Q4 2020 Farfetch Ltd Earnings Call
Yes.
Yes.
[music].
Good afternoon. My name is James and I will be your conference operator today.
At this time I would like to welcome everyone to the Farfetch fourth quarter in full year 2020 results conference call.
All lines have been placed on mute to prevent any background noise in after the Speakers' remarks, there will be a question and answer session.
We'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question press the pound key.
Thank you.
I'd now like to turn the call over to Alice Ryder VP of Investor Relations.
MS. Ryder you may begin your conference.
Hello, and welcome to Farfetch in fourth quarter and full year 2020 conference call. Joining me today to discuss our results are in our founder Chairman and Chief Executive Officer Elliott.
Elliot Jordan, our Chief Financial Officer, and also Stephanie Phair, our chief customer 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 in forward looking statements made today speak only to our expectations as of today.
We undertake no obligation to publicly update or revise them for.
For a discussion on some of the important risk factors that could cause actual results to differ please see the risk factors sections of our form 20-F filed with the SEC on March 11, 2020, and in exhibit 99, two to our form 6K.
Filed with the SEC on April 27th 2020.
In addition, we will refer to certain financial measures not reported in accordance with <unk> on this call.
You can find reconciliations of these non iron for his financial measures tubing, Iowa for a financial measures in our earnings press release in my presentation, both of which are available on our website at Farfetch investors Dot com.
And now I'd like to turn the call over to Joe <unk>.
Thank you Alice and thank you all for joining us today.
2020 wells a year in which traffic leads in salaries.
Successfully advanced our chapter two new initiatives.
Executing on our mission to enable the luxury industry.
And we did so through two lenses display of our robust capabilities with.
Resilient operations and.
Both the perseverance from our more than five calls on the car patches.
This was particularly significant during the height of the lockdown when.
When many boutiques and designers could not operate their physical shops in relies on farfetch as a significant source of revenue in <unk>.
Also as customer demand exponentially moved online throughout 2020.
As we look towards 2021 on beyond.
Laser focused on extending our position to be in operating system in digital enabler for the entire global luxury industry.
Both online and offline.
On a nearly 300 billion dollar opportunity.
In doing so we will build on our progress in 2020, where our teams execute to the impact of Lee to growth full year group TMT, 49% to over $3 billion per.
Further cementing our position as the largest global online destination for luxury fashion.
On the back of a strong fourth quarter as we ended the year with our first.
<unk> attracted our largest cohort of new customers.
And achieved a crucial profitability milestone with our first quarter of positive adjusted EBITDA.
During the quarter, we also announced a transformational partnership with industry Giants Alibaba.
In the small and in that needs to go after our shared vision for luxury in new retail.
By leveraging <unk> platform capabilities in combination with our collective expertise in luxury in retail technology.
As we enter 2021.
In determining than ever to execute on our mission to be the.
In global platform for luxury connecting creators.
<unk> on consumers.
Our focus in our strategic roadmap across price measure gain while.
While our shops are true strategy.
The first three are one strengthening our luxury partnerships.
To China.
Three the luxury new retail, our LNR platform, which I will talk to.
The remaining two are.
For the Farfetch brand.
And price.
Rival global customer experience, which fascinate real attacks.
Starting with our luxury partnerships.
What we are continuing to see is a paradigm shift.
With brands attitudes towards Digitization moving from nice to have two being the number one priority.
And looking across the landscape Farfetch is uniquely positioned to be day, a strategic partner.
Not only are we the only global luxury platform offering new compression.
Brands preferred mode of operating with multi brand channel, but we are continuing to offer a revolutionary innovation by advancing al in which is what Glenn need right now.
In fact, our top 10 E concession brand partners increased their participation on the marketplace as the grille desktop leaves things by more than 70% in Q4.
And our top 100 brand partners have remained lasting partners with 100% retention over the past three years.
Our enterprise clients have also expanding their businesses via our platform as we power more than 50% growth on average in 2020 in the brand Dot Com e-commerce channels of our more mature pass ex platform solutions or Sps climb.
In.
Those who have been on Sps quarterly funny.
Turning to China.
Over the next ideas mainland China is expected to become the largest luxury market and represent more than $100 billion on luxury spend.
Our localized operations in China position us well to attract available Chinese customers by enabling them to shop, a global supplier of luxury fashion from up to 3500 of the best brand via our App.
Website, and social Commerce channel such as Wechat in their native language for block in their preferred payment method.
For our private clients by a local stylists, who is attuned to their local price guidance.
As a result.
One of only a few western e-commerce companies, who are succeeding in China.
This is evidenced by the fact that mainland China is our second largest market for the marketplace and has continued to be a growth driver of our global business, having grown <unk> faster than the overall marketplace again in 2020.
Additionally, in another demonstration of our technological and operational excellence.
Delighted to have soft launched <unk> on the dedicated storefront in Tmall luxury pavilion.
On the fiscal February ahead of schedule.
Our soft launch significantly expands the selection of luxury products on Tmall.
The 2400 plus brand we have already made available more than 90%. These not previously handler platform from the channel.
As a result, PMO for consumers now able to shop, the browser selection of luxury fashion online.
At the time when they are unable to travel to their favorite luxury shopping destination and we believe we have sharpened will increasingly in repatriate the luxury purchases to the message channel.
Such as the Farfetch app or PLP.
We will continue to add more brands to the store shrunk up in.
Until the official launch on the first of March.
Each time, we will begin deploying significant marketing resources to promote our brand with T Mo 779 million consumers.
In 2021, we will lean in and invest behind building our audience in the TLLP channel.
As well as overall fast ACH brand awareness in China across all channels.
Including App, where most of our business is conducted as we believe this is the time to invest in brand awareness in the market widely recognized as the key driver of growth across the luxury industry.
