Good afternoon, welcome to FARFETCH Q1 2023 Results Conference Call. My name is Layla, I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. Thank you. I'd now like to turn the call over to Alice Ryder, VP, Investor Relations. Ms. Ryder, you may begin your conference.
Hello, and welcome to FARFETCH's Q1 2023 conference call. Joining me today to discuss our results are José Neves, our Founder, Chairman, and Chief Executive Officer; Elliot Jordan, our Chief Financial Officer; and Stephanie Phair, our Group President. Please note that unless otherwise stated, all comparisons on this call will be on a year-over-year basis. During today's call, we will also be displaying a slide presentation throughout our prepared remarks, which can be accessed as part of the live webcast at farfetchinvestors.com. Following the call, the slide presentation will also be uploaded to the site. Before we begin, we would like to remind you that our discussions today will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements. Forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to publicly update or revise them.
For a discussion of some of the important risk factors that could cause actual results to differ, please see the Risk Factors section of our Form 20-F filed with the SEC on March 8, 2023. In addition, we will refer to certain financial measures not reported in accordance with IFRS on this call. You can find reconciliations of these non-IFRS financial measures to the IFRS financial measures in our earnings press release, which is available on our website at farfetchinvestors.com. Now I'd like to turn the call over to José.
Hello, everyone. Thank you for joining us today. I'm pleased to report that FARFETCH is back to growth. This is despite the continued headwinds from Russia, China, and the stronger U.S. dollar, with Q1 2023 adjusted revenue up 4% or 13% on a constant currency basis, and adjusted EBITDA margin improving for the first time in five quarters. We have set 2023 to be our year of execution, and I'm delighted that we are absolutely delivering, as reflected in our Q1 results, as well as recent milestone launches. Our key 2023 launches, including Reebok and Ferragamo, have either been delivered or remain on schedule for launch later this year, as in the case of Neiman Marcus Group.
Additionally, our announced transaction with Richemont continues to advance through the regulatory review process, and our cost reduction and working capital initiatives towards achieving our 2023 profitability and free cash flow objectives are well on track. Underlying our Q1 performance is strong execution across our business. I'd like to share with you some recent highlights across our 3 business pillars: marketplaces, platform solutions, and brand platform. Within marketplaces, the FARFETCH Marketplace demonstrated notable progress with underlying growth as measured by order growth, ex Russia and China, accelerating to 18% in Q1 as compared with 12% in Q4 2022. With respect to China, we saw a marked improvement in Q1 Mainland China GMV.
While still in decline, it was to a lesser extent than in Q4 2022, I'm pleased to share that performance has continued to ramp up as we expected, with GMV back to growth quarter- to- date. I have just spent a week in Mainland China and Hong Kong, I am very excited by what I witnessed. Not only does the country seem to be back to normal with a lot of positive energy, it is also clear that the appetite for luxury is very strong. This makes me even more enthusiastic in light of what FARFETCH has built in this market. I believe we are the only Western company succeeding at a multi-hundred million dollar scale in online luxury in China. Very few Western Internet companies have been able to find a strong product- market fit in China.
FARFETCH, thanks to the unique dynamics of the luxury industry, our continued investment in localized operations over the past eight years, and an amazing team on the ground, has created a very differentiated platform for luxury brands to reach their Chinese customers digitally. China is expected to represent more than 25% of the luxury industry by 2030, with Mainland China at less than 10% of our overall business, this means we have significant potential for further growth as our recovery in this market accretes positively to our overall 2023 plans.
We are also delighted to see our internationalization efforts pay off in other key luxury markets, including in Latin America and the Middle East, where GMV grew strong double- digit in Q1. Turning to the U.S., in Q1, GMV declined as expected as a result of our reduction of U.S. online marketing investment by more than 20% over the last three quarters in light of the heightened promotional environment and our increased focus on optimizing for profitability. We're pleased to see that we have actually increased the active customer count and orders by high single- digit, and that U.S. GMV declined to a lesser extent in Q1 than in Q4 2022.
We expect that the promotional dynamic will moderate over the course of the year as retailers sell through their inventory positions and as we start to comp 2022 declines in Q3 and Q4, we expect U.S. to be back to growth in the second half of 2023. In the wider Americas region, thanks to the significant growth and scale of our Brazilian and Mexican businesses, we delivered positive growth, which shows the power of operating a truly global platform, something Stephanie will discuss further today. With our second business pillar, Platform Solutions, the teams have been laser-focused on supporting our existing clients while also delivering on our 2023 launches.
To this end, I am delighted to report that in Q1 we expanded our relationship with key strategic partner, Harrods, with FPS's launch of harrods.cn, providing the iconic retailer with a localized e-commerce channel to cater to a pivotal audience of Chinese luxury consumers. The Platform Solutions and Brand Platform teams have also delivered on planned 2023 launches. We were thrilled to launch the initial e-commerce channel for our 360-degree partner, Ferragamo, in Europe with U.S. and key international markets launching in the coming months. Additionally, our new Brand Platform license, Reebok, went live this month thanks to FPS's launch of the European e-commerce channel and the Brand Platform's kickoff of wholesale operations. Later this year, we look forward to also launching Bergdorf Goodman as part of our broader partnership with Neiman Marcus Group, which remains on track for H2.
