Earnings Call: Q1 2019

May 15, 2019

Good afternoon. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Farfetch 4th Quarter 2018 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 like to turn the call over to Alice Ryder, VP of Investor Relations. Ms. Ryder, you may begin your conference. Thank you, Julianne. Hello, and welcome to Farfetch's Q1 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 discussions today will include forward looking statements. Actual results could differ materially from those indicated in the forward looking statements, and forward looking statements may 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 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 press release and the slide presentation, both of which are available on our website at farfetchinvestors.com. And now, I'd like to turn the call over to Jose. Thank you, Alice. It's great to be with all of you today. Thank you for joining us for our Q1 2019 call. I am pleased to report that we had an excellent Q1 where we continue to successfully execute on our plan and we met important strategic milestones which I will share with you today. We not only surpassed our expectations in terms of our growth and performed well across other financial KPIs, but we also made great progress operationally and are even tracking ahead of schedule on some of our key initiatives. In Q1, platform GMV grew 44% to $415,000,000 Adjusted for FX, this GMV growth was approximately 50%. A pace of growth, which is about 2.5 times the projected 20% compounded annual growth rate of the online personal luxury goods market through 2025. The pace of market share captured by Farfetch continues to be strong, demonstrating that our overall offer to consumers is extremely compelling. Our continued strong top line growth in Q1 increased our GMV over the last 12 months period to $1,500,000,000 which we believe makes Farfetch 1 of the largest, if not the largest single destination for in season luxury fashion in the world, both in valuable transactions and traffic. I am very pleased with our ability to execute on our growth plans for 2019, while also making progress on strategic initiatives to drive growth in 2020 and beyond. Today, I wanted to take the opportunity to review our progress against a number of strategic opportunities that we have undertaken in the past 18 months. We have in fact successfully executed against the corporate development strategy including Star of the Future at Chanel, Middle East joint venture with the Chalu Group, JD dotcom partnership including the Toplife acquisition, entering the resale market with Stadium Goods and Farfetch platform services or FPS extensions with the CuriosityChina acquisition and enterprise deal with Harrods. One of the main themes that I want to cover today is how we are successfully executing on these fronts. With respect to China, our most strategic market, we remain more enthusiastic than ever. There is a great opportunity ahead of us to create the premier luxury gateway to China. According to Bain, China will represent about 46% of the luxury market by 2025, up from 33% in 2018, representing approximately $80,000,000,000 of incremental spend over the next 6 years. Bain also estimates that half of those purchases will be made domestically in Mainland China. As we scan the landscape, we believe the investments we have made over the past 4 years in our localized tech stack, logistics and operations, which were more recently bolstered by the acquisitions of CuriosityChina and Toplife, we accelerate our China strategy and offer brands a one stop integrated solution. All of these positions Farfetch to be the partner of choice to help luxury brands develop and implement a digital strategy to crack China. To this end, the China team has hit the ground running following the announcement of our Toplife acquisition. Working closely with JD on the Farfetch Toplife integration. In fact, we're currently tracking ahead of our initial second half twenty nineteen go live date and are targeting a launch at the end of H1 twenty nineteen. The incredible execution to date demonstrates the benefits from the technical investments we've made in our API based technology platform, our data center in China, as well as the stellar local management and talent we've built on the ground. By going live at the end of Q2, we will be able to leverage traffic from JD's anniversary festival celebration. While we don't expect we have 100% of our catalog live by then, it will give us more time to familiarize ourselves with the ecosystem and test and iterate on our merchandising strategy to start driving results from this initiative in the back half of the year. Another key benefit of being on the JD platform will come from the opportunity to grow brand awareness of Farfetch among Chinese consumers who will see the Farfetch direct entry button in the Level 1 position on the jd.com app homepage. Clearly, our partnership with jd.com and our strategic investment in China are working. We now have unrivaled technical and logistics capabilities that are very difficult to replicate and delivering an excellent customer experience to our Chinese customers. At this point, I'd like to outline the current progress of some of our other major strategic initiatives. It has been 1 year since we launched in the Middle East in partnership with Chalhoub. So it's a good time to pause and evaluate the results with that JV. We are pleased to share that the Middle East is our fastest growing vision. This is on the back of incredible execution from our teams with the backing of Chalhoub. In just 3 months after signing with Chalhoub, Farfetch launched its erratic websites covering the entire Gulf region. Farfetch in this time also opened the Dubai office, started with a full team from outstanding management to marketing, private client and customer service teams. And in the last 12 months, we've signed 2 regional department stores to the network and launched a number of 2ximal tenants on the Farfetch platform. Turning to Store of the Future and our augmented retail strategy. In Q1 2018, we were very proud to announce our exclusive partnership with Chanel who also became shareholders in Farfetch. 15 months later, we're very happy to confirm that the Augmentis retail pilot is now live in Chanel's new fashion boutique at 19 Rue Cambon Paris. Currently, the pilot consists of a client's boutique app and a fashion advisor app plus a number of connected devices such as digital sitting room mirrors, NFC and RFID product sensors, which are designed to augment the client and fashion advisor relationship. It is already delivering a new retail experience to a small number of select Chanel clients. We are delighted that both Chanel and Farfetch are very happy with the progress of this pilot so far. We have many years ahead in this exciting partnership and we will continue to expand and develop the current technology and its user base over the long term. Turning to our strategy of entering not just new categories, but new business models in luxury, we're delighted to update you on Stadium Goods. We have already started to combine operations and benefit from synergies And the operational integration of the full Stadium Goods catalog is tracking ahead of schedule and is expected to be completed in the near future. Browns will also bring Stadium Goods physical presence to Europe for the first time. In an initiative that we dubbed sneakerd East with many exclusive products and collaborations that Stadium Goods and Browns are bringing to London and via Farfetch to European as well as GlobalSneak Heads. We're also excited about 1PO, 1st party owned brand as a new business model. Stadium Goods have seen high demand for their own branded streetwear, which has been a small