or at least stem the loss. So whilst the industry adjusts to the supply and demand and moves more towards Farfetch as an e concession model, we expect that promotional environment to stay for a few more quarters. In terms of new gas group, it absolutely contributes to the overall 30 percent EBITDA margins. So the last 12 months to April, the profit before tax was €95,000,000 versus revenue of €345,000,000 There's opportunities, I believe, to continue to drive EBITDA margin in that business as we leverage the synergies of joining Farfetch. So very strong in terms of the margin targets. And in terms of route to profitability, obviously, a profitable business will help that path to profitability and the positive operating cash flows moving forward. Thanks. Our next question comes from Eric Sheridan with UBS. Your line is open. Yes. I think in continuing a recurring theme, I want to stick to sort of the business mix and some of the back and forth that's going on. So I guess we're just trying to really understand why 2 to 4 quarters again is the right number. What do you think sort of breaks the temperature in the industry or fever in the industry that that's the right way for investors to think about it? Because you can imagine investors are now trying to really understand what sort of growth they're underwriting in this business over the next couple of years, not just the next quarter. And then now that we've got sort of five lines of revenue or 5 different buckets of revenue, maybe following up on the last question, can you walk through a little bit more what investors should expect either in terms of linearity or volatility with respect to gross and contribution margin structure for the into 2020 and 2021? Thanks, guys. Hi, Eric. So I think, as Elliot pointed out, looking further afield beyond Q3 and Q4, we are actively extremely, extremely confident that we're looking at 30% growth rate. And we are absolutely managing the growth. As you have seen, we have been beating our growth estimates. And we could continue to accelerate market share capture. Given the promotional stance of the market, we could still do that possibly because as Ledge says, our cat healthy view ratios are extremely healthy, and we still have to go back more than 6 months inside of the promotional environment. But we just don't think it's the right thing to do. We think it creates a vicious circle. It's not what our cherished brand partners are asking us to help them do. And we think we are going to capture market share still very aggressively, but smoothing the curve to that 30% plus growth, which absolutely remains the target for many years to come. And obviously, the path to profitability and the 30% long term EBITA profitability that we are very confident we are going to have in the future. So the 2 to 4 quarters is really an estimate. The industry, as Elliot pointed out, moves slowly, could be faster. We just want to tender like it really depends on the brands and how fast they will retrieve the volume of supply they've sent into wholesale. They have indicated that they are doing that. We know they're doing that. We don't know how fast. It's not in our hands. What we know and is in our hands is the extension of supply on e concession, which is absolutely remarkable as you could see 275% growth of supply from Prada, triple digits high triple digits growth from the main luxury groups. But then if we look at the 4 50 brands that now operate direct in concession on Farfetch, of which we've had 100% retention rate, by the way, in the last 3 years. It shows the industry is really moving to a direct to consumer model, of which in the multi brand realm, Farfetch is the only mobile fashion player. The secular trend is that we're strongly, strongly in our favor. We should think that right now, we will help the brand in this transition, and we will ease on the response through the aggressive promotional spend and slightly moderate what is a very, very aggressive type of share capture. But long term, this 30% -plus growth is something we always have in our model and something that we are actually increasingly bullish about. Just in terms of the 5 revenue streams, obviously, we're very confident on the 30% GMV growth moving forward over the long term that we've already always said that from the outset of the IPO that that's the target for us. And if you break that out and look at the new revenue streams, clearly the 3rd party business is growing very strongly with new clients within the Platform Solutions business coming on stream next year. That will help drive that growth next year. If I look at what we've purchased in terms of new guards, the connected wholesale revenue grew 59% year on year across the first half. That's at 40% gross margins and it should be continue to sit to grow at good levels as we bring on new brands. It's not just the brands that are currently in existence with the new guards. It's a factory of brands and can achieve more growth from new brands coming on stream next year. The 1P business and the 1PO business, obviously, 10% of our revenue at the moment. With 1PO coming on board, can expect that probably to go to sort of 10% to 15%. But of course, the 3rd party business with e concessions growing will be hard to match even with the 1st party business that we've acquired through New Guard. And then lastly, the 3rd party original, that's really just a combination of what we're already seeing with 3rd party sales already on the platform, but obviously adding in the fact that the wholesale margin will also be captured for brands bought and sold on the platform by our 3rd party boutiques. Your next question comes from the line of Lucas Zlka of Bernstein. Your line is open. Yes, good afternoon. Thank you very much for taking my question. I wonder what is prompting you starting with Stadium Goods, Toplife, New Guards Group and others, China, Curiosity China. And this is making your business model more complicated. And the original idea of building an Uber of Luxury and Fashion Digital Distribution, Is it possibly the case that