Q2 2022 Farfetch Ltd Earnings Call
Is the digital partner in reinventing this heritage brands.
And yesterday's announcement represents the culmination of these carefully engineers deals.
And the extension of our LNR initiative with his small marks an inflection point.
Banking Farfetch is mission and vision to revolutionize luxury.
We believe this validates, especially when seen together with all the partnerships over the past few years.
Not only that the luxury needs a tech platform, but it's also that farfetch is perfectly positioned to answer that call.
We are thrilled with the myriad possibilities distill opens to expand <unk> reach to our attractive marketplace audience.
Bring their curated supply to enhance farfetch consumer's experience.
That enabled our brand partners to leverage our E concession integrations to transition away from wholesale distribution.
And many many other possibilities.
We plan to work closely with Cartier and other niche moment results to innovate there already incredible luxury experience both online and in their 1250 retail stores worldwide.
We are excited by the transformation of the Cat enabled Ynette a group, which includes the pioneers of luxury online retail net apathy and use.
Which as brands themselves are very complimentary to flattish.
All of our survey dividends most of shopping customer profiles and geographic focuses.
In the years to come and upon <unk> successful transformation, which we expect will return the business to profitability.
We are excited about the possibility of consolidating them under the <unk> group as.
As the portfolio of different marketplaces.
Benefiting both sellers and customers globally.
Offering more choice better experiences and more innovation.
There is a lot to be done and still a lot to prove and we are energized by that.
This endeavor never ends because with each milestone our horizons expand further.
Despite the growth in synergies. This deal brings the combined groups with represent only 3% of its vast global industry.
There is plenty of growth to go far and strong secular tailwind that we aim to continue to capitalize on.
While it is pretty clear in my view is that <unk> has positioned itself to be the preeminent digital platform for luxury.
And our responsibility is now ours to continue to execute and deliver on these shared vision.
More recently, whilst we've been executing on our unwavering pursuit of the luxury new retail adhesion.
We have also continued to deliver on our core business performance.
Evidenced in our underlying Q2 results.
Excluding Russia and mainland China each of our three marketplace regions Americas, EMEA and APAC delivered high single digit growth over a tough Q2, 'twenty one comp.
And overall <unk> was up around 40%.
Additionally, on a three year basis marketplace, <unk> growth, excluding Russia and China.
<unk> versus Q1 'twenty two.
In Q2, we also continued to see the results of the progress we've been making in transitioning the marketplace to predominantly full price destination.
As <unk> increased double digits.
And markdown sales on the other hand declined once again double digits.
Outside of these three factors, which were expected and discussed on our Q1 2022 coal.
Q2 underlying performance remained very strong.
With full price marketplace, CMG, excluding Russia in mainland China growing circa 20% year on year for the second consecutive quarter.
This is before accounting for our FX volatility in fact, I'd like to point out that all the figures that shares do not take into account the significant foreign exchange rate volatility.
Which impacted our reported results in Q2.
At constant FX on a year on year basis.
Digital platform <unk> increased 2%.
Brand platform <unk> grew 68%.
And revenue increased 21%.
Elliot will expand further on the impact of currency rate volatility.
All of these is to underscore that our underlying business remains extraordinarily strong.
With growth accelerating on a three year basis outside of macro volatility factors.
These encouraging performance indicators against the current macro environment.
Demonstrate the resilience of the luxury industry.
Further demonstrate higher patches.
<unk> past and proficient response to the adverse macro factors the industry's facing.
Finally, I'd like to update you on some organizational evolution, we have made to better position us to achieve our platform long term vision and reaccelerate growth in 2023, while also driving a more efficient operating structure.
As we shared on our last call. We are taking advantage of 2022 being a year of lower growth to further rationalize our business to have more efficient more profitable and more powerful operations as we aim to exit 2022 and enter 2023 from a position of.
Of incredible strength.
I also believe this is the right time for Farfetch to evolve the design of each organization to further align it with our mission of becoming the global platform for luxury.
This reorganization sees the farfetch platform at the color of our entire business.
This common platform services, our three business units.
Marketplaces, which includes our D to C activities.
Platform solutions, essentially composed of our <unk> activities, mainly Sps.
But also newly acquired SaaS companies that extend fps's ecosystem.
And brand platform.
Which consists of all <unk> activities that are not included in the other two business units.
I E all non digital <unk> activities.
Such as directly operated retail stores and select wholesale we believe that this structure will allow us to drive cost efficiencies.
By scaling our business enhancing our profitability and allowing us to invest in our technology and platforms at a larger scale.
Historically, the marketplace has not had a senior leader accountable for each entire P&L.
But I am taking this opportunity to reinforce the platform philosophy across our organization.
We have clear accountability around each of the three use.