limited production. Based on this strong traction, we will be investing behind the Stadium Goods brand and launch it as a streetwear brand in its own right. This not only creates an exclusive offering for Farfetch, it is also a very high margin profitable line of business for us, albeit obviously starting from a small base. Finally, our continued investments in Farfetch platform solutions which includes the previously named black and white white label business, Curiosity China, Store of the Future and other B2B products is paying off. With Harrods on track as well as a very interesting pipeline of other enterprise deals being discussed, expanding our B2B platform business for 2020 beyond. I'd now like to provide an update on our progress along our 4 strategic pillars. On our last call, I mentioned that we were seeing attractive LTV over CAC metrics with payback of less than 6 months. Based on these indicators, we continue to lean into our customer engagement efforts in Q1. This included our decision to invest in demand generation activities aimed at introducing Farfetch to the first time customers as well as maintaining engagement with existing customers. As a result, active consumers, including Stadium Goods, increased 64% in Q1 to drive a 44% platform GMV increase or approximately 50% adjusted for FX, which exceeded our guidance of 40% growth for the period. We are also pleased to report that we were able to deliver this top line outperformance while also maintaining adjusted EBITDA margin in line with our guidance. Our GMV outperformance was driven by strong results across our regions including U. S. And China, our 2 largest markets as well as the Middle East, the key market which I mentioned earlier. Our platform continues to develop as one of the world's only truly global luxury e commerce platforms. We have recently launched several localized sites in countries such as the Netherlands and Sweden. Our newest site was launched in Denmark in Q1 bringing our total to 22 localized sites available in 15 different languages. This strategy has demonstrated strong return on investment through better economics in terms of demand generation and retention of customers. Farfetch is committed to providing all customers around the entire world who love fashion with an unrivaled customer experience in their language, currency and in the case of 53 countries, local supply with premium delivery services such as same day delivery in 19 local cities. With respect to our strategic pillar on supply, during Q1, we continued to strengthen our customer proposition by bringing additional supply from the best boutiques and brands in the industry. We have expanded our relationships for both breadth and depth of supply and have in the past year launched more than 100 brands on the marketplace. The top by Farfetch Marketplace GMV have increased their supply 160% year on year in terms of stock value. This clearly demonstrates the success of these industry leading brands with their Farfetch e Concessions and the fact that they now see Farfetch as one of the most strategic direct to consumer channels globally. We continue to develop our department store strategy and have signed on Tether and Joyce of the Lane Crawford Joyce Group in Greater China. They are, as you know, a premier department store, brand management and distribution group with operations throughout Asia. This follows department store signings such as Harvey Nichols, Rubaiyat and Triano. Turning now to our technology and innovation initiatives, I am happy to share that the Farfetch platform solutions and technology teams are off to a great start in building out Harrods new e commerce site and remain on track for our go live target in 2020. As our 1st multibillion dollar department store client, it's no surprise that there are certain additional features and capabilities to be developed in order to support their operations as well as specific support for the beauty and fragrance categories and that process is well underway with our teams. One of the benefits of our tech stack is our ability to make these investments at the API level on the Farfetch platform and then leverage them to enhance the experience for all our tenants including our own marketplace, grounds and B2B clients. These same services will also benefit 3.1 Filip Lim, a fashion label now powered by FPS following our launch of their new website during the quarter. As previously mentioned, we have also taken a massive step forward on the Store of the Future solution that we're developing through our ongoing innovation partnership with Chanel. An area which has enormous potential and where we've seen great developments is fulfillment by Farfetch or SBS. Farfetch offers a leading luxury logistics solution with 4 3PL warehouses in key regions including Italy, U. K, U. S. And China. And we have active plans to continue to expand this network this year. Next destination, LA. Brands and boutiques can use SVF to handle all their fulfillment closer to the customer. We are using our proprietary data insights to predict where the product should be sitting, given 90% of orders cross the customs border. All of this without losing global visibility and availability of inventory. This increases speed of delivery, which is a key component of customer experience, allows for a better level of consolidation of orders and significantly reduces fulfillment costs. Fulfillment by Farfetch paves the way for significant cost savings and improvements of service for both consumers and sellers. Also as our sellers grow their inventory to meet the rapid growth of the Farfetch platform, fulfillment by Farfetch is in place to decrease the friction for sellers who would otherwise need to increase their fulfillment investments. We are very excited by all of these developments and by the prospects of leveraging them to create a high margin recurring revenue business with increasing impact on the Farfetch Group in 2020 beyond. We've also achieved major milestones towards our 4th strategic initiative, building our brand. In March, we launched Farfetch Communities, which showcases bespoke editorial content to inspire and help customers find the things they love. We named initiative communities in celebration of our global fanfetch community of fashion loving creators, curators and consumers. And it's designed to be an ever changing gallery, which features their influential tastes, collections and fashion viewpoints to have Farfetch become part of the discussion that helps customers discover what they want to buy. Communities is an innovative approach to building our brand using a storytelling mechanic, which is really relevant to consumers and the way they use media today. It also enables us to highlight the vast Farfetch community, which is made of fashion influencers, our brands and boutiques, who are all incredible storytellers and also want access to our amazing luxury audience. We're very pleased with the initial customer response to communities and by the strong positive response from our brand partners, who are increasingly recognizing the media benefits of participating on the Farfetch platform to display their products and brands to Farfetch's high intent luxury shoppers. The appeal of Farfetch as a media platform for brands continues to fuel strong year on year growth on our early stage Media Solutions business. The vision for Farfetch Communities is to create a perpetual fresh stream of content that we'll be able to incorporate in our digital marketing campaigns. Farfetch Communities will enable us to add engagement data to the product performance data to help us make predictions about demand generation investments, which is really critical for making our flywheel spin faster. We expect this to become a competitive advantage