Finally, our announced transaction with Richemont continues to progress through the regulatory review process with approvals now received in markets including the UK and China. The transaction remains subject to approval from a number of other regulatory authorities around the world with whom we continue to work closely. Our Q1 results reflect our disciplined focus. Based on our performance, we remain on track to deliver on our 2023 plan, which is the first step towards achieving our medium-term targets and our longer-term mission to be the leading global platform for luxury. This represents a more than $360 billion opportunity today. With technology at the core of our business, we have consistently led innovation in the luxury space, having been chosen to be the long-term innovation partners by companies such as Chanel, Richemont, Kering, Harrods, Neiman Marcus, and others.
One of the areas we are most excited about is the recent developments that large language models are bringing to the field of AI. We're already in the leading position with respect to AI in the luxury industry with significant in-house data science, AI, and machine learning teams. We have been active in this space for many years now. Our long-standing partnership with Microsoft has opened up the opportunity to access the most advanced version of ChatGPT, and our tech teams have been developing several concrete applications of ChatGPT for the luxury space. I believe this could be a significant development for FARFETCH. Our unrivaled range is the reason why our customers choose FARFETCH. Large language models open up areas like search and discoverability and storytelling of our brand catalog to provide a much easier-to-use, hyper-personalized interface for our luxury customers.
Large language models also offer other potential applications to augment the productivity and quality of providing customer service and creating product descriptions, for example. This is an exciting development in FARFETCH 's long history of successes in AI and machine learning. There's still a lot to be discovered in this field, and along the way, we will always have the customer in mind and the need to provide a truly exceptional luxury experience. I am very excited by the near-term prospects of rolling out consumer-facing applications of these new AI developments, and I look forward to opportunities for FARFETCH Platform Solutions to collaborate with brands in developing AI applications to enhance their own digital channels. With that, I will turn it over to Stephanie.
Thank you, José, and hello, everyone. FARFETCH has one of the largest, most valuable and broadest audiences in online luxury. In Q1 2023, we added 500,000 new customers, growing sequentially by 2% to nearly 4 million active consumers even after the roll-off of our remaining Russia customers. We continue to focus on engaging and retaining existing customers, a fundamental lever in achieving our growth and profitability targets. As a result, we saw double-digit growth in existing customers shopping on the FARFETCH Marketplace versus Q1 2022, and increased new customer three-month repurchase rates during the period, which is a strong indicator of long-term value. As a marketplace with an extensive range of products, we cater to a broad customer base that represents varying personas and aesthetics, which in turn allows brands to work with FARFETCH to market a variety of looks from their collections.
Also, this means we are uniquely positioned to lean into trends as they emerge across multiple customer profiles and respond to customer preferences in pricing and taste. We are truly global and geographically well-diversified, as demonstrated by our significant presence across the top 20 countries by luxury spend. Not only are we a key player in these large markets, but because of our scalable platform model, we are uniquely positioned to serve the global luxury industry. The global nature of our capabilities allows us to tap into a broad base of demand and lean into markets where demand is strong. In Q1, we saw double-digit order growth in more than half of the 190 countries and territories we serve.
We have also invested in regions that have not historically been a focus for luxury players, including markets like Mexico and Brazil, which continue to deliver outsized growth relative to other regions on the FARFETCH Marketplace. I had the pleasure of witnessing this firsthand during my recent travels to Brazil and Mexico, where our customers' enthusiasm and engagement for our brand were clearly evident. I heard how much they appreciate the fact that we not only have the global luxury brands, but also allow them to shop some of their favorite local brands in a single destination. The fact that they see local brands being showcased to a global audience on the FARFETCH Marketplace also appeals to their national pride and instills an even stronger affinity to the FARFETCH brand.
I believe our global success is as a result of the high quality and personalized services provided through our localized approach, which starts with our supply and is carried through all aspects of the customer experience. This is an approach we have invested behind for several years and have developed a strong presence and strategic relationships with key local players, China being a great example. Where we have a broad customer base, we also, and importantly, have a very valuable private client customer base, which we service in a very personalized way. Within our global and diverse customer base, we continue to hone in on our private client.
We have private client stylists on the ground in many of our key regions, whose understanding of our customers' cultural values and nuances enables them to deliver highly curated experiences. This approach has helped grow this attractive FARFETCH customer segment, which represents a larger base of demand than many of our competitors' entire businesses as the top 1% of our customers generated more than 27% of FARFETCH Marketplace GMV in 2022. We also continued to expand this valuable consumer tier ahead of our overall consumer base. PC retention remains above 90% and a higher proportion of customers in the gold and platinum tiers of our Access loyalty programme are upgrading to the next tier. Additionally, private client average order values remained above $1,100, which is particularly encouraging given overall AOV trends.
