The individual shopping experience is often the most important thing when shopping. This applies all the more in the luxury segment. Here emotions and empathy play a particularly important role in the decision-making process. Even if these emotions may be most pronounced locally, digitalisation does not stop at this industry. Younger people in particular are changing their "luxury" consumption behaviour, because they want to buy more of the finer things online. According to market researcher Bain, online sales are expected to account for around 30% of total industry turnover in 2025, estimated at EUR 330 bn in total. In 2017 the share of online sales was only around 9%.
Given these prospects, it comes as no surprise that manufacturers of original luxury goods such as jewellery, branded clothing and accessories are increasingly turning to the internet. José Neves, who founded the Farfetch company in 2008, was quick to recognise this development. The Portuguese man started with the vision of becoming the global platform for luxury fashion, thus connecting fine tailors and consumers. With success, more than 1,200 boutiques in over 190 countries now sell their goods on his virtual marketplace to around 2.5 million active users.
The trend is likely to accelerate in the future, as Farfetch recently caused a bang in the industry with a "double deal". The London-based company concluded a global partnership with Alibaba and Richemont last week to accelerate the digitalization of the luxury goods industry. While Alibaba and Richemont already have a joint venture, Farfetch is now joining them. By using the luxury shopping channels of the Chinese, Farfetch will expand its reach to Alibaba's 757 million customers. Joint ventures will also be created and a lot of money invested. "The USD 1.15 billion investment in Farfetch by Alibaba, Richemont and Artemis is a strong validation of our position as a global luxury goods platform," said Farfetch founder and CEO Neves.
In China, demand for expensive products is particularly high. By 2025, the Middle Kingdom is expected to account for half of global sales of luxury goods. According to Alibaba CEO Daniel Zhang, the market consists of hundreds of millions of young consumers who are also digital natives. "By partnering with Farfetch and expanding our existing relationship with Richemont, we will accelerate the digitalization of global luxury retail and transform the luxury shopping experience for consumers," Zhang said. Bain predicts that the Millennials and its successor generation, Gen Z, will contribute 150% of the expected growth between 2019 and 2035.
Investors will find out about the further growth of Farfetch on 12 November. On that date the company will present its interim report for the third quarter. Most recently, the curves for sales and profits have been pointing sharply upwards. Between April and June, revenues increased by 70.3% to USD 308 million, while gross profit rose disproportionately by almost 87%. Consequently, the gross profit margin rose to 43.7% from 40.8% in the previous year. This also had a positive impact on earnings before interest, taxes, depreciation and amortization (EBITDA). The return on EBITDA basis improved from -21% to -8%. For the third quarter, Farfetch expects a further increase in gross merchandise volume on digital platforms of 40% to 45% and an adjusted EBITDA of minus USD 20-25 million.
Farfetch's business strategy is finding favour on the stock market. Over the past 12 months, the share price has risen by an impressive 385%. In the last four weeks alone, the share price has risen by almost two thirds. The analysts were unable to follow the rapid rise in the share price, so the average 12-month target of 14 research reports is USD 36.50. This would correspond to a decline of 16.7%.
A recovery phase after the recent price explosion would be a realistic scenario. For such a case, Leonteq has an exceptionally well-equipped Softacallable Barrier Reverse Convertible in its portfolio. The product, which is denominated in USD, has a barrier gap of 35 percent, which provides ample room for possible resetting. In addition, the product has an above-average coupon of 14.00 percent p.a. This is guaranteed to be paid out quarterly. The maximum term is one and a half years, but can be shortened by quarterly observations.
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