as we have more products, which generate more content driving higher velocity of our data loop and better demand generation decisions versus other digital marketeers. Over the course of Q1, we also continued with the rollout of Access, our loyalty program. And I'm pleased to report that it has now been completed ahead of plan and is now available to 100 percent of our eligible customers. While the full implementation is relatively recent, early indications of customer response are consistent with the increased engagement and frequency of SHOT that we observed from our initial test group. We are very excited about access and are focusing on further leveraging the program to increase retention and spend per customer to ultimately reduce demand generation costs over the long term. Before I turn the call over to Elliot, I would like to mention one other initiative, which we are committed to as we strive to drive long term benefits to our people, places and products. As the company has the cross section of an industry more than 150 years old and its rapid modernization into the digital era, I strongly believe Farfetch has a responsibility to be a force of positive change in the luxury fashion industry. I am very proud to say that we've made a big push on this front recently. Just last month, we launched Positively Farfetch. Positively Farfetch is a 3 50 degree strategy to embed sustainability in everything we do to the extent we can. Our sustainability mission is to become the global platform for goods in luxury fashion by empowering everyone we work with to think, act and choose positively. As an example of this, we have begun piloting Second Life, which allows customers to trade in their pre owned designer bags in exchange for Farfetch credit. We've also launched a partnership with Kiva to enable our Farfetch's to support entrepreneurs in need across more than 80 countries with otherwise unattainable funding. Finally, we launched Dream Assembly For Good, our technology accelerator, which dedicated its entire second startup to sustainability in partnership with Stella McCartney and Burberry. I'll now turn to Elliot for his Q1 update. Thank you, Jose, and good evening, everyone. I'm delighted to present to you the Q1 2019 financial results for Farfetch. We have had a strong start to 2019, continuing to execute on the plans we outlined when we last spoke, growing the business above our expectations, investing in near term customer acquisition and longer term platform development and delivering profitability in line with guidance. We've also made significant progress integrating the new businesses that now form part of the Farfetch Group. Q1 GMV has grown 43% year on year to $419,000,000 which was driven by strong in platform GMV, up 44% year on year to $415,000,000 ahead of our stated guidance of 40% year on year. We estimate that on a constant currency basis, platform GMV grew 50% year on year. I'm particularly pleased by this performance as this growth sits on top of the 67% growth rate achieved in Q1 2018. We now have a range of complementary marketplaces and platform solutions that combine to drive this platform GMV. When looking at the non financial metrics we provide, I think it's more useful to split out the AOV for the Farfetch marketplace and Stadium Goods as they operate at 2 different price points and a blended AOV would be meaningless. I think it's also helpful to provide you with total active customers across the group where we serve them directly on our platform through Farfetch, Stadium Goods, brownsfashion.com and associated apps. Orders on the Farfetch marketplace no longer provides a meaningful view of the business performance and so won't be provided moving forwards. So all those metrics in Q1, the Farfetch AOV was $601 which declined by 7% over the same period from last year, which is primarily due to the expected currency translation impact from non U. S. Dollar baskets on the overall AOV. By comparison, the AOV for Stadium Goods across Q1 was US300 dollars We now serve 1,700,000 active customers which is an increase of 64% year on year in active customers compared to March 2018 including the underlying growth across the Farfetch marketplace and including those active on Stadium Goods. As you know, these customers are truly global with demand split roughly a third across each of EMEA, APAC and the Americas. We are proud to enable our sellers to trade internationally 90% of our Q1 orders across the customers border and our bespoke order management system streamlines this trade delivering a multi language, multi currency, duties paid customer proposition with optimized global logistics solutions. Focusing on trade with China, a hot topic right now, I wanted to highlight that 90% of our shipments into Mainland China come from fashion boutiques and luxury brands from within Europe. We currently have no exports from Mainland China, but a growing luxury fashion supply within China to serve local customers from local suppliers. Dissecting platform GMV, our 3rd party business where we provide an end to end technology solution and act as a selling agent for retailers continues to represent the bulk of our GMV with strong growth from more than 1,000 boutique brand and department store partners selling via the Farfetch marketplace, growth in the GMV being delivered by our 18 white label customers utilizing our modular Farfetch platform solutions suite of products and the addition of GMV from the sneaker resellers operating via Stadium Goods. Our first party GMV where we purchased stock at wholesale and sell across our platform grew over 76% year on year, again driven by an increase in our Browns first party business and the inclusion of Stadium Goods first party sales for the first time. Brown's revenue has grown to become almost 10 times its size from 4 years ago, as it has leveraged both the Farfetch marketplace and our white label solutions to power its e commerce presence, ensuring we're offering customers the best selection of merchandise across different channels. As a result, our first party business represents about 9% of our overall platform GMV. Looking at revenues, Q1 group revenue grew 39% year on year to $174,000,000 with growth in group adjusted revenue which excludes fulfillment revenue of 42% year on year to $146,000,000 Platform services revenue which is derived from our platform GMV and excludes our in store revenue grew 43 percent year on year to $142,000,000 as a result of the strong platform GMV growth, a slightly higher mix of first party GMV year on year, 100% of which drops through to revenue and a slightly lower third party take rate of 30% versus the 31.8% take rate from Q1 last year. The take rate decline year on year was driven from the increasing mix of sellers that operate on a lower overall take rate including sellers on Stadium Goods, which as some of you have already noted is closer to 20%. Q1 platform order contribution of $50,000,000 was 34.9% of platform revenue similar to that delivered in Q4 2018 as we continue to focus on delivering the right balance of absolute profitability to fund our business growth whilst also reinvesting and growing the customer base at attractive economics. Q1 demand generation costs of $31,000,000 is 22% of adjusted platform revenue as compared to 20% in Q1 2018. As we mentioned on the last call, we have seen some strong LTV over CAC metrics at a cohort by cohort level and are seeing payback on CAC spend within 6 months. Based on this, we have continued to invest in new customer acquisition and up weighted our paid media spend to support customer retention by focusing on second and third order activation to drive the lifetime values. As a result, we've seen an increased share in orders from existing customers across the quarter, improved