It is for all of these reasons, our broad and valuable customer base, our regional diversity, and our highly engaged and high-spending private clients that our brands and boutiques continue to see FARFETCH as a key partner to reach luxury consumers. The strength and depth of our customer base is extremely compelling to the industry, and as a result, our brands and boutiques are continuing to allocate stock to their FARFETCH channel, further improving the offering we have for our existing and new consumers. Our top 20 brands, excluding NGG brands, grew available supply by 60%. Now I'll hand the call over to Elliot to discuss our financial results and outlook.
Thank you, Stephanie, and hello to you all. I'd like to start with the key financial highlights for the quarter. First, FARFETCH is back to growth, and our underlying growth accelerated in Q1 2023, reflected in marketplace order growth, excluding Russia and China, which was 18%, up from 12% in Q4. Additionally, brand platform GMV grew 15% and adjusted revenue increased 13%, both at constant currency. Our reported GMV continued to be impacted by unprecedented macro forces that started in 2022, namely the closure of Russia, COVID restrictions in China, and the strong U.S. dollar. Despite these factors, reported GMV was slightly higher than last year. Digital Platform Order Contribution Margin remained robust at 32.4%.
SG&A was in line with expectations, with a decrease in spend versus Q4 2022, a year-on-year reduction in the underlying cost base through our cost rationalization initiatives, and incremental investment to support the new FPS and brand platform deals signed in 2022 as previously guided. Finally, as is typical for a Q1 period, there was a use of cash in the quarter, but this year it was favorable compared to both Q1 2022 and Q1 2021, reflecting our focus on improving our working capital and overall cash position. Slide 10 shows our P&L results, which reflects a solid quarter. Group GMV was $932 million, a 0.1% increase on a reported basis, and up 3.6% on a constant currency basis. This was driven by growth across all 3 segments on a constant currency basis.
Adjusted revenue was $476 million, up 13% on a constant currency basis, driven by strong brand platform performance and first-party growth across the digital platform. Gross profit grew 4.4% to $241 million. G&A and technology costs were $218 million, very much in line with the expected position and reflecting underlying cost savings and incremental investment on new 2023 revenue lines. Adjusted EBITDA improved slightly year-on-year to -$35 million. I'd now like to discuss the performance of our segments. The digital platform started the year well. Slide 11 shows that. Digital platform GMV growth, excluding Russia, China, and the impact of FX, was circa 10%. Adding back Russia and China, growth was +2% at a constant currency.
The impact of a strong U.S. dollar resulted in reported GMV of $800 million, a reduction of 1% year-on-year. This makes Q1 2023 the strongest overall quarter for digital platform growth in four quarters. The strong underlying performance was underpinned by continued robust growth across our marketplace, with the highest sequential active consumer growth across four quarters, reflecting our successful customer acquisition and retention initiatives, and an acceleration in order growth, excluding Russia and China, to 18%. In terms of average order value, we have seen a 10% reduction to $566, driven in part by the currency headwinds incurred as we report in U.S. dollars, plus lower underlying average order value due to higher levels of markdown and a shift in consumer demand for items with lower price points.
On a regional level for the FARFETCH Marketplace, the Americas improved quarter-on-quarter, delivering low single-digit growth year-on-year, with growth in Mexico and Brazil the highlights, partially offset by continued softness in the U.S. as a result of the promotional environment. We specifically tailored our demand generation expense in this market to drive efficiencies. EMEA improved quarter-on-quarter with low double-digit year-on-year growth, excluding Russia, supported by continued strength in core European markets such as France, Italy, and Spain, and double-digit growth in the Middle East. Asia Pacific improved quarter-on-quarter with an improvement in China, albeit still lower year-on-year. As José mentioned, this important market is back to growth in Q2 to date, in line with the ramp-up that we expected for the full year. Turning to revenue, where digital platform services revenue grew 8% to $341 million.
This increase was driven by 28% growth in first-party GMV and revenue. First-party GMV represented 22% of Digital Platform GMV as we continue to trade through our first-party inventory holding. In addition, we increased Third-Party Take Rate by 90 basis points to 32.9% during the quarter with higher marketplace take rates and FPS billed fees. These two factors were partially offset by a reduction in third-party GMV of 7%, reducing third-party digital platform services revenue by 5%. In terms of margins, Digital Platform Order Contribution Margin was broadly flat at 32.4%.
This robust position was achieved as we saw a 16% reduction in our demand generation spend, generating 470 basis points of incremental order contribution margin versus Q1 2022. First-party gross margin of 27.9% as we traded through our inventory holdings, and third-party gross margin of 67% with an impact from additional duties and shipping costs, as well as higher cost per order of logistics through the lower average order values in Q1. Moving to the brand platform, where we delivered GMV of $110 million, an increase of 10% on a reported basis and 15% on a constant currency basis, reflecting stronger deliveries for our spring/summer 2023 collections within the quarter. Brand platform gross profit was $60 million at a 52% gross margin, an increase of 330 basis points versus Q1 2022.