Onto platform in the luxury new retail vision.
Price hedge is more than in the marketplace.
From day, one we set out to be a platform for the luxury industry on over the past 13 years, we have been expanding our platform capabilities to address the needs of our marketplace and branded site as well as those of the browser in luxury industry.
Which we envisioned would become increasingly digitized.
Our vision also encompasses offline luxury channels.
And since 2016, we have been building out our star of the future capabilities, which are now part of the overall Sps product suites.
We will leverage these technologies into fueling our al in a strategy to address the needs of luxury businesses because their parents, our Elisa enterprise clients.
This time last year, we launched <unk> dot com on Sps.
Since then our capabilities has been instrumental in enabling new iconic luxury department store to continue serving its global clientele throughout the pandemic.
We have also continued to expand our solution set for our enterprise clients.
When new exciting is we believe unique capability I would like to highlight is <unk> recent launch of E concessions as a service.
This solution enables department stores and E tailers to directly plugged into brand stock systems and effectively become time for places.
Our first implementation is now powering burglaries AECOM fashion on average dot com.
And the results over the initial couple of months indicate that the future is delivering in meaningful lift two burglaries performance on Harrods Dot com.
Our enterprise grade operating system proposition powered some of the largest and most prestigious luxury brand.
From Chanel to Harrah's and is in dollars by Alibaba P. Schmuhl anatomies to deliver digital innovation for the industry via the luxury new retail adhesion.
This squarely positions farfetch in the category of digital enablers.
And reinforces my belief that Farfetch is the platform that will enable the entire industry to try it.
Our unique position we have to not only go after the online luxury market.
So to address the digital strategies of our enterprise partners offline channels and the entire nearly 300 billion dollar global luxury industry.
Clearly we are at the start of this journey, but.
But we are tremendously excited about the luxury new retail is.
Relevance today for luxury in this.
Spectacular reaction, we are getting from the luxury industry for our vision.
We will continue therefore to invest in our technology in.
And also start investing in our B to B brand and tissue in the product sales efforts, we've increased organizational culture.
While we remain committed to achieving profitability for the full year of 2021, we have also earmarked a portion of our anticipated profitability to fund these growth initiatives.
Before passing to Stephanie I'd like to update you on the important work we are doing around E. S. G.
Our positively farfetch initiatives integrates a multitude of programs throughout the business to further our vision in a sustainable way.
In 2020, a year that highlighted more than ever in part ourselves using our global platform to be in enabler of positive change across the industry. We have made significant progress across each of our five positively farfetch pillars.
Since commissioning in April 2020, we have been kind of an offsetting all.
Deliveries in returns.
We also significantly increased our offering of sustainable products.
Our cautious added which now represents one in 10 products on the marketplace and more than 5% of 2020 group <unk>.
And importantly made clear our platform is a platform for everyone.
On the initiatives such as our black designer added which helped drive 66% GNP growth for these brands on the marketplace.
These are just a few examples of the positive changes we are driving I was in for.
You to visit the ESG path on our impact in relation side.
Apache in versus Dot com to access our need for graphic we've published with some key highlights from 2020 and learn more about our longer term aspiration, which we outlined in our 20 <unk> growth.
I will now let Stephanie walk you through our two other pillars brand and unrivaled global customer experience.
Stephanie.
Thank you Sidney Hello, everyone. It's great to speak with you on today and give you in breaks on top of you. If I captured your initiatives as we redouble our efforts to build a true new customer centric organization.
To touch on our brand pillar SA.
I just summarized we had an incredible 2020.
<unk> brand as we introduced a new brand identity and launched a full funnel brand marketing campaign.
The campaign was focused on counting panels and in an emotional connection to farfetch in communicating what makes farfetch unique who we are and what we deem it help tie in greater awareness and transformed our brand image with luxury consumers and brands alike and their sales so much more to do.
I could spend hours on everything we have done for the customer in 2020 in as they say in the image sensor thousand web satellite <unk> video, we've made available on our IR site at <unk> Dot com.
We have the ambition to be the most loved brand in luxury and the first and last destination in customer go to when they want to be inspired a sharp reduction.
As such in 2021, we intend to invest in initiatives to bolster our brand awareness and cement our unique positioning some of these initiatives been cleaned.
Our second brand campaign for <unk> in April in targeted cities in the U S. China, the middle East and in UK.
Only on Farfetch, a strategy to differentiate our brand by pain trial in unique Cheng with an ongoing focus in on boutique proposition on leveraging our MTGE acquisition and delivering excuse cash bank partnerships, while deploying all that capability from our global reach to our innovation features.
This follows our success is advance a boutique brand and mining homework in 2020, but also in fine tuned in eventual path, who made farfetch net platform of choice to unveil day 2020 holiday collection.
And already in 2021, we can execute on the launch of each molecule concept for how bad Bad Adi factory among other partnerships and hosted a nice team as in men's shows fidelity in the banner and all flights new season concept in 1990 days.
These are examples of partners, who in addition to seeing Farfetch as one of their sales channel.
To recognize the tide, he didn't actually audience and marketing capabilities, we offer to support their own FX to grow that brand.
We continue to invest in full funnel marketing and driving efficiency in existing channel, while adopting new ones, such as programmatic television Snapchat and kicked off.
By leveraging our unique day to capability, we aim to create in balance between paid efforts and cost effective owned channel I am thinking in an integrated way between paid cash app downloads display affiliates, social and CRM channel to drive acquisition and retention.
And to do this more sustainably and sales brand NAV we.
We will continue to focus on delivering on unrivaled global customer experience.
Strategic pillar.
