Online luxury fashion retail platform Farfetch Ltd. (FTCH, Financial) has a sound growth strategy that could catalyze its stock price.
The company is focusing on investments in China, which could strengthen its position in the luxury retail market. It is also investing heavily in new technology, while partnerships with major brands could enhance its competitive position.
While the near-term outlook for U.S. and Chinese retail sales is uncertain, the company’s loyalty program may lead to a higher level of differentiation and a wider economic moat.
Having gained 1% in the last six months versus a drop of 1% for the S&P 500, the stock could offer investment appeal.
Chinese growth opportunity
Farfetch’s strengthening position in China could boost its financial performance. It recently acquired Toplife, JD.com Inc.'s (JD, Financial) luxury platform, providing its range of brands, boutiques and department store partners with direct-to-consumer access to 300 million shoppers.
This significantly improves Farfetch’s competitive position in China. The country accounts for the vast majority of growth in the global luxury industry, so this could allow luxury brands to succeed in the lucrative Asian market and appeal to millennial consumers.
As part of its increased focus on China, the company plans to ramp up investments. It will invest $60 million in 2019, which is expected to catalyze its growth in 2020 and beyond. As part of this initiative, Farfetch will improve its existing fulfilment capabilities, extend the size of its China team as well as raise brand awareness.
Investments in partnerships and technology
Farfetch continues to expand its range of partnerships and is aiming to grow its seller base to more than 1,000 brands and boutiques by the end of the year. It is also seeking to increase its number of partnerships with department stores.
It is expanding its offerings to include watches and fine jewelry and increased its exposure to the street wear segment through the acquisition of Stadium Goods. This gives the company greater footing in the adjacent premium house wear market, which is very important to its current business.
Investments in technology are expected to enhance Farfetch’s white label offering of services to luxury brands and retailers. It now operates the websites of 17 luxury companies. An increased investment in technology, alongside a reorganization of its business-to-business services, could simplify its services. The sharing of technology between its white label services and its marketplace could help the business to become increasingly efficient over the long run.
Risks
The retail outlook in the U.S. and China continues to be highly uncertain. In China, for example, retail sales growth is currently at its lowest level in over 15 years. The trend is expected to continue downward throughout 2019. Similarly, in the U.S., retail sales unexpectedly declined 0.2% in February after modest growth in January. Further weakness in the wider sector could cause Farfetch’s financial outlook to be downgraded, while investor sentiment toward the stock may come under pressure.
In response, the company is seeking to improve its competitive advantage. One way it is doing this is through an improved loyalty program. Its Access loyalty scheme has recorded increased customer engagement and spending per customer. The program, which is scheduled to be rolled out globally following encouraging tests in a number of locations, will offer a variety of gifts, early access to new releases, free global shipping and expanded returns to loyal customers. This is expected to reduce Farfetch's long-term demand generation costs and help to differentiate it from industry peers.
Outlook
Although Farfetch is expected to remain a loss-making company this year, its loss per share is expected to narrow from 63 cents to 47 cents between 2019 and fiscal 2020. Investments in growth opportunities mean the company's financial performance will be negatively impacted in the near term, but could lead to improving profitability in the long run.
Investments in its operations in China as well as future partnerships could strengthen Farfetch's competitive position. Its loyalty program and the investment it is making in technology may increase its differentiation. This could help it to overcome short-term weakness in the U.S. and Chinese retail markets.
Having only marginally outperformed the S&P 500 in the last six months, the stock could offer long-term investment potential as it implements what appears to be a sound strategy.
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