As last year, we increased our inventory provisioning due to warehousing delays. Our operating cost base, consisting of G&A and tech expenses, was $218 million. This was an overall reduction in spend versus Q4 2022 and accounting for a one-time ruble hedging credit last Q1 and the incremental spend associated with the launch of new clients for 2023, we have seen an underlying reduction in spend versus Q1 2022. We remain on track to spend $950 million for 2023 as a whole, which includes underlying savings of 10% versus 2022, driven by headcount reductions and cost-cutting initiatives across the entire cost base.
On cash, we closed Q1 with cash and cash equivalents of $486 million, a net decrease of $248 million during the quarter, in line with expectations given the usual Q1 seasonality of group operations. As I said earlier, the Q1 movement was favorable compared to the equivalent movement in Q1 2021 and Q1 2022, which saw an outflow of cash of $326 million and $425 million, respectively. Compared to Q1 2022, this improvement was a result of a reduction in investment spend and actions taken to improve our working capital position, including tightening our inventory balances.
We expect each quarter of 2023 to be stronger in terms of use of cash than the equivalent of 2022 due to stronger adjusted EBITDA, reducing our first-party inventory balances, reversing the post-Brexit buildup of our VAT receivables due from European governments, which currently stands at over $200 million, and expanding our marketplace creditor position as we return to growth. This means we expect to close Q4 2023 in line with the closing Q4 2022 position. That leads nicely to full year guidance. I wanted to remind everyone of the guidance we set for 2023, which remains unchanged. We are on track for GMV of circa $4.9 billion, which includes digital platform GMV of circa $4.2 billion and brand platform GMV of circa $0.6 billion.
We expect revenue of $2.9 billion, up circa 25%. Stable year-on-year margins, including brand platform gross profit margin of 48%-50% and Digital Platform Order Contribution Margin of 33%-35%. Our focus on costs means we continue to expect SG&A of circa $950 million, and we continue to target adjusted EBITDA margin of 1%-3%. We also see no change to how that result will be delivered across the remaining quarters of 2023. With Q1 delivered slightly better than expectations, we look towards Q2, which we expect will deliver stronger reported growth at the GMV level. We will be annualizing the Russia and China impact, so these macro factors fall away. We will also start to see contributions from the recent launches of Ferragamo and Reebok, both driving GMV and revenue growth.
Moving into Q3, the currency related headwinds from 2022 are expected to largely neutralize, allowing the strong double-digit underlying growth position to start shining through once again and further improve our reported GMV and revenue growth. We also expect to launch our new partnership with Neiman Marcus Group during the second half of the year, with most of the incremental impact expected in Q4. Finally, we expect positive adjusted EBITDA to track this stronger top-line performance as we navigate through the year. In terms of cash, we expect that the working capital outflow in Q1 will reverse with strong working capital dynamics, particularly in Q4. I'll now pass back over to José for his closing remarks.
Thank you, Elliot. FARFETCH is back to growth despite a continued uncertain macro backdrop by remaining focused on the clear objectives we've articulated. Our Q1 results are the first step towards delivering on our plan for 2023, our year of execution. We continue to be focused on driving our three business pillars and delivering on the deals we signed in 2022 with the recent launches of Ferragamo and Reebok. As we look further out, we're also focused on achieving our medium-term targets, including the successful completion of our announced transaction with Richemont and our longer-term mission to be the leading global platform for luxury. FARFETCH is uniquely positioned to go after this more than $360 billion opportunity.
We have a track record of strong growth over the years, as FARFETCH grew at a 24% CAGR or 3x as fast as the industry between 2019 and 2022. I'm extremely confident in our ability to continue expanding our reach across this resilient luxury industry and also on our prospects for delivering sustained profitability and free cash flow over the coming years. With that, I'd like to open up for your questions. Thank you.
We will now move into our Q&A session. For those of you who are joining us via Zoom, if you would like to ask a question at this time, please raise your hand by clicking the Raise Hand button under Reactions at the bottom of your Zoom window. Once called upon, please unmute your audio to ask your question. Please be mindful that only one question per analyst will be allowed. Thank you. To start, we would like to take our first question. Doug Anmuth from JPMorgan.
Thanks so much for taking the questions. Then just more broadly, as we, you know, are roughly halfway and some of the new partnerships. If you could just also comment on the sustainability of demand generation leverage that you're seeing. Thank you.
Doug, it's José here. I'll cover your other questions first and then touch on the U.S., and then I'll let Stephanie cover the customer and demand generation part of the question, if that's all right. Look, if we said that 2023 is our year of execution. I'm really happy with the delivery against that. Q1 was a quarter where we were back to growth and a quarter of acceleration in our top markets, both U.S., China, but also other markets. It was a quarter of launches and key launches, landmark launches. Reebok is live, on budget and on schedule. Same with Ferragamo.