Starting with our private clients on most valuable and most engaged customer segment, which serves as a proxy for the most demanding customer and who we reference to help us streamline our FX for cost per business.
Here, we will continue to lean in to new ways of shopping enabled by technology and accelerated by COVID-19.
<unk> events and virtual styling appointment.
We will continue to scale in a fashion concierge service for kids and.
The items on demand, whether on farfetch or not and provides a fantastic retention tool and unique differentiator in our overall proposition.
The team rent in any sales items for the value of about $100000 and on occasion much more you might remember on 1 million dollar sales EMEA in 2020.
And importantly, we continue to invest in our guidance team in expense 2009, global cities and who built on NAV by providing even more price night service to the customer wherever they are.
In 2020, we acquired on the 2 million new customers at in lower year on year cost of acquisition.
Our investment in marketing tech over the years and our wide datasets enabled us to invest efficiency in Mindy as search volumes in market demand shifted throughout the year.
While we continue to lean into customer acquisition, and particularly App downloads 2021 in a year for retaining these customers to our CRM FX increased personalization and our access loyalty program.
This is in the context in by updated survey by 66% of customers polled state that they will do more on most of their luxury shopping online for the opportunity in Canada.
In 2020, we brought our consumer tech products, even relative to the customer by orienting ourselves in to bring value along the customer journey and making the farfetch experience, even more inspirational relevant and compelling for the customer.
And looking for the future with new ways of shopping in.
In 2021, we will create new opportunities for growth through the expansion of our pre owned Alpha and launched <unk> as a way to continue offering newness to our customers and extend the full price selling window for our pipeline.
I am also very excited to announce that we will be laying the foundation for launching the beauty category on the market pace in 2022.
<unk> has been one of the fastest growing personal luxury goods categories and represents approximately 25% as in nearly $300 billion in luxury industry in.
Turning to beauty and then only on Farfetch way the framework I mentioned earlier.
It means it's showing the customer in in my six crossover between fashion and beauty to appeal to our existing audience for fashion that day.
Secondly, leveraging our innovation capabilities to offer features such as virtual try on for the makeup category and finally from a business model point of view and now in beauty brand to launch their products on Farfetch via our E concession model and benefit from the higher margin that entails and.
And now I'll hand, the call over to Elliot to discuss our financial results and outlook.
Thank you Stephanie and Hello, everyone.
I'm pleased to be sharing with you the latest financial results of the Farfetch group in particular, the important milestone of achieving profitability at the adjusted EBITDA level for the first time in Q4.
Each was also thirsty about $1 billion <unk> quarter.
We have closed the year in a strong financial position with cash reserves of $1 6 billion.
The fourth quarter of 2020 was ahead of the expectations, we outlined to you on our last call with <unk> growing 43% year on year to $1 1 billion.
Digital platform order contribution margin, increasing 310 basis points year on year to 35, 1%.
Total G&A and technology expenses operating costs on lower year on year as a percentage of adjusted revenue by 540 basis points.
We achieved positive adjusted EBITDA of $10 million against negative $18 million one year ago.
And we delivered $201 million of positive cash flow from operations across the quarter.
This completes a remarkable full year 2020 performance on <unk>.
<unk> GMB growth of 49% a hit on our initial 40% to 45% growth expectation.
Digital platform <unk> growth of 42% in acceleration from 40% growth in 2019.
An increase in digital platform order contribution margin from 350 basis points year on year.
Expansion of brand platform gross margin by 325 basis points year on year.
On a reduction in operating costs as a percentage of adjusted revenue by 570 basis points year on year.
Adjusted EBITDA of minus $47 million.
This is minus $121 million in 2019.
And with $116 million of positive cash flow from operations over the year.
Looking at Q4 by business segment in starting with the digital platform, which grew GMB by 49% year on year to $939 million.
Within the food Party GMB grew 40% year on year led by growth in profit platform solution and a move in doubling of brand in <unk> sales on the marketplace.
For third party take rate was 28, 8% a slight decrease year on year due to the increased mix of <unk> and lower proportion of higher margin immediate solutions revenue.
Third party gross margins were 66% versus 68% in the prior year quarter, reflecting the impact of higher fulfillment cost per order on a free shipping in free return proposition.
<unk> from our first party business grew 96% year on year and represents a 16% share of GMB.
Posted by our direct to consumer foods coffee original proposition and focusing of GMB.
First party gross margin stepped up from 24% for 36% year on year due to a higher mix on full price sales and growth of first party original offering.
Digital platform order contribution margin expanded 310 basis points year on year for 35% driven by efficiencies in demand generation spend which reduced from 23% of digital platform services revenue in Q4, 2019% to 19% in Q4 2000.
<unk>.
These efficiencies were achieved while we also acquired over 500000, new customers in the quarter on <unk> CFO.
<unk> maintained strong customer retention.
Additionally, growing non pay channels and leveraging data tomorrow at spend per visit on.
On paid channel.
The work is paying off with lower customer acquisition cost year on year.
Despite increasing costs through paid media across the luxury fashion space.
Adoption of the Farfetch EM debt now 55% of marketplace GMB.
Payback on the Q2 2020 cohort within six months and the Q3 in 2020 cohort with higher three months lifetime value than the previous 10 quarters.
We continue to focus on full price sales across the marketplace with fewer primary days in Q4 2020 as compared to 2019.
This helped drive based on economic for sellers on the platform as a result, we drive higher average selling prices, but fewer items per basket, which has resulted in a slightly lower market price average order value year on year at $626.
The brand platform outperformed expectations with DMV in revenue of $104 million.
And gross profit of $52 million.
At a 50% gross margin.
This is due to relatively strong wholesale demand for spring from a 'twenty one option, particularly within the Palm Angels collection.