As such we have reorganized the business according to the screen people.
And have created two new roles.
Chief Marketplace Officer, who will be accountable for the performance of the marketplaces Bu.
And group President, whose role is to position our class age group capabilities to the industry, ensuring our three be us work together to deliver on class hedges mission to be the platform for luxury.
I am delighted to share that as were <unk> <unk>.
<unk> GP market place.
We'll take that boast of Chief marketing officer.
Stephanie Fair will be our group president.
I am excited with this new structure and I believe it prepares us for the incredible growth ahead of us in 2023.
And in years to come.
One of the benefits of this work has been the identification of a number of applications and overlaps across the previous <unk>.
This means that we will be able to streamline our organization.
<unk> reduced our head count.
<unk> overlapping functions and teams.
But because we have areas of our business that are adding lash clients and growing rapidly. Our overall head count by year end 'twenty. Two is still expected to be just slightly higher than year end 'twenty one.
The exact level two of our executives will be transitioning out of the business.
Chief Marketing Officer, Carlos Jones, as well as chief commercial and sustainability officer charged with Ali.
Who will be succeeded by our senior Vice President commercial Steven Eggleston, who has been with Farfetch for almost seven years.
Changzhou will remain on board to help with the transition until the end of 2022.
And then in an advisory capacity through the <unk>.
End of 2023.
I want to thank both charged <unk> and Carlos for their incredible contributions to advance Farfetch is mission to be the global platform for the luxury industry.
And for building teams with amazing talent to carriers through our next phase.
I also want to thank all of those have hedges.
Who has been an incredible part of our journey.
And we will now pathways with us as part of this <unk>.
They are all incredibly talented.
We wish them the very best.
And we are sure they will do extremely well.
And now I'd like to congratulate Stephanie on her new role and ethical to learn to update you on the progress we're making within the <unk> group.
Thank you Seth and Hello, everyone I look forward to stepping into the group Presidents, where I will focus on working with our partners to further grow that digital capabilities, leveraging our audience, our global reach and our technology solutions across the Farfetch group.
Today, I would like to take you through some of the key initiatives and recent developments across our areas of focus including our brand engagement.
<unk> partnership with Paragon, now and customer retention and how we're positioned for the volatile macro environment. We are currently in.
We continue to see strong brand engagement on the platform with brands continuing to increase supply in the market pay up double digits in Q2, and working with us and unique collaboration and loan chip demonstrating our strategic value as the online partner of choice for the luxury fashion industry.
As part of our efforts to try and excitement and cultural relevance with new level audience heads. We've recently launched five tech speak a new concept retail CME limited edition releases, we can most exciting fashion culture today, only unpack assets and leveraging our unique community brand and retail partners.
Jeep and Browns and stadium goods.
With the goal of driving organic traffic and new customer acquisition by low cost channels with social bonds MPI. We've been very pleased with the initial with ebay. The first job openings have any for <unk>, which celebrated Asian American design, so that <unk> generated over 2 million social media impressions and campaign level coverage.
We're also seeing a push social commerce with our digital marketing strategy and a campaign with fast growing new social media platform <unk>.
Turning to our media solutions business, we are continuing to rapidly scale, our high 19 media conditions head neck, and I'm pleased to announce that in the second quarter media solution to each record sale to buy paint brand campaign across multiple categories, such as Gucci fragrances can be a diamond collection.
<unk> 792 connection and climax amplification of <unk>.
Beyond the transactional value our brand and boutique partners are buying into a valuable global consumer bank.
To be quite a millennial and Gen Z with a 70 <unk> female and male of Asia.
And from a consumer perspective by allowing banks to net <unk> data to tap into millions of monthly visitors, we able to provide the newness and differentiation that the luxury customer demand.
We have also been gaining traction with bank beyond that she fashion to market compartment that embody our E mails and the luxury lifestyle. For example, we have held campaigns with the likes of pushing and mine Shandong luxury and fashion Kingston brands with similar customer profiles to five times.
Immediate solutions capabilities are also an important component of our recently announced global strategic partnership with <unk>.
We couldnt be more excited about this engagement at peace of mind that the power capability and potential at the Farfetch platform in fact hedged proposition.
<unk> has a rich heritage of creativity, and craftsmanship and with the recent appointment of macro Quebec, TX CEO. We're excited about inflationary approach to revise this iconic brand by looking to Farfetch as a strategic partner to accelerate e-commerce digital capabilities and create new engaging shopping experiences.
<unk> has been an E concession partner for many years, but this partnership expands defense participation in the marketplace leveraging fast ACH example, audiences to appeal to more millennial and Gen Z luxury customer company.
As part of the partnership <unk> E Commerce site, using Farfetch platform solutions, and <unk> will begin to impact <unk> and fast ACH as media creation, while also exploring future retail innovation.