We're on track with Kering Group for the second half this year. We continue to make progress with Richemont as well. This makes us very confident about the rest of 2023. We're on track to achieve our guidance, back to growth, EBITDA profit and positive cash flow. We've also implemented a number of initiatives. We're very disciplined in terms of the cost side of the business and the fixed cost. As Elliot outlined, the underlying business, excluding new deals and new partnerships, actually we saw a reduction in about 10% of the fixed cost base and very disciplined on cash, with a Q1 that was a significant improvement over Q1 last year.
With a number of actions well on track to end the year with as much cash, if not more than what we started. You know, all in all, very, very positive dynamics. Just to elaborate a little bit more on in terms of the U.S. Look, in Q3, we shared with you and we noticed that the market was becoming very promotional in the U.S. Retailers, luxury retailers had built inventory levels, and we were starting to see, you know, a high promotional activity. Therefore, we took the decision to prioritize profitability and reduce our demand generation spend to the tune of circa 20% since then, quarter- every- quarter.
As expected, we saw a decline in Q1, although we saw an acceleration, sequential acceleration from Q4. In fact, in terms of customers and orders, we are growing in the U.S. Active customers grew high single- digit. Others grew high single- digit, and the decrease in GMV is the result of lower AOVs as the customers are slightly trading down and taking advantage of the promotional environment elsewhere, and therefore have become slightly more price sensitive. By the way, we don't see that with our private client. Our private client, the AOVs remain at $1,100. It's a very large part of our business, is almost a third of our business, and we see 90% private client retention. That, that business hasn't really been affected that much by these dynamics.
Now for second half, we do think there's a probability of inventories being more managed by retailers and lower inventories across the industry, less promotional environment. One thing we know for sure is that the comps will get much easier for us in Q3 and Q4, and that gives us confidence that we're gonna go back to growth in U.S. That will also be supported by our broad exposure to other geographies. China is as expected, recovering. We're actually positive year-over-year quarter-to-date in Q2. Also I think we're demonstrating that our very global business and the investment we've done in internationalization is paying off. The Americas in Q1, for example, actually grew year-over-year in spite of the US decline.
That's the result of businesses that are now at scale and growing at strong double- digit in Brazil and Mexico. Middle East continues to be very strong. Southern Europe continues to be very strong with double-digit growth year-over-year. You know, as we start comping, we've now comped Russia, we will continue to comp China, FX. This underlying strength of the business makes us confident for our 2023 numbers. Of course, there's still three quarters to go, and we will continue to be very focused on execution and very focused on continuing the disciplined approach to cost. Actually leveraging all the strengths we have in terms of the customer base and the, and the incredible platform we've built.
Stephanie, if you want to cover the demand generation question, please.
Yes. Hi, Doug. I'm Stephanie here. I'm glad you asked about the demand generation leverage because we are pleased with that, and it's very much an intentional decision. As José mentioned, we made the choice to drop our demand generation spend to really lean in on efficiencies and be nimble as to where we invest to drive those efficiencies. The U.S. is a case in point. We dropped by 20%, but we didn't see that commensurate drop in sales. I think, you know, to give you a little bit of background around this is really the result of a long-term strategy. It's been, you know, 15 years of investment in marketing tech to really be able to hone in on efficiencies.
We continue to find new ways of driving, sort of profitability through profit multipliers, looking at sort of audience targeting, looking at, you know, drilling down to sort of profitability at the product level. It's also a result of an investment over the years. I've talked a lot about investment in brand building, which shows up over time. Diversification of channels as well. I've talked in the past about app being a channel that whilst, it's a more expensive channel to acquire customers, it has very strong, long-term value. You know, this is, this is a long-term, effort. I'm pleased to say that both CAC and CPRO are down. I think the story here is one that we've mentioned before is really about retention and engagement.
I mentioned this at the Capital Markets Day. We've acquired a very large, broad base and very valuable luxury customer. We continue to grow that base, 500,000 customers this quarter. We're really continuing to engage on retaining that broad and large customer base, and we have a very strong strategy around retention. Personalization, you know, some of the developments that, as José talked about in AI will only accelerate that. For example, this quarter we talked about, we launched FARFETCH For You, which is already showing some really promising results in terms of curating the marketplace one-on-one. Personalized communications have a 90% higher conversion rate, and we keep driving those up year-on-year. We're really becoming more and more surgical about all of the factors that drive retention.
As we invest on that side of the business, we're actually expanding it to really the end-to-end customer experience. I think retention is a big part of this strategy. To your question about, you know, what should we expect in terms of that leverage through the end of the year, we've always said that we manage our demand generation to a framework around payback, and we are, you know, back to the sort of under six month payback. We will continue to manage it that way, lean into markets where we're seeing really good payback and pull out of markets where we're not. I think you should expect to see around 7-7.5% of GMV in terms of demand generation spend.