our retention metrics and witnessed a 4% increase in average order frequency by customers on the Farfetch marketplace versus Q1 2018. This level of investment continues to set ourselves up well for our future growth and stronger order economics in future periods. About half the reduction in order contribution margin year on year comes from the increase in investment and demand generation and the remainder from a reduction in gross profit margins as a result of our platform cost of sales growing faster than our platform fulfillment revenue and our platform services revenue, the latter a function of the reduced take rate. As expected, we have continued to leverage our G and A expense which is $62,000,000 for Q1 2019 is 42% of adjusted revenue versus 50% in Q1 'eighteen. G and A grew 20% year on year against the 42% adjusted revenue growth. This reflects our ability to drive scale across the platform by benefiting from previous investment in our platform services, account management, customer service and corporate teams to deliver strong GMV growth from the existing resources. We continue to make investments in technology with the Q1 P and L charge of technology spend growing in line with revenues year on year to $20,000,000 In addition, we incurred $19,000,000 of capitalized product development costs. These reflect our investment into growing our product and engineering teams that are delivering the platform developments critical to our success including the integration of Farfetch onto jd.com's platform, building a new Harrods website, initiatives to enhance our database digital marketing demand generation capabilities and products to further enhance our customer engagement activities. Adjusted EBITDA loss for Q1 of $30,000,000 or negative 20.7 percent of adjusted revenues is aligned with our expectations and reflects the reinvestment of efficiencies into growing the business. Of note, below adjusted EBITDA is our Q1 share based payment charge of $39,000,000 and Q1 depreciation and amortization charge of $14,000,000 The share based payment reflects 2 things, the quarterly charge of $18,000,000 in relation to our stock based compensation plans, including employee incentive awards following the Stadium Goods acquisition and the 2019 annual key contributor grounds as part of the Farfetch compensation plan and $21,000,000 of fair value remeasurement in relation to cash settled awards and provisions for associated employment related taxes. The step up in depreciation and amortization quarter over quarter to $14,000,000 reflects the increase in capitalized development costs in relation to the long term infrastructure and assets we are developing, dollars 2,000,000 of amortization of acquired intangible assets as well as a $4,000,000 impact following the adoption of IFRS 16 on lease accounting. The resulting loss after tax was $109,300,000 and loss per share of $0.36 Coming back to the impact within the quarter as a result of the required implementation of IFRS 16. As I mentioned on the last call, this non cash accounting change alters the treatment and presentation of our operating leases across the balance sheet, the P and L and the cash flow statement from January 1, 2019. It's important to note that our 2018 comparative information has not been restated. We now recognize the initial present value of the unavoidable future lease payments as right of use assets and future lease liabilities on our balance sheet. You will see that as of March 31, 2019, we have reported right of use assets of $94,000,000 and associated lease liabilities of $95,000,000 These amounts will now be depreciated over the remaining life of the leases. On the P and L, our operating loss and reported EPS are not materially impacted. However, the result of this accounting change is that adjusted EBITDA and adjusted EBITDA margins in 2019 will be more favorable than in 2018 all else being equal. This is because we no longer record operating lease charges within our G and A expense above adjusted EBITDA, but have instead replaced these costs with a depreciation charge of broadly equal value, which sits below adjusted EBITDA. As I've said, we have not restated the comparative figures. If we did restate the full year 2018 P and L, dollars 13,500,000 of rent would move below adjusted EBITDA, making underlying adjusted EBITDA loss $82,400,000 and adjusted EBITDA margin negative 16.3%. For Q1 2018, adjusted EBITDA margin would have been negative 20.3% after $3,000,000 of rent moves below adjusted EBITDA. There is no impact to cash, but cash flows associated with lease payments now form part of cash flows from financing activities instead of being contained within cash flows from operating activities. Once you've digested all of these changes, you will see that they do not materially impact our economics, our financial position or the cash flows of our business that has given my team something interesting to do over the last few months. In terms of liquidity, we ended the quarter with $795,000,000 in cash and cash equivalents following the $150,000,000 cash component of the Stadium Goods acquisition which was completed in Q1. In terms of capital expenditure, as we think about our future business plans, we've decided to develop our own fit for purpose Farfetch campus that has the bulk of our engineers and operation staff in our spiritual home of Porto in the north of Portugal. In conjunction with these plans, on April 8, we acquired 70,000 square meters of land at a greenfield site just north of the city for a total cost of $17,000,000 This new facility will be transformational for our Porto based teams bringing them together under one roof and allowing for future growth. We believe these plans will deliver significant P and L benefits and positive net cash flow over the next 10 to 20 years and beyond. As part of positively Farfetch initiatives, we will be constructing the new facilities in accordance with LEED standards, making our new home one of the most sustainable office developments in Europe. We expect an additional $5,000,000 will be spent on preparing the site over the rest of 2019 before construction, which we expect to cost $70,000,000 is completed in stages across 2020 to 2022. Looking ahead to Q2 then, we are making good progress on the developments needed to add the full Stadium Goods catalog to the Farfetch marketplace. And as Jose said to launch Farfetch on JD later in the quarter. Whilst these developments won't have a material impact in Q2, the underlying momentum of the business is strong and a good response and with a good response from customers in relation to the new springsummer collections on offer. As such, we now expect Q2 platform GMV growth of 40% to 42% year on year. We expect currency will continue to depress Farfetch AOV for the quarter ahead. At the adjusted EBITDA level incorporating the effect of the P and L from Stadium Goods, our strong G and A leverage, investment into technology and continuing to drive near term customer investment, we're expecting an adjusted EBITDA loss in Q2 of negative 19% to 21% of adjusted revenues. Whilst it's too early to be reflected on the platform GMV position across H2, the higher than expected growth rates across the first half should be reflected in the full year outlook for growth, which is now 41% year on year. Our full year EBITDA margin guidance of negative 16% to 17% after the adjustments of course for IFRS 16 remains in place. Jose? Ricardo, Elliot, racking up, the online luxury industry remains a fast growth opportunity with the recent numbers from Bain pointing to a 20 percent average yearly growth through 2025. Farfetch has now established itself as one of the largest, if not the largest single destination in the in season luxury market with over $1,500,000,000 