In store revenue grew 40% year on year due to the opening of direct to consumer offline stores in key.
<unk> locations, however, as expected losses.
For lifestyles were down approximately 20% year on year due to pandemic related store closures.
Turning now to our operating costs, which were stable quarter on quarter at $172 million.
This demonstrates the leverage we are able to achieve from our platform infrastructure, which has supported <unk>.
In 2% increase in <unk> between Q3 in Q4.
As a result, we delivered a 540 basis point reduction year on year in Spain, as a percentage of adjusted revenue from 42% in Q4, 2019% to 37% in Q4 2020.
This culminated in our first profitable quarter with Q4, adjusted EBITDA of $10 million, representing a two 2% adjusted EBITDA margin.
Operating loss was $223 million.
Primarily due to share based payments of $119 million and depreciation and amortization of $60 million.
One final point to note regarding Q4.
So we have seen a $38, 65% appreciation of the profit share price during the quarter.
It's important for noted this increase in profit is valuation as it translates to a non cash $2 1 billion revaluation on items held at fair value.
This additional $5 80, I think loss per share is the result of revaluing the liability in place over our convertible notes and joint venture in the Middle East.
Each can be seafood in fact.
Sure.
Before we outline guidance for the next 12 months I wanted to remind everyone about our previously stated financial growth for the business <unk>.
Including delivering a 30% adjusted EBITDA margin over the longer term.
We expect to achieve this by capturing significant market share delivering further expansion to our unit economics and continuing to leverage the platform infrastructure.
Our 2020 results demonstrate execution in line with these goals as a result, since our IPO year of 2018, <unk> has grown from $1 4 billion.
To $3 2 billion, primarily due to a doubling in <unk> on the digital platform.
Adjusted revenue was two nine times higher in adjusted EBITDA margin has improved from minus 19% to minus 3%.
And we expect to deliver positive adjusted EBITDA for the full year of 2021.
In 2021, gaining market share remains our priority as does in this thing into the platform to capture our longer term opportunity.
As such China will be a key focus for demand generation in brand investment as we look to increase brand awareness boot large T LP audience and in Schuh of Farfetch is the destination for luxury fashion in this market.
Globally, we will also invest in Buda, no brand and continue to invest in our platform technology to deliver functionality to offer new categories, such as beauty and additional enterprise level platform functionality, particularly supporting the luxury new retail vision.
We are also anticipating higher units shipping costs.
In some additional expense for European Digital services, Texas as well as from short term impact to first party gross margin as a direct result of the Uk's withdrawal from the European Union.
All of which will put pressure on our order contribution margin.
We actually see in opportunities to leverage our planned fulfillment by Farfetch infrastructure in Europe to support new UK based upon in stores.
<unk> and brand, including Browns over the longer term.
More on this in the coming quarters, as we expand our European warehouse capacity and begin diversity on the first part of the inventory to Continental Europe.
Taking all of this into consideration for the full year of 2021, we are targeting digital platform <unk> growth of 30% to 35%.
Which equates to two year growth of 85% to 90%.
We expect this growth to be front end weighted.
Adjusted revenue is expected to grow a little faster than digital platform GMB as we anticipate foster growth on.
Our first party original sales.
We expect digital platform order contribution margin of 35% to 37%.
Our operating costs are expected to leverage further to be between 38% to 40% of adjusted revenue, which will result in expected adjusted EBITDA margin of 1% to 2%.
Looking at Q1, 'twenty 'twenty, one we expect digital platform <unk> growth of 50 to 55 for the same.
The slight year on year step up in digital platform order contribution margin to be between 32% to 34%.
Brand platform revenue to be between $95 million to $105 million at circa 48% gross margin and adjusted EBITDA to be marginally ahead of Q1 2020 at minus 19 to minus $21 million.
Turning back over to you now Jersey.
Thank you Elliot.
In summary, 2020 was a landmark year, where despite the in imaginable challenges in counter <unk>.
It is our own initial expectations in terms of driving growth and scaling the business.
In meaningfully accelerated with our strategic positioning as the principal platform for the luxury fashion industry.
None of this would have been achieved without the dedicated efforts of all our fast patches.
And I want to thank them for leaving our values day in.
And they out.
Being brilliant revolutionary on human thinking globally amazing customers in working through the zone for the sake of the creators curators and consumers of this industry, we love to serve.
Looking forward 2021 will be a year of leveraging the incredible achievements of chapter one in Italy is a chapter tool to enter a new phase of growth for Farfetch.
Which will drive significant opportunities in many years to come.
We are laser focused on being the platform for this global industry, helping.
Helping in brands and retailers in a spirit of win win partnership to fully digitize their businesses online and offline.
Whilst we remained focused on profitability for our full year 2020, when we will redeploy some of the gains from our continued growth.
These price main pillars.
Luxury partnerships.
China.
Fluctuate new retail platform.
Brand.
On the customer experience.
As we continue to go after our chapter two vision in the long term opportunities ahead.
To be the platform, enabling this nearly 300 billion dollar global luxury industry.
Thank you and we will now open the call for questions.
And we will now take questions if you'd like to ask a question. Please press Star then one on your telephone keypad. Our first question comes from the line of Oliver Chen with Cowen Go ahead. Please your line is open.
Hi, Thank you regarding the environment that you're seeing now or what are you seeing with the promotional environment in.
What do you think may happen as stores reopen in the vaccination pathway.
Takes hold globally.
Elliot would also just love your take on on your guidance for the contribution margin for Q1, what's underlying that in terms of of what youre expecting in the marketplace. Thank you.
Hi, Oliver I'll take the first part of your question.
On.
What we're seeing in terms of promotions.
<unk> is actually quite encouraging.
Thanks in market last year.
Became.
Disciplined.