Great. Thank you both. Helpful.
Our next question comes from Lauren Schenk from Morgan Stanley. Lauren, feel free to unmute.
Great. Thank you. I just wanted to dig in a little bit more into the Q2 outlook, just given all the moving pieces, anniversarying Russia, Reebok, Ferragamo. It sounds like you're expecting all geographies will deliver sequential improvement, but just given some of the new partnerships, any way to sort of think about the magnitude of GMV improvement in the Q2 ? Then just wanted to reconfirm that on the full year guide, you're still expecting about $500 million on the year from all of the new deals together. Thanks so much.
Hi, Lauren. Good to speak to you. It's Elliot here. Look, I think you saw in the sort of the shape of the year slide, you know, absolutely, see the year continuing to pan out as we predicted back when we provided full year guidance. Obviously the key goal here is for us to deliver the $4.9 billion of GMV. That's the expectation for this year. And, you know, with Q1 slightly ahead of where we thought we would land because of the, you know, very focused execution on delivering what the customer needs in this current environment. You know, we remain very confident that the $4.9 billion is the right place to be.
Yes, you know, in terms of incremental value from clients, we absolutely are seeing, you know, that sort of $500 million number as the GMV that will come through from the new clients that we will launch on FPS and obviously Reebok, which has now gone live. Obviously a key part of the growth to $4.9 billion is with the new clients. Underlying, you know, we're obviously gonna be achieving high single- digit, perhaps 10% sort of underlying like for like growth across the business to achieve the numbers for the full year and remain very confident that that is the profile. In terms of Q2, you know, I don't wanna be drawn too much on exactly where we'll land.
You know, obviously back to growth in Q1, we will see that expand as we trade into Q2. I think the GMV number will still be a single-digit year-on-year growth. I don't want people to get too excited at just the stage. You know, obviously we will focus on as much as we can with the new clients that have gone live. I think single-digit year-on-year growth is probably the right thing to be focusing on for Q2.
Great. Thank you.
Our next question comes from Geoffroy de Mendez from Bank of America Merrill Lynch.
Hi. Good evening, everyone. Thank you for taking my question. I just wanted to come back on the guidance for this year, on an underlying basis. I think, Elliot, you just mentioned that the guidance for this year was between 8% and 10%. I think initially when you guided for these numbers, you had in mind that China would only come back to growth in the second half of the year, and you didn't really have a clear view on where the U.S. would be in 2023. Today you're now saying that China is already back to positive in Q2 to date. If I understood correctly, you're also saying that the U.S. should be up in the second half of the year.
Does that mean that you're thinking that the underlying growth could be faster than the initial guidance, or is it not? If not, what's the offsetting factor here?
Hi, Geoffroy. Great speaking with you. Look, I think again, I'll say, you know, we obviously achieved in Q1 exactly what we sort of set out to achieve, get the business back on track, focus very much on cost, delivering an improvement on our cash position year-on-year, and, you know, maintain the healthy margins that we've been delivering as well as, you know, this, you know, I suppose slightly better than expected performance in terms of GMV growth. You know, we've got a really good plan for the rest of the year. We've got a fantastic position on inventory from third-party clients. You'll have noticed from the report that, you know, inventory levels are up significantly year-on-year.
The comp headwinds will start to reduce, which is also, you know, very positive in terms of reported numbers as we start to move through Q2 and beyond. I think there's plenty to navigate, so we don't want to get ahead of ourselves in terms of where numbers may or may not be versus that original plan. I think the plan of underlying 8%-10% is still the right plan. In terms of by geography, we are seeing China back to growth, absolutely Q2. That will pick up across the rest of the year. We obviously are still expecting a moderate ramp back up. The numbers for this year for China will be lower than 2021.
You know, we aren't seeing a full recovery back to 2021 levels in our expectations for China. We are obviously seeing growth from the rest of the year now as we move forward. On the U.S., obviously, we are seeing a better position from where we were in Q4, and I think that will improve as we trade through Q2. Whether that will get to positive territory in the U.S. is yet to be seen. You know, I think second half growth for the U.S. is probably what you should have in your numbers. You know, that obviously will allow us to deliver this 8%-10% underlying. I think broadly that's the focus for us.
you know, we'll trade all markets as best we can, but, you know, we don't want to get too ahead of ourselves in terms of numbers, right at this stage.
Thank you very much.
Our next question comes from Ike Boruchow from Wells Fargo.
Hey, thanks. Elliot, maybe for you, when we look at the inventory and the balance sheet in the 1P business, can you talk about the quality of inventory you're sitting on now? Maybe what your expectations are on the inventory line as we get through the year. Then to that point, the 1P penetration and 1P gross margin, I assume that directionally those should be improving as we move through the year, but can you give more context behind that? Maybe some more specific numbers about what we should be expecting there.
