Farfetch stock plummets 40% after earnings present a much different company from IPO one year ago

Farfetch Ltd. stock took a beating in Friday trading after the online luxury retailer’s earnings report presented investors with a far different company from the one that went public a year ago.

Farfetch FTCH, -44.49%  shares were down 41.3% in Friday trading, en route to the biggest one-day percentage decline since the company began trading in September 2018. The stock has tumbled 39% over the year to date while the Amplify Online Retail ETF IBUY, -0.83%  has gained 25.2% and the S&P 500 index SPX, -0.66%  has rallied 16.3%.

Farfetch reported wider-than-expected second-quarter losses and announced the $675 million acquisition of New Guards Group, a platform that has launched a number of luxury brands, including Off White and Palm Angels. Off White is already one of the top 10 most popular brands on Farfetch, according to the announcement.

The acquisition allows the company to add a “brand platform” to its existing platforms: “technology, data and logistics,” said José Manuel Ferreira Neves, Farfetch’s chief executive, on the earnings call, according to FactSet.

Neves said Farfetch plans to relaunch the Off White website on its site in the fourth quarter, including in China.

This is the latest in a string of acquisitions for Farfetch over the past year including Stadium Goods in December 2012 and Toplife in February.

Neves also announced that its Chief Operating Officer Andrew Robb would be stepping down in 2020 after nine years with the company.

“Taking a step back, it’s clear that the story has changed meaningfully since the IPO, and Farfetch shares are headed to the ‘penalty box’ (we doubt investors will be clamoring to buy the expected weakness in the shares), but there’s still a structural story here,” wrote analysts led by Ike Boruchow.

“Ever since we launched coverage of Farfetch 10 months ago, one of the most common pieces of investor pushback we’ve received is that it’s difficult to get comfortable with the story given that there are so many moving pieces in the business.”

Analysts also called the latest acquisition “curious.”

“While there are some interesting aspects about this acquisition (an asset-light business that’s actually quite profitable, as it made $95 million of pretax income for the last 12 months on revenue of $345 million), it’s also unclear how exactly this fits into Farfetch’s business, as 95% of revenues come via wholesale/licensing, which adds even more revenue streams to an already dense business/financial model,” the note said.

Wells Fargo thinks this situation has only gotten worse each quarter, but analysts are still bullish based on the “huge opportunity” for online luxury goods given its under-penetration online, appeal among young shoppers and room for growth in China.

Wells Fargo maintained its outperform rating, though it slashed its price target to $17 from $32.

Cowen analysts also think that Farfetch is in the right place at the right time, with luxury sales moving online.

“Our outperform rating is based on Farfetch’s position as the leading platform for the burgeoning global luxury fashion digital market, connecting luxury brands, boutique retailers and consumers,” wrote analysts led by John Blackledge.

Still Cowen, cut its price target to $16 from $33.

KeyBanc Capital Markets is also optimistic about the future after Farfetch said it would reduce the amount of discounting it does, in line with luxury labels’ desire to maintain the health of their brands.

“While Farfetch’s decision to pull back on promos will be a headwind to near-term growth, we think it positions the company well in the ongoing shakeout within luxury retail,” analysts led by Ed Yruma wrote.

KeyBanc rates Farfetch stock overweight with a $27 price target.

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