in last 12 months platform GMV and over $1,900,000,000 estimated in full year 2019. And in spite of that scale keeps capturing market share from competitors at incredible pace. Our platform GMV growth of 44%, which adjusted for FX was approximately 50%, is comfortably above our previous expectations and demonstrates the strength of our business and consumer offering. In the last 18 months, Farfetch has executed several strategic partnerships and acquisitions, be it in markets such as China and the Middle East, entering new categories such as with stadium goods, innovation with Chanel or expanding supply, for example, by adding department stores. I would like to congratulate all Farfetch's for what has been an impressive execution on these strategic initiatives. All of them either on track or going faster than anticipated with a number of them poised to fuel our growth in 2020 beyond. We demonstrated our ability to studiously evaluate where to invest and then deliver on our plans post investment, all while staying focused on the core marketplace business, which is reinforced by these new initiatives in a virtual flywheel. We are very pleased with our progress across our strategic initiatives. Whenever we see opportunities to execute on our long term mission, either in promising markets or in strategic categories that remain untapped by Farfetch, we will continue to explore opportunities with potential partners, while we remain focused on executing on previous such moves as well as on our car business. We're building on our incredible foundation to go after the lion's share of the online portion of an industry that we believe over the next decade will grow to be worth more than $500,000,000,000 Over the next 10 years, online penetration of this $500,000,000,000 industry is expected to grow from 10% to 25%. And this means we have the opportunity to go after an incremental $100,000,000,000 of sales in the online luxury market. We accelerated our opportunities with the strategic actions we took over the past 18 months and we're now executing towards realizing them for 2020 beyond. Thank you. And with that, I would now like to open the call for questions. Your first question comes from Ike Boruchow from Wells Fargo. Your line is open. Hey, good afternoon, everyone. Congrats. Great start to the year. I guess, two questions. 1, first for Jose. I'd love to kind of hear more about the relationships with your top brands. It seems like more of the luxury brands are talking more openly about joining the digital world, especially in the marketplace model. So talked about expanding your depth of supply. So just kind of curious about your brand relationships today. And then Elliot, I'd kind of just love to get your perspective on contribution margins knowing that you're reinvesting into customer growth today, but where would you like to see contribution margins over the next year or 2? And how do you balance that against scale at some point kind of scaling this business and the profitability? Thank you. Thank you, Ike. In terms of the brand relationships, we are extremely, extremely pleased. We added over 100 brands to the marketplace, now counting with over 400 brands directly using our marketplace to reach consumers globally. And specifically, the top brands, the super brands, as sometimes I call it in this industry, they are obviously focused on direct to consumer channels such as Farfetch and the Lindown in fact. So we were very pleased to report more than 160% growth in the supply in value from these top 10 brands. So definitely strength in health in these relationships. And what for me is more important is the strategic angle with which we see brands approaching the Farfetch marketplace. For example, just with the launch of communities, we've had some of the largest rents in the industry really reach out to us, very excited about a new way of leveraging storytelling and wanting to be part of it. So we will have some of these super brands in the next few weeks joining the Farfetch Communities effort. So this shows that they're seeing Farfetch as a direct to consumer channel, obviously an amplifier of their storytelling in terms of the global fashion consumer from China and Japan all the way to the Middle East and U. S. And that is from a strategic perspective very, very powerful. So we will continue to do everything we can to align our strategies with our brand partners. Hi, Cai. Just on the contribution of margins. I mean, I think it's probably best to look through the headline contribution margin and look at the sort of underlying economics that are in behind. And we're still seeing fantastically strong economics, unparalleled economics really with $600 AOV, 30% take rate. The LTV over the 6 month period is paying back as we have been seeing. The Q3 2018 cohort absolutely paying back within the 6 month period since then. And the Q4 2018 cohort over 3 months is looking to be in the same place. So, 1st and foremost, the customer cohorts are super strong. And as we talked about in the past, the key here really is to focus on retention and frequency of shop to help continue to boost that LTV. And historically, we've seen 3 times LTV over CAC on a 2 year basis. As we disclosed at the IPO, we're seeing those trends continue since then. So for me, focusing on those economics is the key place to look at. And whilst we've got significant growth opportunities ahead of us, and as Jose has just talked about, very strategic supply partners that are being brought on board, I think it's right for us to continue to invest upfront on acquiring those customers, investing and locking in those customers in terms of retention and then of course bringing on the strategic brand. So right now this kind of mid-thirty percent, so we were just over 30% in Q4, 30 sorry, 35% just over 35% in Q4, 35% here in Q1. I think this mid-30s is a good place to be in the short term. Over the longer term, I'm very confident we will be on the right path to getting back to the 60% long term order contribution margin target we talked about over the last few quarters. And of course that then ultimately drives the profitability of the business from then on. So right now investing, not too worried about the margin, obviously getting the right balance between cash being delivered from our revenues, so we can invest in the business and continue to deploy that into technology. And then longer term, the margins will rise and deliver the profitability. Your next question comes from Louise Singlehurst from Goldman Sachs. Your line is open. Hi, good afternoon, JJ, Elliot. Thank you for taking my questions. Elliot, firstly, just on the AOV, thank you for the color on that so far. I wonder if you could just give us a little bit more help in understanding the impact of FX. Obviously, if there's any underlying promotional activity, obviously, in Q1, the FX, and obviously, you hinted at the Stadium Goods dilution in there as well. And then just more structurally with the messaging around customer engagement, should we structurally be thinking of a lower AOV going forward, I. E. Much more constant engagement and more frequent orders going through the system? So it's much more about building that community that you often have been talking about during the call today. And then secondly, I wondered if you could just talk about the revenue, the GMC guidance for this year. Obviously, approximately 40%. You've nudged it up to 41% there or thereabouts in the same magnitude. Is it just more granular than we think in terms of the forecasting? Is there an FX assumption in there as well in terms of the movement there? And then finally, just on the Chanel progress there. Can you just talk about the rollout for Chanel and if you're able to use some of those initiatives with Chanel