Hi, Ike. Yeah, great questions. Look, like we've done a superb job actually in Q1, sort of churning through excess inventory balances that we've been carrying. You know, between the end of the year and now, on an underlying basis, actually, the inventory levels have come down. It's been sort of offset somewhat by Reebok inventory that's now come onto the balance sheet. About $20 million-$25 million of Reebok inventory was added in the quarter. Underlying, we've seen a reduction in our inventory levels. That is clearing through old, dated stock. We've been able to use the sort of current environment of promotions across the industry to manage that stock through and very much focus on moving through the inventory balance.
That has caused this shift up in terms of share. As I said earlier on, the GMV is up to 22%. You know, the margins on the first party business therefore continue to be suppressed, you know, below 30%. You know, obviously we'd much rather have our gross margins on 1P in the 30s. Which is, you know, back to sort of better historical numbers. Because of the fact that we were clearing older dated stock, we've been able to utilize some of the provisions that we have against the stock position to be able to offset some of the margin pressure, which is why we've seen, you know, good 1P margins year-over-year.
Obviously, as the team has been more aggressive on some of the older stock, it's released those provisions. Also we're seeing in Q2 to date, the ability to continue to sort of move through inventory at slightly better margins than we were expecting. Everything's holding up quite nicely, but plenty of work to get through. My target for the end of the year is to have overall inventory back below $300 million. We've got something like $50 million-$60 million of inventory at a net level. That includes, you know, net of any additions for Reebok through this year, so much higher than that number in terms of underlying inventory to clear. We're taking that focus through the next few quarters to get that number below $300 million by the end of the year.
That will result in continued gross margins below 30% for the rest of the year, and it will mean that 1P as a mix of GMV will probably stay above 20% for the next few quarters. Our intention as we exit this year is to have inventory levels back under control as we go into 2024, and then the GMV mix will come back below 20% as we see 3P grow again and 1P will sort of moderate. Hopefully that paints a good picture of where we are. Very pleased to be working through it. I think the other key aspect of this is, as we bring that inventory down from today's balance of $346 million to below $300 million, obviously that turns back to cash.
This is where we're seeing the opportunity to really improve our working capital position across the year by turning inventory balances back into cash, which obviously helps us get back to the $700 million-plus number by the end of the year.
Great. Thank you.
Our next question comes from Nick Jones from JMP Securities.
Great. Thanks for taking the questions. You know, in the press release, there was comments about personalized communications, improving conversion rates. How should we kind of think about these efforts to generate more personalized communications, whether maybe it's through some of the generative AI stuff you're working on versus kind of the pullback in demand generation that you've made, and can these efforts kind of offset the pullback? Thanks.
Hi, Nick. We have been laser-focused for years now in terms of deploying artificial intelligence and machine learning algorithms to personalization. This is one of the vectors of growth and the opportunities we see in the marketplace. We have an absolutely unrivaled range, many more brands and products from all around the world. This is really a key USP for FARFETCH , but personalizing that offer, that vast offer to each single customer is a major opportunity for us. We're very, very happy with the results of that effort.
Our in-house algorithms have beaten every single algorithm we've tested in the industry on A/B testing, and therefore we now have full in-house recommendations engine, rankings engine, and obviously these things get better and better as we go along. The conversion rate of personalized communications is almost double. It's 90% higher than other communications. You can see, you know, the benefit that comes from it. To that extent, we're very excited about the recent quantum leaps in terms of large language models and AI that we've seen since the launch of ChatGPT. We're very excited about that. We think that there are, you know, really powerful applications in the luxury industry.
We think we're better positioned than anyone else to capture those opportunities, because of course, it's about these models and in that we have a long-term partnership with Microsoft. We've been able to agree with them and in the spirit of that partnership and deepening of that partnership, to have access to the latest versions of ChatGPT. Of course, it's more even more important the how rich your dataset is, and your knowledge base in terms of applying these models with a fantastic user experience for the luxury customer, and for this industry. In those two elements, I think we win in spades.
We have a very rich dataset with, you know, with transactions, global transactions, visibility of both online and offline transactions, across 3,500 brands in 190 countries, over 1 billion visits per year, 4 million active customers. This is the scale in terms of dataset and the richness of that dataset, which is quite unrivaled in this industry. When what we also apply our knowledge of the luxury industry, I think we're in a very good position to have the best applications of ChatGPT for this industry. We're actively now working on 3 proofs of concept and we believe that could drive the personalization effort even further, which has been very successful in the past.
I think with this quantum leap in these advancements in AI could really accelerate that even further. Not just that, I think there's opportunity also on the increasing of the efficiency in terms of our operations. Think product descriptions, think customer service and augmenting the quality and the speed of customer service, the impact that has on retention and customer satisfaction. In terms of image generation, we have acquired Allure, which is already proving to boost our efficiency in terms of our digital generation of images without using real models, but with the quality that a human eye cannot really differentiate between what Allure is producing in terms of quality. That's leveraging advanced technologies and AI.