Brand increasing.
On the move still a zika in sessions.
<unk> seen carrying publicly in la.
We're in the other brands clearly, saying that the E concession model, which is a model that we pioneered in this industry is.
Is the model to go obviously E concession sales why brands control pricing and promotions they tend to be less promotional.
In our case the strategy is clear in independently of what's going on in the market.
<unk> says when you're in the hospital that we would focus on a full price strategy.
And we have had.
Drastically less promotional in much much less promotional days in 2020 than what we had in 2019.
That is working really well.
As you could see royalties in fact accelerating now in in Q1, even in.
The E concession business for example.
Growing at close to triple digits.
And and we continue to see a much bigger for banks in weeks coming true.
Which which is fantastic deals on its Bob.
In addition of hour.
Of our strategy.
You asked about.
Stars V opening obviously, we all hope that happens as soon as possible.
I think.
What we are witnessing in the paradigm shifts in this industry.
In the industry that remains.
Still today very underpenetrated in it was online sales were 12% of luxury sales in 2019.
That jumped to 23% in.
In 2020, but it's still a low number and Mckinsey Bain and other analysts predict this too.
Continuing to grow very fast up to 35% in the hemophilia is fine.
So we will continue to see this secular trend of consumers discovering the benefits of online shopping.
And therefore, we're very confident on that he's a sustained growth in the paradigm shifts for our consumers and also for brand who have seen.
The needs to elevate digital strategies for that number one priority and here, we're incredibly position as.
The only platform specializing in this factor in offering a suite of capabilities. Both on multi brand mono brand, which is their own brand dot com also on.
And offline solutions would start with the future for that seasonal I say, new retail is really what the industry needs and the reception has been spectacular for all these products that we're bringing to market, including the eco fashion that is in service that we launched with Harrisonburg free I think that can be revolutionary.
For the industry that can really accelerate.
<unk> is moving very quickly tweak in sessions with E tailers in deposit sales alike.
For the benefit of the whole packaging growth.
Okay.
Our net all of the high great speaking.
So just.
Just following up on your on the second part for on the queue.
Outlook I mean, we've rebounds debt of Q4 in a really strong position, particularly on the GMB for thing so.
We're expecting to actually step up for the growth year on year to achieve in acceleration between Q4 to Q1, 50% to 55% GMB growth.
Particularly strong.
Spring Summer 'twenty one.
The options that we're getting through from all marketplace participants.
Is there anything good strong growth and so on the order contribution is.
Underlying savings that are coming through as always we're getting a bit of food price mix.
On product, which will help drive the gross margins on the first party business in particular, obviously the first party original product Palm Angels in particular was very strong helping drive the direct to consumer gross margin.
These fees side of our direct to consumer offering is now actually as big as sales on the marketplace. So we're really managing to attract customers across a number of different channels. There. We're also seeing savings coming through from our use of data driven marketing to drive down the cost of acquisition in <unk>.
Moving low cost channels, the apps driving fantastic levels of engagement to keep costs down as well so sort of underlying things are in the right direction. We do have to manage those some short term pressure.
We are seeing shipping cost.
Go up obviously the growth of E. Commerce recently is putting a lot of pressure on supply demand for.
<unk> global shipping in that is flowing into higher charges for us. The team is doing an amazing job to mitigate as much of that as we possibly can we can move our carriers working with some innovative solutions around shipping routes in packaging in those sorts of things, but I do think there will be some pressure on new order contribution margin via processing for.
Because of this digital services tax free.
In introduced across European countries, we are sharing the cost of debt.
Marketplace participants taking on a fair amount of ourselves so that will put pressure on order contribution margin and then lastly, as I said earlier on the Uk's exit from the European Union has caused some operational challenges near term, but also some additional cost challenges as goods move between the U K in <unk>.
Europe, we've got a lot of product for Browns here in the U K. So that has to be sold out I think there'll be a little bit of impact on gross margin, but that will be short lived as we move into Q2 in beyond we're going to move product.
Not distance for our UK store was in northeast in for U K online consumers, we're going to move that to continental Europe in through our fulfillment by Farfetch solutions that means less cross border to in from the UK and we're actually looking to roll that out through some in the UK Department stores.
Boutiques to other brands that are also seeing the same challenges.
Tuning.
The changes there in terms of regulation through a bit of an opportunity for us as we move forward.
In our next question comes from the line of Eric Sheridan with UBS go ahead. Please your line is open.
Thank you so much for taking the questions maybe just two parter on the soft launch of the storefront on T Mall I know, it's early days, but any learnings or taking share skus in the market as you do that soft launch I think we'd be in the interest to investors. That's number one and number two you know as we look out over 'twenty, one I think that.
Soft launches maybe earlier than we thought so in terms of going forward quarters any sense of what investments you still see as critical towards your success in that initiative in China, and what sort of elements of contribution are baked into the full year guidance from that initiative. Thanks.
Hi, Eric.
Great question. Thank you.
I think.
In incredible milestone not just for Farfetch, but I think for for the entire industry.
Early next week, we are willing to move from soft launch to.
Our official launch.
That means that the vast majority practically all the 3500 brands.
On the <unk> platform is going to be available to T mobile 779 million customers.
95% of these brands did not have a presence on tmall that income.
<unk> for example.
And then in.
This is very very exciting.
These messages from Ceos XIAFLEX in center very excited.
What is our wealth is in an incredibly.
Incredible achievements with one single integration on the five hedge these brands are able to address the Chinese customer there were already on our average marketplace in China, where apps on wechat mini programs.
Now they open without any word from there the size.
Net investment they opened to the receivable channel with almost 800 new investment so.
Very very exciting.
It's a channel where as in any other channel we have to learn that Epsilon.