further abroad in terms of other brands going forward? Presumably, there's a period of time where they're exclusive. If you could talk about that, that would be very helpful. Thank you. Sure. Hi, Louise. So just in terms of AOV, the 7% reduction year on year was pretty much all down to the translation effect of currency. So I look across the basket of currencies that we have in terms of customers being able to shop in their local currency. Sterling was down 6% or 7% versus the dollar. Euro was 8% down quarter 1 versus this quarter 1. Aussie dollar was down 9%, real was down 14%, ruble was down 14%. And across the board, the U. S. Dollar has gotten so much stronger. And that's really just kind of flowing through to the reported number in terms of AOV and that's the main driver. There is a little bit of mix impact, not from Stadium Goods actually though that's why I split out AOV on the marketplace from Farfetch marketplace from Stadium Goods. So $601 doesn't include what's sold by Stadium Goods directly. That's in the $300 AOV number that I just talked about. But of course, if these categories that are at a lower price point, childrenswear is a good example, good strong growth in childrenswear that is bringing down the AOV from mix effect, but there's more items for basket starting to compensate for that. So overall, the AOV is mostly currency. In terms of customer engagement, I think if customers are buying slightly smaller baskets, but buying more often, I think that's a good thing. We've seen over Q1 versus last Q1, very strong growth in our organic direct traffic. I think that's been boosted by Farfetch Communities. I think there's customers coming now to be inspired by Farfetch. And if they come back 7 times and then buy, I'm very happy with that rather than going somewhere else. So that's good to see. In terms of revenue guidance, so what I've done is taken the 44% growth across Q1 versus the 40% that I previously guided and the now 42% growth across Q2 versus the 40 percent previously guided and let that flow through to the full year number. And so the full year number naturally moves up from 40% to 41%. For the second half, I'm leaving at 40% for the time being. I think it's too early to talk about Q3 and Q4. I prefer to talk about that when we speak again next quarter. And then I suppose just coming back full circle to currency that depressed AOV drives the depressed GMV which then drives the constant currency number of 50% that we just talked about. And I'm seeing currency, the U. S. Dollar is continuing to be strong really across Q2 at least. Some of the currencies I've just talked about flow through into Q3 with the U. S. Dollar being stronger. And then something like the Aussie dollar based on today's spot rate, it could be the rest of the year where we're seeing currency headwinds there because of the stronger dollar the U. S. Dollar. So that's a bit of a mixed bag, but that's where we land unfortunately. And on Chanel, Jose? Yes. Thanks, Louise, for your question around Chanel. This is a long term play for Chanel and for Farfetch. It's also an exclusive relationship for the time being. We launched a pilot. Chanel is very happy with this, so are we. And obviously, as you would expect, following this, there will be a gradual rollout to other countries and then our global geographies over the years. Absolutely, both exclusivity, the technology we're developing, which we're developing as everything we do as a true platform, so multi tenant with the ability to be customized and adapted to different maisons and their needs. It has always been the intention to put it as a service of this entire industry. And not just brands, but department stores, boutiques, large scale retailers. And we've had in fact lots of inbound interest and people asking about it. So long term play, I think we believe there is the full $500,000,000,000 that this industry is the full $500,000,000,000 that this industry is going to move in the next 10 years. And we're really excited that we're now servicing real customers in real shops and not just shops, the Chanel boutique in their spiritual home in Rue Cambon with real fashion assistance. So it's extremely exciting and very, very proud of the team. Luiz, I should clarify that Q2 guidance, of course, is 40% to 42 percent, which is what's flowing through to the full year number. Your next Your next question comes from John Blackledge from Cowen. Your line is open. Great. Thanks. A couple of questions. Could you discuss the GMV growth across kind of the main geos, Americas, EMEA and APAC? And any further color on China, the growth there and perhaps kind of your expectations for consumer spending in the Q2 and the rest of the year? And then just on the K grade, Elliot, maybe how do you see that trending over the rest of the year? And then over time, I think you said kind of a 30% take rate over the long term. Just given the mix of Stadium Goods, should we expect that to be a bit lower as we go along here? Thank you. Hi, John. Just a bit of color on the sort of demand by region. It's been pretty solid across all the 3 major regions that we provide information on. EMEA, APAC and the Americas. What's interesting is that Europe, Middle East and Africa is the biggest of those 3 being pushed along by Middle East, which is fantastic to see that partnership that we started with Chalhoub Group last year really starting to drive a lot of the growth in that region. And then within the Americas, North America, the U. S. Has been particularly strong over the quarter. And then inside Asia, I'll let Jose talk maybe a little bit more about China more broadly, but Mainland China is very much driving the Asia Pacific segment. So very pleased with growth across all of our markets. That's the beauty of Farfetch is that we are operating in a number of different markets and seeing good growth across those markets. I'll let you guys come back to China more broadly. On take rate, I've talked I suppose in the past about a range of 29% to 32% relatively volatile within that range in the short term. So you've seen last quarter it was closer to 32%, this quarter it's 30. I'm expecting short term that 29% to 32% range to be the guardrails. And then as you say, settling down at 30% over the longer term as we start to bring on some of the higher margin businesses within Farfetch platform solutions that drive really good take rate. And then of course offset some of the larger brands with strategic take rate that's maybe slightly lower than that range, but still very confident on 29% to 32% short term and 30% long term. Your next question comes from Eric Sheridan from UBS. Your line is open. Thanks so much for taking the question. 2 if I can. On macro, as you work region by region, is there any areas where you saw your consumer sort of outperforming or underperforming versus expectations? We tend to get that question a lot from investors for further granularity on a region by region basis. And turning to Access, what should we expect the output from the investment in Access to be? Is it greater retention, higher order velocity? How are you thinking about what the return on access will be in terms of what it will do for your consumer behavior as you look out over the long term? Thanks, everyone. Hi, Eric. So on macro, I think, obviously, lots of conversations going on publicly in the market and medium about U. S, China tariffs and all of that. I think from a trade perspective, 90% of our sales in China are coming from Europe. Then there are other markets that are also not affected by this like Middle East supply going to China, Australian supply going to China. So the U. S. Is really a tiny fraction of our supply into China. And from China to the U. S. Is 0, literally. So we have domestic supply in China, but it's just for the domestic in Mainland China. So from a pure trading perspective, immaterial exposure, I would say. And then I believe I personally believe that it's a very resilient market that we're in. And there are 2 secular trends. 