I think with these new advancements that we're seeing in this space, we will be able to also apply those to what has already been very successful. Yeah, we're very excited about personalization and continuing to elevate the luxury customer experience.
Thank you.
Our next question comes from Blake Anderson from Jefferies. Blake, feel free to unmute.
Hi, guys. Thanks for taking our question. I wanted to ask on the customer growth in the U.S., you said that was up high single- digit. Was wondering the mix of that in terms of maybe a higher end customer versus more of an aspirational one, in terms of income level. In a more normalized environment, what do you feel like that customer growth could be if you weren't discounting lower than peers? Thank you.
Hi, Blake. Stephanie here. Yeah, we've talked about the U.S. specifically, and yes, well, you know, it is an uncertain economic environment, and we've seen those reports certainly in, you know, other calls. We are pleased to see that we've seen, you know, order growth, active customer growth, and we've seen an acceleration quarter-on-quarter. I think, you know, a large part of that is coming from our customer growth. Where that is not translating into sales is more to do with AOV. You know, it really is around our strategy to continue to grow customers and retain the large customer base we have.
I talked about it earlier, the, you know, the long-term efforts we've had in brand building in the U.S., we've invested quite a lot. There are efforts around efficiency to really acquire the right kinds of customers. I think in terms of the difference between aspirational, and private client, I think we need to take a step back and actually think about how we are positioned, as a business, as a marketplace to really cater to both of those. I think this is very unique to FARFETCH and also positions us extremely well to navigate, these very questions that you have around markets and what kind of customer. FARFETCH has the broadest range of supply in the industry, which means that we can cater to a very broad range of customers.
you know, we can cater to the aspirational customer who wants to come in, you know, at a bronze level, is what we call them in our Access programme. Through our efforts over time, we start to build share of wallet and move them up. We are also cater to a very high-end customer, the private client customer. We've actually seen acceleration of that private client customer moving up tiers from gold to platinum and into private clients. I think what FARFETCH does in a way is very actively reflect the way the industry operates.
If you look at the way some of the largest brands in the world run their businesses, they talk about the high end, they talk about the private client, but their sales come from a very broad base of product. They cater to the aspirational customer with small accessories, you know, shoes, smaller bags, and then of course, they cater to the very high end. That's where we are very, very well positioned at this time to navigate both geographically but within markets, so we can cater to both different price points and different trends and customer preferences.
We have time for one more question. Our final question will come from Marvin Fong from BTIG.
Great. Good evening. Thank you for taking my questions. I guess I'd like to just kind of focus on Europe. We haven't talked much about it, but it seems to be, you know, I think you said it was up low double- digit. I was just curious, is that more of a function of easy compares or, you know, or is the geography performing better than you expected? Maybe just a quick housekeeping question. Elliot, could you speak to the gross adds in the quarter? Was it $400,000 or better in the quarter as it has been in past quarters, or did we see some pullback there in line with your lower demand generation expense? Thank you.
Yeah. I think, you know, over the last 15 years, we really invested a lot in terms of having a truly global footprint and capabilities. It's one of our company values is think global. We believe this is a global industry. We believe that brands have the absolute imperative needs to appeal to the key luxury markets around the world, and this is a global luxury customer base. So over these 15 years, we've invested in a very robust, very robust operations and logistics platform. So we're able to collect products from 50 different countries and deliver to over 190.
That logistics capability, combined with the technology we've developed, we're in 15 languages, providing customer service, providing, you know, payments in different jurisdictions, different countries. It's a truly localized experience, and that's what's driving the growth. The growth in Europe is coming predominantly from Southern Europe, so we're seeing very good results in Italy, in France, in Spain. This is because we have these languages. We've had these languages for a few years. This is an investment we've made in our payment systems, logistics, and also marketing tech, the ability to really operate at global scale and move the demand generation dollars to where they are where they are more efficient.
In fact, on a three-year stack, we've grown these markets over 100%, including the Middle East. Yeah. You know, very happy that our investment in building a global platform is really materializing into strong growth in all these geographies. We think this is a competitive advantage and a strong moat. It's an investment we've already made, so now we're ready to leverage these strong investments. This is something our brands tell us that is one added reason why they very much want to be on our platform. You saw the growth in our top 20 brands in terms of supply made available to the FARFETCH platform is staggering at 60% year-on-year.
This is because we bring them an incremental, very high-value luxury customer in all these geographies.
Marvin, I'll just finish up on the gross adds. I think we've said before, but it's around 500,000 in the quarter in terms of new customers acquired.
Okay, great. I must have missed that. Thank you, Elliot and José. Appreciate it.
Great. Thank you all for joining.
Thank you, everyone.
With that, we'll conclude our call today. Thank you all for joining us. We look forward to updating you on our progress next quarter.