you're seeing that this original model is not working and not producing enough of a profitability so that you have to complement it with other activities? Or where is this logic coming from? If you could explain us, that would be great. Absolutely, Lucas. Thank you. So I think we always said that our strategy was to be the global platform for us. That has not changed. And if you look at the acquisition, Stadium Goods is a category that we had already. They were sellers actually on the marketplace, on a category that is very much a strong sort of growth in the industry and it's definitely in the luxury realm. The China acquisitions, it's written in the Mission segment, the global platform collection from China, obviously being a key key market for us. And a new gas group brings a NAV dimension, a brand dimension to the platform. We always said M and A was going to be one of the tools in the toolbox. We were very fortunate to be interested partners for these companies. I think it reflects, in fact, the extraordinary execution. We're talking in terms of new gas, the company with give or take $500,000,000 in annualized sales and almost 30% profitability. Know that in terms of cash in the bank, they don't need they were not looking for a financial transaction. They were looking for a strategic partner that could really elevate their business. So the result of the success of our model is precisely why these very, very successful companies wants to partner with us. And when we see opportunities for making progress on our platform vision, we will see them. We will see them studiously, cautiously. As you may imagine, there are hundreds of opportunities that every single day are put in front of us. But when they are absolutely world class companies such as Newhouse, these are opportunities that absolutely make sense and keep our strategy, and we will take them. Your next question comes from the line of John Blackledge of Cowen. Your line is open. Great, great. Thank you. Just a couple of questions. I've been hopping between calls, so I apologize. On the guide and the lower platform GMV guide, was it just promotions? Just curious if you saw maybe a slowdown or something as the quarter progressed, which maybe led to the little bit of a lower guide in the back half of the year? Second would be, if you could talk about the Stadium Goods integration and maybe, I don't know if you can call out the impact, it or what it added to the platform GMV growth in the second quarter? And then the third question would be the JD integration, sorry if you talked about this already in the Q and A. Just any color on kind of traffic differences you're seeing in browsing and or purchasing with the Farfetch store on JD versus your consumers using the local app and or the web page? Thank you. Hey, John. Good question. So in terms of the quarter as it exited, as we were saying, it was the promotional environment really that is across the board. And to sort of follow-up on one of the earlier questions, it wasn't in one particular market. It was pretty much global. The U. S, Europe, within Asia as well, we saw very, very heavy promotions. And obviously, we wanted to go toe to toe to be competitive for our customers. So it's very hard to unpick within that anything other than the sort of competitors are really feeling it. With Farfetch growing at 44%, we're obviously stealing significant market share from the e tailers. And obviously, the shift from offline to online, we are helping drive that because we've got one of the best propositions out there and the broadest range of products for the customer. So I think what we were seeing was a retaliation on Farfetch's position and that's what we're seeing. My view and shared by the Board as we discussed the second half was let's moderate the growth, let's focus on long term sustainable growth, let's not carry on down the road, which could lead much further down in terms of profitability of the whole industry by continuing to promote and much better to focus on long term customer value and drive that view rather than promote. So that's really the view on the guidance and why we've it out. It is a small part of the overall platform and obviously helps over the longer term, but really isn't worth breaking out of the numbers. We're talking overall platform growth and that's what we're guiding towards. In terms of JD, we're seeing interest from customers on the JD platform. Clearly, China is an environment where you need to learn as you go what suits for customers on various channels. The team has done an absolutely fantastic job driving faster growth across Q2 than across Q1. That has come from not only JD's go live, but more importantly from the core product out in China being the app tools on WeChat and the portal itself more broadly, the website more broadly. So we're very pleased with China overall. We think we are well set up as the luxury gateway for China to be able to help the brand. More brands, as we've been saying, are now with us as an e concession model. So we've now got over 4 50 brands e concession and China obviously is open to them via Farfetch. So a huge opportunity and a huge opportunity for Stadium Goods to go live with their own app in China as well. So very excited about what that opportunity could be. JD will be a part of that from 2020. Your next question comes from the line of Jason Helfstein with Oppenheimer. Your line is open. Hi, Anthony on for Jason. Just a quick question. Is owning brands through New Guard put you in conflict with any of the 3P customer brands? So, Bahir, thank you for your question. So this is something that I have actually personally socialized, obviously, in a very confidential way and without naming the targets with key partners and got a very, very strong level of confidence. I think on the contrary, I think luxury brands want to be on Farfetch because Farfetch has amazing brand adjacencies, amazing other luxury brands and other products that they want to be seen next to. To put it in perspective, we have 3,000 designers represented in the platform. 