Sarah comments endorsement and embarking on an integrated partnership with Big scale marks a critical evolution point in a fast ACH platform competition, Jamie further cementing farfetch as the platform of choice for the luxury fashion industry.
Moving on to our consumer.
Private clients continue to perform the strongest of any cohort and are reflective of the resiliency of the luxury consumer.
During the quarter, we maintained over 90% retention of our private clients, who delivered strong <unk> at circa $1100.
Also during the second quarter, we saw an increase in high value transactions with a focus on how much investment.
And the number of transactions exceeding $10000. So an increase of 11% year on year session on cash which is our proprietary sourcing survey continues to be a differentiated proposition for our private clients.
Private client that used cash in <unk> have a 30% higher retention rate versus other private clients, who do not use the seven we intend to continue to grow and focus on enhancing this private time experience, which still has significant room to grow and become a bigger part of our business.
And we will be launching a more direct conversation requests module in the second half expanding fashion concierge to more of a PC customer base.
We remain steadfast that NEP sheets resilient industry, and given our differentiated proposition and Capcom capabilities. We believe we are well positioned to deliver sustainable long term growth and now I will handover the call to Andy edge to discuss our financial results and outlook.
Thank you, Stephanie and Hello, everyone I would like to discuss the financial results of Q2, which reflects better than expected trading across all platforms offset by foreign exchange impacts that were worse than expected.
As a result of the stronger U S dollar.
The overall results demonstrate our ability to address near term challenges deliver robust underlying growth.
And manage our resources effectively to achieve our goals moving forwards.
I want to start by noting that the historic strengthening of the U S dollar against most currencies over the last quarter, particularly the euro falling in line with the U S. Dollar for the first time in two decades created a significant headwind for many U S dollar reporting global companies.
We have high exposure to this historic appreciation in the U S dollar.
Because more than half of our digital platform GMB is transacted in non U S dollar customer currencies and a 100% of the brand platform is transacted in euros.
The impact is even greater so revenues as the vast majority of our digital platform Commission revenue is booked in euros and brand platform revenue is made up entirely in euros.
Finally, our profitability is also impacted because the positive contribution to adjusted EBITDA from our profitable foreign entities is reduced on translation to U S dollars.
As a result across Q2, we achieved revenue of $579 million, an increase of 11% year on year or 21% on a constant currency basis.
Gross merchandise value of $1 billion twice, the GMB of Q2, 2019, and up 1% year on year or 8% on a constant currency basis.
Our gross profit growth outpaced revenue growth to deliver an expanded gross margin of 46, 2% versus 44% in Q2 'twenty one.
Our adjusted EBITDA was a loss of $24 million versus a loss of $21 million last year.
We remain well funded with $675 million in cash cash equivalents and short term investments.
The major drivers of reports of GNP and revenue growth included.
Single digit growth in the marketplace outside China, and Russia, including growth in full price of 20% year on year.
Our brand platform growing GMB at 47% year on year from strong demand for off White and Palm Angels and the catch up on the lost sales in Q1 2022.
And our in store GMB growing 39% year on year.
I would now like to discuss these factors in more detail starting with performance across the digital platform.
Reported digital platform <unk> declined year on year by 3% to $883 million, but grew 2% year on year at constant currency, which was slightly lower than the Q1 2020 to constant currency growth of 5% year on year as Q2 had a full quarter of impact.
From reduced trade in Russia and China.
By region for the marketplace GMB from China was down year on year due to COVID-19 restrictions.
We have seen strong engagement from customers, including during our 618 event in the China market and year on year growth on Tmall.
Which means we remain optimistic about the China market and our overall proposition moving forward.
We expect this market to return to growth over the next 12 months.
Russia saw zero sales across the quarter and will remain closed for the foreseeable future.
The Americas overall continue to show resilience and GMB from this region is now 87% higher than 2019.
Core Europe growth accelerated coming out of Q1 with faster growth in Q2 from the U K, Italy, France, and Spain, while we continue to see weaker performance in the D. C H.
Active customer numbers were stable quarter on quarter and up 13% year on year at $3 8 million.
Very pleasing result, as we are seeing at least 50000 customers drop out of this metric each quarter from the loss of Russia trade.
This drop out of Russia customers is expected to peak in Q4 2020 to adjust over 100000 customers.
We also continue to see strong demand for our media solutions product delivering the highest contribution to platform services revenue and helping deliver a 90 basis point boost overall to our third party take rate, which was 31, 2%.
In terms of margins digital platform order contribution margin was 31, 7%.
240 basis point decline year on year.
This decline is attributable to higher demand generation expenses year on year because of continued investment in acquiring and engaging customers.