On how to.
Utilize the platform until demand generation on this platform, but extremely sophisticated as we move in.
<unk>.
So we have to apply our data capabilities, our matched in tech capabilities.
To this platform in the same way, we apply them on on a global or on.
Bryan Maher on any other our wechat.
That will take some time to fine tune in.
But we're very confident on that over the longer term this will be a very very meaningful.
<unk>.
And Meanwhile, the passage App, which is the vast majority of our sales in China.
<unk> continues to go from strength for same so really fast growth.
On what.
Our our new channel day in terms of investments debt as Elliot said he's going to.
D allocated to that channel both.
Both in terms of brand awareness for final and off of the pharma snacks a day within the.
For Alibaba platform and even external platform for that channel, we want to do a push.
Also for the awareness for fast actually in China overall in both I think this is a year where the.
The Chinese luxury customer is not yet traveling in each.
It's really.
Flocking to the for the online luxury channel so to say.
And so we think these fees in that leasable opportunity to capture.
Brand awareness in debt in that market.
I think it's early days in terms of banking.
Those elements in total.
In the guidance.
And.
Therefore, we are.
We're going to continue to learn with that channel and update you.
As we go along.
Okay.
Okay.
Our next question comes from the line of Douglas Anmuth with Jpmorgan go ahead. Please your line is open.
Hey, Thanks for the question, it's Corey on for Doug.
Two from US first just curious what youre seeing in markets that have started to reopen and maybe how that's shaping your thinking for growth in.
In 2021, and then you mentioned earlier on the call. The beauty category launch so just hoping to circle back to that a bit maybe if you could talk a bit about the opportunity that you see in the beauty.
Category longer term and in.
Any specifics around launch timing or brand partners that you may have lined up thank you.
Okay.
Hi, Doug I'll take the first part of the question and then Stephanie.
We'll talk about beauty is very very exciting new catch rate that we're going to launch in a deep way.
In 2022.
Look I think you know.
This new.
[noise] paradigm shifts that we've seen with consumers is really here to stay in.
This is not just a belief right we can go.
For the data bonds for both macro.
In macro.
So on the data points, we have a class ACH.
I think the strongest state the bonds.
The cohort data. So we add is as you know.
500000 customers in Q2 400000 in Q3 over 500000, new customers in Q4, which was the lack of we now have.
Cohort data from Q2, and it's incredible that data. So the retention is that it's shown we have lifetime value.
Our lifetime value for those customers, which are higher than the previous 10 quarters.
Those customers the cost of acquisition of those Q2 customers has been paid back.
In less than six months, therefore in the Q3.
Cohort of customers is as I said, showing very strong repeat purchase behavior spend per customer behavior.
We also conduct surveys that we conducted another brand so it's reasonably.
Go Hawks of test for the 66% of customers.
Have concerns they go.
Going to shop more online are actually do most of their shopping online either more or most.
From now on independently of Av.
As far as closings openings, etc.
And then you look at the macro picture right. So this is a cash with that is still very underpenetrated in.
It's 23 percentage is in 2020 number.
There's plenty of room for growth.
We added year on extreme in Dalian in CMV in.
In Walgreens for 300, Veolia in give or take probably smaller difficulties, but let's say $300 billion at steady state.
So thats, 1% price for this.
Huge huge we're only scratching the social for you we have access to markets such as.
China, where online penetration is even lower.
So we're not concerned at all with the reopening of the stores and in fact, we think it's a way for opportunity.
It's a great opportunity to help.
Primarily the small smaller boutiques from smaller brands to drive customers back.
Back to their shops, we're working on on that.
How can we for box community to get back in the seat because I think in the end.
Benefits from a healthy.
Sector on the healthy industry.
And I'll take and then a question on beauty.
Hi, Dan Thanks for your call from we've always bad debt as a bolt on on move on to catalog in tier 300 billion net.
Sure good category in that in Q2 will take about 25% credit close to one of the fastest growing category and in.
Especially thinking if not.
If you take the fund, particularly in any Wow people in more comfortable buying on line. So we've been thinking about this for a while and we really wanted to launch a full proposition on <unk>.
And when you think about it in a unique way. It. This is not about just launching in adjacent categories and we believe in it we continue to lead in this day.
Apache has taken in <unk>.
On that framework I mentioned in India, which is in only on Farfetch right now.
What kind of a unique selling points about that that 'twenty is that unique proposition that means that customers will come to us as a destination and has been extensively thoughts around EBITDA.
Research in one of the selling price and in my for cross border between fashion and beauty are customizing and Gen Z tell us that they want to shop for milk.
So and there's investment in content and in our customer journey in proposition around how we want to prevent beauty and the second one candle is playing on ideas around innovation and there's a lot happening in the beauty space around in innovation, particularly in India. If you think about in making it the physical and particularly in.
Our intake in how would you bring the experience for the clinical data.
Store online in that so much that can be done with that with augmented reality. So that's something that farfetch can then he came to not get too I own.
New technology innovations that because the platform. We're also able to plug in in.
Credible innovation from tied up for partners.
Which really keeps us up to speed.
The latest technology out there and then third in very important I think from a partner standpoint.
We have huge enthusiasm from them.
From all of the pipe net currently work with in many of them has net fashion business and have ITT population as well, but also in DT balance had been following what we've been able to continue for the fashion industry in how we've seen in enabler to the fashion industry on Fedex team this opportunity.
On around partnering with Farfetch and in particular as you think about our unique business model.
Concessions, which I believe is unique and brand new to Pennsylvania to concessions in department store, but it's not really available on loan and that gets them on.
That in my children's and many control at that product.
On a lot of things to get them kind of established TD bank, but also net of compensation in.