450 are direct. The others are represented by the boutique. And this is what attracts the likes of Pucci and Prada and other flower platforms, the incredible level of luxury and brand adjacencies. Adjacencies. This move elevates that even further. So I am entirely, entirely confident that this will reinforce and elevate the ease of our effects and patterns, creates a fantastic favorable effect above around original confidence that will benefit all participants. This event. Your next question comes from the line of Ed Yruma with KeyBanc Capital Markets. Your line is open. Hey, good afternoon. Thanks for taking the questions. I guess first, given this very difficult trading conditions in luxury, what is the overall health you think of the boutique partners that you have? Are you seeing maybe potentially higher rates of go out of business given some of the discounting? And then 2, as it relates to kind of overall industry inventory levels, is your expectation that the luxury houses are able to kind of pull back on inventory? Do you think that demand improves and kind of what underpins maybe some of the improvement you're hoping for longer term? So in terms of the boutiques, actually, we have seen a lot of help, a lot of help coming from small, multi brand luxury boutiques that have embraced an obvious channel vision. We have extremely high contrast with the department stores who unfortunately have had much harder time. And in general, I think the smaller format would help. It's really the large scale format, both the patent star or large scale retail, that is obviously much more demanding in terms of the sheer amount of dollars to drive the necessary investments and even working capital, technology and construction to stay relevant. And this is where we've seen most of the things in the industry. I think the channel dynamics, the brands have been very clear, some very publicly in earnings calls such as ePlan or Capital Markets Day, they added privately for show, you close it in private from other brands. The brands have been very clear. The more they can move direct to consumer, direct to consumer being their own brand.com, obviously, but also multi brand econfashion because we all understand that the consumer shops multi brands. The consumer does so in the physical world. And in the online world, it's even more exacerbated because no one's going to download 200 apps on the phone. So the brands are clearly trying as fast they can move from a wet wholesale and wet online wholesale into more direct to consumer models, of which Farfetch is the only global econ fashion model. How fast will they be able to make this transition? It's a question I don't have yet so far. And hence, we estimate this to be a 2% to 4 quarter time frame. On our side, we will do everything to accelerate it. As you've seen, in eConfashion, we're adding every quarter, the last quarter we added over 40 or 0 econ sessions to the platform. The main ones are growing their supply in triple digits. So we're doing our part of the equation, which is welcome the brand and then provide the resources and the teams and the integration so that they can move as fast as possible to our model. Then the brands will have to do their size in terms of taking a little bit of a hit on their wholesale revenues and buybacks from that channel. But that's something that is on that side of the equation. The final question will come from Marvin Vaughn of BTIG. I apologize. Great. Thank you for taking my question. Just a question on demand generation expense. Given the promotional environment, is that something you're either going to dial up to generate the generate business or is that something you might dial back down just to maintain a good return on your spending? And then second question, just to give us some additional comfort that this is mainly a promotional phenomenon, could you maybe comment on how orders or growth in active consumers is behaving? It was very good in the second quarter. Could you maybe give us some update on how it's trending thus far in the Q3? Thank you. Hey, Marvin. So just in terms of demand generation, you'll see actually from Q1 to Q2 as a percentage of GMV, the demand generation dropped back a little bit. So, we were able to pull back on the demand generation as we targeted to the right level of customers, less reliance on paid search, moving more towards lower cost channels such as social media and retargeting display, of course, and affiliates and then into our more organic channels, including what's coming through from the loyalty program access in terms of organic engagement. And we saw quite a lot of organic traffic build on the back of the Farfetch Communities initiative. So we are seeing a lot more customers on the website or predominantly through the app actually on a more organic fashion as they start to be inspired and engaged by the content that we're now putting through on a day to day basis. So that's a significant opportunity for us. At 7.1% of GMV, that's roughly 19.5% of our revenues. And so still opportunities to bring that down even further as we build that organic engagement. At the moment, we are making sure we focus on new customers and bringing them into 2nd, 3rd and 4th time orders. So, we are pinging them a little bit more in terms of media spend, particularly on that retargeting to drive that sort of flick between new customers into existing. As I said earlier on, once you get to a mature state, we are retaining 55% of the revenue from an order contribution basis, so very strong profitability from a cohort by cohort basis and then by seeing payback within 6 months. So we're always tailoring the spend, the promotion, the organic, inorganic traffic to make sure that it's the right cost to serve versus the sort of revenue per visit and those are all in a very good place. There are no further questions in the queue. I turn the call back over to the presenters. Great. Well, thank you all for joining us. We look forward to speaking with you on the call next quarter. This concludes today's conference call. You may now disconnect.