Inflation in paid channels and a redistribution of media spend from Russia and to higher cost geographies.
A 230 basis point decrease in gross margin from our first party business because of pricing and stock clearance activity first mostly offset by a 290 basis point improvement in third party gross margin to 69%.
Through higher media solutions income improved commission levels.
Higher pass through of costs to consumers and efficiencies gained in shipping partially the result of currency movements.
Now I'd like to move on to our brand platform.
During the second quarter, we resolved the warehouse issues impacting our operations in Q1, and alongside strong demand for <unk> brands off White and Palm Angels deliver.
<unk> delivered brand platform GMP of $107 million, an increase of 47% year on year or 68% on a constant currency basis.
Year to date brand platform <unk> is growing 12% year on year or 22% on a constant currency basis.
Brand platform revenue was $117 million, reflecting the GMB position and $10 million of revenue from our new partnership with Reebok, which commenced in March 2022.
On margins due to the re book revenues lower royalties on Palm Angels. Following the majority acquisition of the spreads and improving underlying product margins. We delivered brand platform gross profit of $61 million at 53% gross profit margin and increase.
560 basis points year on year.
Moving on to our operating expenses, which are comprised of G&A and technology.
Total costs were up 17% year over year with operating leverage from our platform services and marketing cost lines, an additional year on year spend on warehousing costs for first party stock holding.
Profit after tax was $68 million, including a noncash benefit from the revaluation of items held at fair value of $252 million.
We finished the quarter with a liquidity position, including cash and cash equivalents and short term investments of $675 million in.
In Q2, we closed the previously announced strategic investment of $200 million into the Neiman Marcus group.
Although I'd like to cover our outlook for the rest of the year.
As the Q2 results highlight we are successfully managing many factors across the business and achieving strong underlying revenue growth and improved gross margins.
We are also progressing our cost saving initiatives to focus resources on areas of the business that are delivering stronger near term payback and on achieving our strategic initiatives.
<unk> announced yesterday.
On a constant currency basis, our H two outlook remains largely unchanged from last quarter. However, we expect the stronger U S. Dollar will continue to impact our reported growth and profitability for the rest of the year.
As a result, our full year expectations.
Digital platform <unk> growth of north of 5% year on year.
<unk> platform GMB growth of north of 10% year on year.
Digital platform order contribution margin above, 30% and brand platform gross margins above 50%.
In addition, our cost saving initiatives allow us to target breakeven adjusted EBITDA for the second consecutive year.
I will reiterate that ongoing currency movements may adversely impact our reported figures.
In terms of reserves, which are largely held in U S. Dollars, we continue to closely manage our liquidity position.
<unk> profitability and improving working capital position as we exit the year means that cash and cash equivalents is expected to close about $650 million at year end and with that I will turn it back over to Joe <unk>.
For his closing remarks.
Thank you Elliot.
Luxury is an amazing industry cement is in the pillars of creativity craftsmanship and culture.
And from a financial point of view very profitable and resilient.
Even in very adverse macro environments.
We always believed this $300 billion industry needed its own tech platform.
Tailored to specific needs and revolutionizing the luxury shopping experience, both online and offline and reveal farfetch over 15 years to be that platform. We call. This vision luxury new retail.
The 1400, plus luxury brands and retailers, who are part of our community share. This vision.
And this week I am thrilled to have announced our deal with <unk>, which is a major step forward in our mission.
There is a lot to do and a lot of growth to go far.
And while we have our eyes on our north star our feet firmly on the ground.
We are definitely navigating the macro environment with.
With our marketplace delivering high single digit growth.
Outside Russia, and China, and taking the opportunity of a year of slower growth to redesign our organization and make it much leaner and more powerful.
This means we will exit 2022 in a very strong position.
In 2023, we will lap the impact of Russia.
And I believe China will return to growth.
Additionally, we will start to see the impact of last deals such as Reebok Neiman Marcus group Pancetta Gamble.
Multiple factors of growth.
And with the strong underlying performance of our business outside macro affected regions.
And the rationalization, we took the opportunity to take action this year.
Very bullish for 2023 and beyond in terms of growth profitability and cash generation.
We expect to share our ambition for 2023 as well as our long term vision in an upcoming capital markets day, which we are planning to take place before the end of the year. Thank.
Thank you I will now open the line for your questions.
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 hands by clicking the raise hand button under reactions at the bottom of your screen window when called upon please UN mute your audio to ask your question. Please be mindful that only one question per analyst will be allowed thank you.
Just start we'd like to take our first question.
Our first question comes from Ike <unk> from Wells Fargo. Your line is open just for you asked a question.
Thank you.
I guess my question was on.
The <unk> transaction just around timing I believe you guys said yesterday, you expect it to close before the end of next year I guess my question is.