In the beauty brand such as everyone knows is incredibly important for the young customers. So.
And it's in multiyear roadmap ETF incredibly specific it requires investment in China architecture platform developing features and specific content that we're excited about this and we look for.
The key platform.
Our next question comes from the line of Louise single Horse with Goldman Sachs. Go ahead. Please your line is open.
Hi, good evening in Guam.
Three questions from me if I may. Thank you very much on firstly just on E concession does definitely seem to be increasing percentage Donald for brands in on online.
Those have been some catch that in.
On the strip out E tailers, considering type of model as well.
When you say down.
Around in it.
Clearly the leader, but is there a view that the competitive landscape change in little bit soft ex clinic labor plan of.
<unk> full of plants.
Most regions.
And let's say following on from that do you think that there's still quite a big change.
In the traditional wholesale model and then a quick follow up for Stefan if I may on <unk>.
Just also on the topic of the concession.
At this point on the beauty specialty is that purely the E in direct with the brand would that take.
On a multi brand boutique.
On the arrangement that sounds secret tightening and then my second question if I may.
You can tell us anything about what you saw in the surprises nathans and decided to pay for in 2020 any changes in terms of average age demographic regional on.
Changes that may have been a surprise.
And in my last question, if I may just in terms of the guidance on.
Obviously, there is a lot of uncertainty in the lack of visibility everybody, but given.
Wonder if you could just help us understand the breakdown of some of the peak you talked to us about the contribution margin, but I wonder if there's anything you can help us understand about customer stickiness that you see from <unk>.
Expectations around returns.
Nevertheless on the take rate thank you very much.
Okay.
Hi, Louise I'll take the first question and then they can take it as a tool.
So I think it's really important to clarify.
How our new concessions work on.
How.
Some of the other.
Deals that he has seen in the markets in a very early days.
Work, because thats a true.
Fundamental.
From there.
When a brand. So for example, when Harris that feels habits in Burberry boats I can talk to the east professionals as a service.
When we connected the Burberry E concession.
On Harrods.
That gave habits access to thousands and thousands of burberry products.
Jobs shipped directly from numerous Berger integration so we have.
Manny.
I don't know exactly probably 'twenty RMR Gregory.
Burglary flagships of Burberry distribution centers in Europe in the last in Japan attach on globally.
E Commerce fulfillment centers.
This is something it took us six years to build price. So we have 550 new confessions.
Now over half of the supply available on path actually is coming directly from multiple integrations dozens sometimes of integrations with average single brand.
And what happens is that in switches on and suddenly you see are in.
Meaningful at least.
The range is extended right.
Now this is what I call. The true you can session than what's called the items, maybe let's call them.
I don't know few though we confessions.
Rather than in the thinking.
The names, which are simply a financial arrangements, whereas in brand phase.
I will ship to you. The 300 Skus that are you guys in every season.
I want the full margin U shaped me back losses on sale for us.
The sale on return deal.
This is this doesn't change the game at all for the consumer so the consumer still sees the same 300 skus nothing changes.
On the retailer has a lower margin the brand benefits by having a higher margin in control over platform merchandising. So it's a deal that whilst this is good for the brand.
It's not advantageous in salaries for the retailer.
It could be in terms of stock risk et cetera, but that so the consumer doesn't change absolutely anything.
And I think this is where we come in with a fundamentally different proposition two brands for.
Rents by February today for example can go to all of our Department stores all day everyday lives.
And say use this integration because this integration gives you access to.
7000 Skus.
With one single integration.
And I think this is very exciting these can be resolution aerie and accelerate the brands move three concessions.
And be a win win proposition for the new Taylor, who expands the range for the consumer who sees.
In expanded range on many unique products not previously available.
And for the brand debt doesn't needs to take risks and allocate parts of stock across dozens of E. Tailers on.
On the patent on staff. So we're very very excited we think we have a unique model because <unk> is in.
Tens of millions of dollars of technology investment that we do every year as you know.
We now have 550 E concessions ready to go including all the top.
I think 1970 per cent of the top service multi brands on our platform.
Sessions with us.
So we see these as very exciting developments.
Including in beauty, but all day.
The bus on to especially on that one.
Hi, Nathan I cant speak again on.
On your question about beauty, yes, good ideas Trump brand.
<unk> in concession take net okay.
On the awesome on the market take in bank at the main compensation for helping with the brand for lifelong Panther and the N b bonds, but the idea is coming in again to how we've done it for cash in complement that with one tool to really offset new product.
You may be able to be nimble in react to customer demands in but can you can do that.
Two bands and also think about kind of the long periods in our opportunities in my hands around beauty.
Remy and thinking about debt in a similar range from.
In that in that respect and but the way we think of bad debt is that mainly and we can enable in in the case that we can enable our brand multi multi maple and GAAP.
We clearly have a good day.
From the industry on here.
The second question about customers.
In 2020 has been weak.
Any interest income and an incredible year in terms of EBITDA from that application was acquired.
On the 2 million in new customized.
Question for <unk> was 505, new <unk>.
So you can imagine that we've been monitoring those customer cohorts and very closely to try and understand where they're coming from and in <unk>. How can we keep in entertainment.
So our platform.
And then pre brand campaign per day per.
Brand campaign.
And we're finding in a few interesting data point for you, we're finding that quite a few of them in.
On line.
And they are coming in for example from Department store.
In this I think speaks to the structural change that we're seeing in it.
In the chamber people are moving from offline.
Online sales, what we found for points back in.
Finding debt, we're acquiring a higher proportion of these new customers to asphalt price statements. In this is in line with our strategy, which Andy I can share that Andy about focusing on full price.
What this means is that this is a higher quality customer and we've seen increased for the purchase rate and in in the same vein lifting more customized acquired 50 per barrel and for what we mean ex the absolute top tier.