1 is the migration of offline to online in China, very low penetration of luxury online at the moment. And then the other secular trend is millennials and Generation Z as a huge new cohort in luxury and particularly in China. And obviously these customers are digital first. I think those tailwinds are far, far stronger in our industry and in our business model than and any macro win. So I remain very, very confident on China. On access, what we've seen in the pilot, so we've AB tested it in Q2, Q3 last year in some markets. And what we've seen and that is consistent with what we've seen now that we've rolled out 200% of our customers is that the engagement of customers goes up. So the times they return to the site on the app and the time and the frequency of shop goes up as well as the basket. So very, very strong results, which make us very confident that we should continue to invest in the program and in the benefits that we pass to the access customers. And we will see in the medium to long term a strong return on investment on those investments we're making today. Your next question comes from the line of Jason Helfstein from Oppenheimer. Your line is open. One on the fulfillment side, maybe talk about long term strategy around, I guess, that 90 minute and how close ultimately do you want to help inventory move to the customer? And then obviously how that plays into the relationship with the bigger retailers? And then secondly, can you talk about Stadium Goods as far as the resale business versus kind of working with brands like Nike and Adidas who may not necessarily be on your platform today and but can open up a much bigger market at the price point even at the kind of more expensive items that they sell, if that ultimately leads to a new kind of vertical for you, right, the $175 sneaker and bringing those customers on your platform? Thanks. Yes. So I think on fulfillment by Farfetch, we are very, very excited about our capabilities of keeping 3rd party logistics. So to be clear, we are not building warehouses and we're not hiring fulfillment staff. We are partnering with great 3PL businesses, for example, in China is on top of the JD Luxury Logistics. And then we essentially keep those 3PL warehouses with our software, with our operations. And that is extremely scalable. And that's why we now have more warehouses scattered around the world than any of our competitors. And that will continue to be the case and we'll continue to roll out depending on the demand that we have in each city. What's great about fulfillment by Farfetch is that it enables an increasing level of service to customers, so faster delivery. Farfetch, sometimes people don't realize, but we have a unique model that already offers same day delivery in 19 global cities. This is something that you don't see often in e commerce in general and I think it's quite unique in the online luxury space. With fulfillment by Farfetch, we can do extra services such as consolidation of others from different merchants and obviously, save costs because with 90% of the orders crossing a border, if our data scientists can predict when the orders are going to be, we can ask our European suppliers, for example, to have the product already closer to the customer, be it in China or LA or New York or wherever we may open in the future. So advantages all around for consumers, for fulfillment costs on the Farfetch side, but also remove friction from the growth of supply as our sellers, as you can see, we're growing over 40%, 44% in terms of GMV, 50% at constant rates. As this fast growth could create some pressure in terms of fulfillment for our sellers, that is then completely removed by fulfillment by Farfetch where they can use our warehouses to expand their fulfillment capabilities. So I think it's going to be really important for future growth. And on Stadium Goods, Afolip, we are very, very excited. We just to be clear, we have over 700 boutiques and many of them, they are Tier 0, Tier 1 boutiques for Nike and Adidas shops. So when these sneaker companies that have the collaborations, etcetera, many of our boutiques, including Browns, are part of that network of premium drops. So we do have access to the first hand new products flowing into our customers. That's what gave us confidence that this was an incredible category. Obviously, some of these products, they completely run out of stock in minutes, as you know, and they're then resold at the multiple to the original RRP. And in that space, Stadium Goods is the luxury company in the sneaker resale category and a very, very cool brand for sneakerheads. So that's what we're excited about is serving the sneakerhead community with the drops and when they are not fast enough with their clicks and then coming back to them with the Stadium Goods offering. Your next question comes from the line of Doug Anmuth from JPMorgan. Your line is open. Hi, this is Corey Carpenter on for Doug. Two questions, if we may. Just following up on the resale market, in addition to stadium goods, you recently announced the 2nd life pilot. Could you talk about your broader ambitions and opportunities you see in resale across these different categories? And then on the platform business, it seems like this has been a good inroad for relationship with clients. So could you talk about how you think about the platform opportunity longer term? And is the ultimate goal to move these partners onto the marketplace? Or is this a business in and of itself that we could see scale meaningfully? Thank you. Hi, Doug. So on the resale category, yes, sneakers are a category where we're going to invest aggressively post acquisition with Stadium Goods. We think it's the most premium brand in the space. It has huge international potential in China in particular, but in other territories such as Europe, hence the collaboration with Browns in London, where we're going to launch first time with the physical presence of Stadium Goods in Europe and Japan and other countries. More broadly in terms of resale, we have had a vintage, which is essentially resale in our portfolio for a number of years quite successfully. And what we've done is expanded our model, which was until now essentially setting the best, most luxurious vintage boutiques from all around the world and invite them and sell us on our marketplace, expand this to our customers. And this was really a sustainability angle. We had many customers in our studies, in our research around sustainability, one of the main concerns is the life cycle of products and the circular economy. So we thought it was really interesting to start experimenting with providing our customers with an ability to trade in their products to Farfetch and obviously help that circular economy in terms of our sustainability credentials. So it's something that we are monitoring. It's not we're not making any predictions or statements in terms of its potential, but we're certainly monitoring and let's see how what consumer reception we get on this. Your next question comes from the line of Lloyd Walmsley from Deutsche Bank. Your line is open. Thanks for taking the question. This is Kunal for Lloyd. A question on China, I'm trying to understand or frame the TAM and how that is changing with the acquisition of Toplife. Wanted to understand, 1, where you are in terms of revenue and one of the things you pointed out earlier in this call is that China is the 2nd largest market behind the U. S. So that's probably with the WeChat integration that you have. How does that change with