It seems like a long time can you kind of walk us through.
Why why it might take so long for the deal to close in the second part of the question is are you able to begin the one up in the <unk> integration.
Before the deal actually closes or do you need to wait for that transaction actually closed before you can start to go to work.
Okay.
Thank you.
So they all I'll take your question.
I think first of all since the share our philosophy when we.
Announced deals and gave indicative timelines.
I think we've done a good job in terms of managing expectations. If you look at.
Historically, our deal with J D. We announced it we then launched in <unk> instead of generating revenue.
Before.
The expected.
Time, so ahead of time.
Tim with Harrods same recently with Alibaba.
And I think we like to keep it that way.
Especially when you have things that are not under our control in this case.
It will be regulatory review.
In modern luxury addiction as you would expect.
And we really want to be respectful of the regulators here.
And that also means that we will review.
What work can start.
And what work, we will need to wait for regulatory approval.
Of course, we will go as fast as possible and disease.
So.
<unk>.
As you have heard from from Yoann.
Cartier the either Mezz loans, very very keen to be re platform in the marketplace.
With.
This is <unk>.
Transformation that is eagerly anticipated by the Ceos of the various zones in the.
On the online distributors and so we will go as fast as possible, but again, we want to.
To be.
<unk> in our deals and keep that philosophy in terms of when we do announcements.
Provides.
Expectations and then.
Is that realistic and then beat them if possible.
But I would like to highlight that 2023 is already even even if.
The regulatory approvals take a little longer and all of that is already lining up to be.
Fantastic year for Farfetch.
We have Reebok, we have human Mac as group, we've had Salvatore ferragamo.
The organic growth that you are seeing in the business outside of macro factors again full price growth of 20%.
Excluding Russia, and China, we will lap the.
The stoppage in Russia.
And I believe China will turn into.
A strong tailwind so that is already incredible gross debt that we.
Anticipate coming out of all.
All of these different vectors and we're confident of that and of course.
If then we're able to move.
Even faster with.
With the re small various facets of the deal of course, we will see if that opportunity as well.
<unk>.
Our next question comes from Doug Anmuth from Jpmorgan.
<unk> made and ask your question.
Thanks for taking the question.
One for Joe and one for Elliot.
If you could talk about what gives you the confidence that China turns into a strong tailwind next year and just how you would assess the learnings on the Tmall luxury pavilion, thus far and then Elliot.
Shifting to full price was more than offset by a decline in markdown sales is this driven by less markdown inventory or just less demand overall and can you update us on on the current mix there. Thank you.
Hi, Doug.
In terms of China.
I think first of all where we remain very bullish about China in the medium and the long term. We think this is an incredible America it will be the largest luxury goods market in the world.
2025.
We have an incredible position there as the only western player that has for many years invest is.
In that market, creating.
Incredible capabilities there.
And I think that we will be able to seize.
Strong demand for luxury products.
Actually online where penetration is still very low in that market. So we remain very bullish in the medium to long term in terms of China, and we will continue to invest in that market.
I think what makes me confident is that we see we see strong engagement from the Chinese customer.
We continue to see high traffic elevate the levels of traffic.
We continue to see we saw a very strong June 18.
Event.
T Mo.
<unk> seen positive growth in spite of the macro headwinds.
And I think.
Right now we're seeing in terms of our App, which is the larger part of our business. There we have seen double digit declines I don't think this will.
<unk> last for long I think this will turn into positive growth.
Next year and potentially strong positive growth.
The situation in China continues to be impacted by COVID-19 restrictions.
Especially for our cross border business is.
As we are having a long lead time to deliver to customers.
Yes.
Ill quarantine.
Procedure for Paso crossing the border.
And in certain gateways disinfection procedures for puzzles.
Which we're confident that.
Probably there will be more comfort around cross border logistics and package he is et cetera given.
Clearly the World Health organization.
<unk>.
Has said that.
There is no risk of contagion from pastels.
And that those that was relaxing the west very very quickly in China is taking a little longer.
But I think that once we are able to service our customers. There is very strong engagement on the platform. The demand is there.
Conversion rates, obviously is affected by these longer lead times.
But I think this is transitory.
And that's a huge potential in pent up demand impact in that market that we will be able to see.
And just on your second question in regards to Mark down. It is all driven by the level of inventory that sellers are putting on to markdown in the depths of markdown they are taking.
Remember we've spoken a couple of times now about the fact that we four.
Strategic purposes, and making sure we align ourselves with how the industry is moving.
Over the longer term.
And making sure that there is.
Do you have space for the brands to put stock on in the full price selling window.
And.
They're obviously using that to drive.
Growth on Fitch at full price and beef will not need to put as much stock into the sale of <unk> and the markdown section, which absolutely the brands are wanting to do.