And again those customers are higher quality customers and has a better repurchase range. So we've seen on one month three months and six months.
In purchase rates are higher.
In 2019 to 2000.
In 2000, and then in turn from <unk>.
On <unk>.
Mike spot on.
So it's for quite some time, our for the pumps for some of.
But we've also seen ex.
Cash in an emerging market, where customers simple stuff like that and so market such as Mexico. For example ramp in the supply of lots for new customers and we really havent got in pockets of opportunity for 2021, not only to continue doing what we're doing in acquire.
New customers. It can kind of talk about dynamic accelerants that everything we're doing has contributed to put up.
But also the KOL in the suits both approximate.
And then Luis on guidance Elliott here again.
We think 'twenty 'twenty, one is super exciting year for Farfetch.
As you pointed out there is a lot of moving part in.
And what we've done in sitting in the guidance is really focused all goes on two things. The first is delivering sustainable levels of GMB growth in the second is ensuring we grow ahead of the market in capture market share and we believe the 30% to 35% year on year growth takes both of those boxes.
We obviously are good at seizing opportunities.
You saw last year, we set out initially to deliver $2 5 billion.
We picked up our growth to deliver $2 75 billion on.
For the marketplace for on the marketplace for digital platform and growing customers at the same time. So if we see opportunities we will obviously chase.
Chase those opportunities down, but I think it's worth pointing out as we head into Q2, especially will be annualized in the launch of Harrods. So.
<unk> becomes more like for like from Q2 onwards, as opposed to <unk> for growth over the last nine months. So far we also have on the marketplace in annualized <unk> of the very high numbers of new customers that we saw from Q2 onwards.
So we were expecting.
The growth will be front end weighted weighted as we just see it earlier on at $50 to 55% GDP growth.
For the first quarter in as we start to annualize those impacts from last year, what I think youll see as we going to skew growth spec.
Towards more retained customers include in those customers we acquired in the last 12 months.
Last year, we were skewing growth towards those new customers. This year, we're going to see for our skew back towards customer retention from our cash.
Just on the base previous for 2020 in those acquired in the last year on <unk>.
Returns on not seen any significant movement either way to be totally on its review I think that.
Fairly neutral for the year ahead. So it's all about order growth on the marketplace to drive what we're seeing in terms of the <unk> year on year.
In terms of take rate.
A couple of things to point out here first of all the take rate includes all revenue across the digital platform from all third parties on the marketplace, we're actually seeing our commissions go up year on year.
So despite the increasing brand b concession mix underlying commissions, obviously going up we see in 100% retention of the top 100 marketplaces pathogens in the same time, so they're clearly seeing value that's being created.
But as if ps's grow in over the last 12 months, we've seen a lower take rate start to flow through but actually the end of the day. It will contribution that matters because it draws Hollywood contribution and you have seen net increase over the last year up 310 basis points in the last quarter and ultimately that's what we're focusing on so.
Guidance for this year is in it.
Good sustainable growth market share gains improve in order contribution driving through the leverage of the fixed cost base, allowing us to invest in the brand in the China into the platform in Maine.
102% EBITDA margins, which will be fantastic result, first year of profitability.
And we have time for one last question. Our final question comes from the line of Andrew Rumor from Keybanc Capital markets. Go ahead. Please your line is open.
Hey, Good evening guys just two quick ones for me I guess first.
On China, how will it be reported on the P&L going forward, whether you segregate what the JV is doing versus farfetched in.
Individuals and then just as a broader question and I know it's in.
In our strategy over the past year plus to really reduce demand.
Demand generation expense you guys have done a great job with that are these final cash.
Longer term thank you.
I didn't quite catch your second question actually so maybe we can come back to what that was on the first question.
What a short on some though we won't be breaking out China between.
The app or phosphates for all the new JV will be reported as a digital platform GMB.
As all other.
JV that we have in channels.
Mr thick in accretion actually if the reach you repeat yes.
Yes.
The bigger picture question, you guys have done a great job at reducing demand generation expense I know, you've kind of shifted a little bit into free shipping I guess kind of looking back on 'twenty one's levels are these sustainable levels going forward or do you think you'll need to reinvest in that line. Thank you.
Yes there.
Two things happening here that are really driving underlying reductions in demand generation in the first is <unk>.
Use of data.
We've got more data in terms of luxury participants.
Than anybody else in the marketing team is fantastic engine to be able to use that data to really.
Target customers and shift them away from high cost channels towards low cost channels in retain of on.
The app or through organic or direct traffic and also allow us to moderate.
Spend on food change in marketing.
We can reduce wastage in that space in really sort of focus on auctions, where we know we're going to get more conversion because the data is telling us we've got customers here, but it looks like customers that shop with us so over the net.
That's what I'm here in saving that we believe will carry on.
Moving forward in in the second is everything that we've been talking about in regards to new investment around the brand.
In our engagement with customers in in early on Farfetch way, whereby we have so many unique opportunities to speak to customers from boutiques brands. The duration that we have our editorial and content that will allow us to be able to continue to engage with customers, particularly on the epic game, which was 55.
For <unk> in the last quarter and that will allow us to continue to lower that demand generation spend you saw a significant reduction year on year in Q4, now I think as we touched on around China, We do want to.
Leverage.
The assets and we do want to lean in to the new opportunities. So we will redeploy some of that short term back in to China, but over the longer term as we push order contributions bump.
We'll see demand generation expense come down.
Terrific well I think that brings us to the end of the call. Thank you all for joining US we look forward to updating you on our next quarterly earnings call in the coming months.
Have a good night.
This does conclude today's conference call you may now disconnect.
Right.
Okay.
In Europe.
[music].