the JD Toplife acquisition? And what is the competitive landscape right now, Yes. Yes. Thank you for touching on that topic. I think China remains an absolutely strategic priority for all the brands in the industry. It is the fastest growing luxury goods market accounting, I believe, for something like 85% of the growth in the industry last year. And as such, brands know that they need to crack China and they need to crack China digitally. As we all know, the Chinese consumer has actually leapfrogged. And for example, in terms of digital payments and mobile payments is well ahead of the West. So the question here is, how can we help brands crack China? And this is what we've been investing very, very intensively in the past 4 years. So we currently have a data center completely connected in an active architecture to all our infrastructure globally. We have a local engineering team, local data science team, product management team, 300 people in fact in 3 offices in Shanghai, Beijing and Hong Kong with unrivaled logistics capabilities able to do both cross border in record lead times consistently and also domestic delivery. We've acquired CuriosityChina, which is powering the WeChat channel for 80 luxury brands. And of course, the marketplace and now the new top line channel. So I think this is a 3 60 degree gateway to China. And the beauty of it is that it's a turnkey solution. So once you have one integration with Farfetch, you live in China. So that's the case for the 3,000 brands we have on the marketplace. They are now able to tap the Chinese customer directly through Farfetch and very, very shortly through our exclusive luxury channel on JV, which I think is very exciting. Your next question comes from the line of Stephen Ju from Credit Suisse. Your line is open. Great. Thank you. So, Jose, can you give us some more color on your Middle Eastern operations, the behavior of the ALVs and order velocities and the rate of returns and all that stuff may lie and adjustments you may have to have made in order to take down friction in the region? And digging a little bit deeper into the China opportunity, do you anticipate any sort of logistics related investments that you might have to make in the region? Or will JD be handling most, if not all of that, for you? So in terms of the Middle East customer, it's we're very, very excited. It's a very it's a young customer, but with actually higher AOV compared with the average. Very, very sophisticated, as we all know. It is, however, and this is for me a huge opportunity, a market where online penetration of luxury is very low. So customers love shopping in malls. As we all know, the Dubai Mall is the largest, most luxurious mall in the world. So there's a strong mall culture. But there hasn't been a strong focus from our main competitors in localizing in a complete and thorough way for these markets. And this is not just the UAE, we're talking about Saudi Arabia, obviously, all the other countries in the Gulf as well. So what we've done through the partnership with Chalhoub was obviously first hire an amazing team. It's all about people. So the team we have on the ground is absolutely stellar. And then start a heavy program of localization with obviously Arabic language and a number of features on both the website and the app, which make this an incredible experience for the local customer. We also have a local private client, which is our VIP team. As we all know, there are high standards in the territory. So it's important to have this incredible level of attention to detail for these customers. So we think we're only scratching the surface, but we're seeing already very strong results. So your question around logistics in China, we are not planning any CapEx. So we do this in partnership with logistics companies. Obviously, JD being a shareholder and the pattern in the territory, we're leveraging their incredible logistics capabilities in the territory. And we've also developed our tax tag to enable integrated customs clearance in record time. So we now have a very consistent cross border delivery service in China. And what is I think very unique fulfillment by Farfetch warehouse in Shanghai where brands can consign with us and we'll take care of the rest, which for brands is an incredible, incredible advantage. So obviously, we're going to continue to double down on our customer experience in China along those lines. We have time for one more question. The final question I have 2. First is also about China opportunities. You mentioned that you will participate in JD's June 18 anniversary sales event, which is great. Should we expect that you will launch on JD on all its 300,000,000 users? Or is it going to be a gradual step by step launch to its users? And then how should we think about the user behavior in China? For example, their average order size, their order frequency, things like that. Could you just give us some more color? 2nd question is relating to your active customer, which had a great net add this quarter. Could you just provide more colors what are the main drivers? Who are the new consumers that sign up to your platforms? And what are the main reasons that you think that leads to this much higher acceleration of user growth? Thank you very much. Hi. Thank you. So the JD channel essentially is a level 1 button. So Farfetch will have a level 1 button, plus obviously all the JD App users, if they are searching for a particular brand that we have, we will be available to the entire population of users, all the 300,000,000 users. The level 1 button we have requested and agreed with JD to be shown to customers that the data science engines that JD has, have high propensity to buy luxury. So we want to elevate the channel, obviously very mindful of the positioning of our brands in the industry. And we thought this would be the most powerful solution. So absolutely available to all 300,000,000 users with the button visible to the ones that we know are likely to be luxury shoppers. Our Chinese consumers are very sophisticated and actually the AOV is higher in China. The age is younger, which is really interesting. So last time I checked, I believe around 29 years old on average. So we're appealing to squarely on the millennial and even Generation Z cohort of customers. And this is incredibly powerful because this is exactly the customers, the brands must capture. And so I'm very happy that we were being seen by our brand partners as a great media channel and obviously sales channel to penetrate the new Chinese luxury customer. Hi, Alaa. Just in terms of active customer numbers. So the numbers now, the 1,700,000 versus the 1,400,000 last quarter now includes Stadium Goods, obviously. So that explains part of the sort of step up. But if we were to strip that out, actually we've seen very strong new customer growth as I was saying earlier on with the economics and really strong place. We've linked in to continue to grow that customer number, but actually what has helped drive the boost within Farfetch is less dropouts from previous cohorts. So we've been able to retain customers in great numbers than we have previous quarters. So that's helped drive the net new customer up. And you can kind of back solve it. I gave you the little nugget that we had an average order frequency increase of 4% Q1 this year over Q1 last year. And so you can sort of see that active customer numbers on an underlying basis grown to a very strong place. I'm very pleased as I say cohort by cohort on the payback and the LTV that we're expecting over the customers that we added. So yes, good place. There are no further questions Thank you so much for joining us today. We look forward to speaking to you next quarter. This concludes today's conference call. You may now disconnect.