As they try and draw their own full price mix and pull away from promotions across most channels I think it also.
If you look at our mix, we've now got over 600 brands direct on the platform is e-commerce.
Im sorry, its E concessions on the platform.
Relationships with us rather than going through the multi brand boutiques.
We are thats the case the brands, obviously in control of pricing and levels of markdowns for Backstopped by our <unk> and <unk>.
So they are choosing to put less stock into the markdown section because they are getting more sales at full price through us and thats reflective really of the playbook that we've got on the platform. So.
<unk>, both the rig stock and stopped from multi brand partners was up double digits in terms of value year on year as we exited Q2, but the stock the rig from the brands are 600 brand E concessions direct was up something like two five times as much growth as we are seeing from the <unk>.
<unk> brand.
Retailers, so lots of additional start coming through from all of the right partners and Thats, meaning our GMB mix is now.
<unk>.
30% of GMB coming through from those direct E. Commerce partners. So we really see in the GMB shift towards those longer term strategic partners.
And the stock's growing as a result, but that means more full price and less markdown on farfetch.
Our next question comes from Stephen Ju from Credit Suisse. Steven Please on me and ask your question.
Okay. Thank you. So I guess a question on the beauty and some of the other sort of adjacent categories. If I may so.
It seems like there is about six to 700 SKU.
Might be slightly more avail.
Available on Farfetch right now.
I think in the past you guys have talked about the value of the merchandise you are currently showing on the platform. So you know what percent of the total do you think beauty is as a percentage of total now and where do you think it should line as we think about the longer term mix of that business.
Yes.
And also if you think this is a category that will require I guess up greater participation from Farfetch as a first party. Thank you.
Yeah.
Hi, Steven I'll take this question.
So yes, I think looking at Skus is one way of looking at it but I don't think it's necessarily relevant and particularly in how we were previously talking about fashion just because the makeup is very different in terms of how banks see that range, there's a big focus on hero Skus.
Replenishment, so I'll focus now on having the right.
Mix and assortment and making sure that we have the right mix of that heritage brands.
The indie brands and then many balancing the categories. So in hair care wellness skincare makeup. So we're still very early on in that and we're still building up.
To the brands.
Coming onboard, but I think it really is about.
We've always said you know we are a curated destination.
So we think about that sort of level of beauty brands and and you know we do set a filler and make sure that we have.
Above that but I think sort of more broadly in terms of you ask.
How big could that be as a percentage that I think is the guiding principle, but we look at the fact that the beauty market the addressable.
The market is sort of $70 billion out of that 300 250 billion personal luxury goods market.
It does not.
To go out there and a real opportunity for us to offer beauty and a crossover way to luxury fashion customer and I think.
This made to answer your question about first party, what is particularly valuable about our offering to brand partners. This is the first time really.
We've been able.
Heightened rights and that sort of large PD comes out might have been able to access an E concession model with <unk>.
We're moving away from wholesale and wanted to go more direct to consumer we are offering them a condition that allows for that.
And which was not really previously available, possibly offline, but not.
Not online so.
We've got a lot of the big ones.
Boyd and first party.
In which we're able to acquire two.
<unk> and toys and find that Greg it's really to complement with some of the indie brands. We're just not set up for that concession model, but I think the way to think about it is that that will continue to really be complementary as opposed to a bank.
Piece of the pie.
Thanks.
Yeah.
Our next question comes from Jason has seen from Oppenheimer, Jason Please on mute and ask your question.
Okay.
Thank you.
I guess I'll just do one.
It does seem that.
In stores, gaining share year to date in U S and Europe versus offline. So is there anything youre seeing in behavior or data that suggests that this is.
Temporary and kind of after this I guess I have an abnormally.
We got back online gaining share for luxury.
Hi.
No we're not we're not seeing any.
They can necessarily tell me one way or another I think what we go back to is just the fact that there is a structural shift to online we know that that will be 30% in 2025, and I will take you back to Tony We ran I believe in 2021, where our customers were saying.
Sort of post COVID-19 environment, they would be shopping more online than they did before and so.
We are seeing that our retention metrics.
<unk>.
Remain strong and actually.
In line with 2019 numbers, we continue to see new customers.
Coming to us quarter after quarter so.
Secondly, we knew that there would be a normalization of behavior.
Online offline, we are big believers of that Omnichannel approach and in many ways. We are an online and offline business because we think about.
Retail approach in the way of partners, where we benefit from.
From offline behavior as well we Randy.
That's one.
And so it is it is certainly a bit of a normalization as you as you stated that the structural shapes continue to be online.
And our next question comes from Lauren Chung from Morgan Stanley . Please on mute. Please ask your question.
Great. Thank you I just wanted to ask about Neiman Marcus maybe just.
If there is any updated timeline on when you expect the Bergdorf Goodman and Americas International GMB to hit your P&L and then I know you mentioned the U S business.
We'll be using some of your modules, maybe just from an accounting perspective will be <unk> from that business hit your digital platform DMD as well. Thank you.
Hi, Lauren great Great speaking with you.
Look it's all but.
At some point next year, we're not sort of talking specific dates. So that thing is Joe as I talked about in the pre prepared remarks were now going to do our capital markets day before the end of this year that gives us a chance to.
Clarify with investors, we see the opportunity for the various parts of the platform as we've restructured the business we've got marketplaces on the Edwards.
We're going to have if piece on the Kelly I'm going to have day to day doing the.
The brand platform as yours already has been and Kelly, who has been running a fever since day one.
We'll be part of that capital markets day wish you will be able to outline.
The exciting developments for clients moving forward and we'll be able to give you an update on what we're doing for these amazing transformational deal for the industry. So if you don't mind waiting to BMO will provide more clarity at this stage just sometime next year is the best estimate to give you right now.
Next question is from Blake Anderson from Jefferies. Go ahead. Please go ahead ask your question.
Hi, Thanks for taking our question I wanted to ask on the full price dynamic.
Wondering if you I think you've talked about that as being the majority of your business now I'm wondering if you could say how much of that is your business now and how much more to go especially in these in the second half and then how should we think about maybe your average price point increases due to that.
Should that impact your customer growth at all how do we think about the impact of customer growth there and.
Thank you.
Hi, Yeah, I'll take that one.
So.
We are now.
Very very good place I think in terms of.
Luxury peers for the markdown full price mix food.
<unk> price now is north of 70% of the overall <unk> mix I think.
And that gives us more opportunity to continue to shift towards more full price.
As I said earlier on with the strategic shift of the industry away from markdown, so plenty of room still to grow.
Full price offering I think it's worth pointing out that there will always be a place in the industry for markdown.
<unk>.
Not only do we see markdown on Farfetch, but there are other.
Very highly competitive businesses out there that provide channels for the industry to provide clearance markdown.
And the Sydney growth into the future.
For us.
I think as we move into the second half we are still going to have markdown activity coming through particularly from our first party business you will see that the gross margins on the first party business.
Still running down year on year, that's because we had bought stock.
Assuming much higher levels of growth, we obviously completed most of the ordering for the season. Our next season before the macro challenges of Russia, and China hits US we've tried to cancel as much as we could be.
But obviously, we are honoring contracts and taking stock in and we'll have to clear that stock throughout the rest of the year, which will continue to suppress the gross margins will be at that is built into my forecast for 30%.
Plus order contribution on the digital platform for the rest of the year.
As it pertains to customers.
I'm really pleased actually with the customer number $3 8 million active consumers means.
It means we were stable quarter on quarter slightly Opex Lee, 13% growth year on year that was across.
All of our categories fashion in particular was very strong in terms of new customer numbers in the U S. We had more active customers in Q2 than we did in Q1, China. We had more active customers in Q2 than we did in Q1, we're seeing some really good.
That's coming out of those of those two key markets and as Joe as I said earlier on really good strong green shoots coming through for <unk> as we move forward.
<unk>.
I think those customers.
Tend to show up a broad range of products, we're definitely seeing with 20% year on year growth of full price outside China, and Russia that our customers clearly are buying into products at the start of the season.
The extended European Summer has seen very strong growth for <unk>.
Holiday.
And so travel categories between categories, where customers have continued to buy in at full price.
So we are able to grow customers across the full price mix, but also we're seeing customers buy into markdown now that we started the sale than we were and so for the back end of the season, so very broad.
The ability to attract a number of different different customers.
I would point out it's extremely competitive as well, hence why you've seen our demand generation costs increase year on year, we've seen cost inflation in terms of demand generation.
But we are attracting a good mix of customers over 500000, new customers in the quarter in terms of AAV actually on an underlying basis that was slightly up year on year, we've seen an increase in our average selling prices as customers buy into higher categories that high full price mix is driving a higher average selling price.
We're seeing slightly more items per order, which is fantastic.
And then on the on the marketplace and Thats, all offset by this currency impact. So when we're translating euro baskets or renminbi baskets were stealing baskets into dollars to.
We calculate our average <unk>, obviously, the stronger dollar is putting lots of pressure on that metric.
<unk> was down <unk>, 5% as a result of the significant appreciate from currency, but on underlying basis <unk> was up because of stronger selling prices. So I hope that answers your question.
Very happy where we are with customers.
And as we move into the second half I think lots of opportunities for us to be able to deliver growth for consumers and really amaze customers on the marketplace.
And our final question today will come from Louise single Harris from Goldman Sachs. Please feel free to ask your question.
Hi, good evening, everyone. Thanks for taking my questions.
If I can have a quick follow up.
Underlying growth rate.
22000, net customer additions that you've obviously been materially impacted by Russia, and China and just firstly on China electric tape has been down anywhere between minus 13 months.
In the quarter is there anything on the regional color that you can just give us.
About the other regions.
A big impediment to the underlying great number.
Just to check and you did indicate in some of the commentary regarding the impact of Russia that will have a little again.
In terms of the numbers, but I wonder if you can just help us think about the underlying dynamic and is it possible to talk to us about the number of gross additions in the period just like if you could give us that number and then just one quick follow up Jay that couldn't help but notice your extremely bullish comments for 2023, just circling back on the China comments earlier can I just check given the size of.
Paragon mainland et cetera, I guess, we can do right that China is the biggest delta from what we're seeing today in the business.
You bet, Tim Gray posted outlet for 23, thank you.
Otherwise I think we did ask for one question each but just because it will last we will go through them all for you.
Customers as I see it very very very happy where we are the gross new additions was again 500000.
In the quarter, we lost.
About 50000, just north of 50000 active consumers because of Russia.
That's a number that's going to exist now each quarter as.
As we start to annualize that.
Down at the Russia business. It will peak in terms of just over 100000 customers dropping out in Q4 so.
You're right when we previously spoke I actually thought the.
Active customer number might drop back year on year. So the fact that we've been able to.
<unk> slightly positive as you say because of the strong gross additions.
Is very very good in my view.
In terms of China, the numbers you talked about.
We are in that ballpark in terms of GMB year on year and decline.
Obviously being our second largest market with such significant year on year decline in <unk>.
Significant headwind for us.
And obviously, Russia, we talked about this.
On the last call as our third largest market around about 7% of <unk> last year for the marketplace again, a significant headwind in terms of the numbers and that was the main reason why we took out gross down last quarter. The reason that the growth rates for the rest of the year.
There have been revised slightly down is all down to currency you can do the math yourself in terms of the impact of the stronger dollar gains.
Again, we the GMB would've been across Q3, and Q4 and the shift in terms of the growth rates is all down to the appreciation of the U S. Dollar on the line, we're still seeing very very strong.
Our position in terms of order and customer growth and I'll pass over to Joseph <unk> with regards to 2023.
Hi, Louise and thank you for asking that question because I.
I definitely think that 2023 is shaping up to be a fantastic year for us.
We will lapse, Russia, which as Elisha said it was a significant part of our.
Of our business.
We do have all these exciting launches reebok.
We both we actually gave a timeline is around.
End of end of Q1.
The others, we will provide more clarity in our capital markets day, but definitely they will be revenue generators and growth generators.
And I'm talking here about a third of Ferragamo Neiman Marcus group.
In 2023.
But then there is there is the underlying growth of the business, which is very strong.
When we consider the FX headwinds.
The wins that we're seeing.
Where we're really seeing very very strongly in terms of the underlying business outside of Russia and China.
In terms of China, the minus 30 that you say that.
Luxury houses and I reporting an LDL confirm were ballpark in that.
And that sort of figure.
You can see how China returning to growth even if it's not the outsized growth very fast paced growth that we historically have seen recently in that market.
He is a significant reversal.
Of our trading dynamics.
And I am confident we are that market is going to return to growth.
My confidence comes from reports from other players in the industry.
Luxury brands.
The other thing that they are confident about the market there is pent up demand.
We see the data in terms of engagement of customers. They haven't stopped downloading at opening our our app and engagement with our conversion rate is lower.
Cause of transit times and lead times due to cross father COVID-19.
Issues.
But we believe that the demand is there the engagement is there.
And we have a unique competitive positioning in that market with with.
With unique.
With unique South Florida Manny.
Many many designers and brands that seem to fast ACH platform the gateway to China.
Even in the big brands, we have unique skus and products because of their cost by the nature of our business.
And so we believe that.
It's going to be a great year for plus outside China as well so if you.
All of that.
We see strong top line growth in.
In 2023, but this is not just about top line are the.
The streamlining of the business and the reorganization that we were able to take advantage of a slower year. This year.
Will mean that we will exit 2022.
A leaner business.
We've we've.
Profitability in 2023 and cash generation.
Heightened levels as soon as we capture that growth as we know we've laid in.
And these new initiatives are going to bring to factset. So so I think 2023 shaping up to the return to growth.
As well as heightened levels of profitability, taking advantage of the rationalization that we were able to do this year in the in the business.
Yeah.
I think that concludes our call. Thank you everyone for joining us we look forward to speaking to you next quarter.
Good night.
Yes.