Q3 2022 Farfetch Ltd Earnings Call
Our enterprise leadership team under this new framework.
This reorganization is enabling us to fundamentally restructure our head count obligation and cost base and we are already seeing some initial benefits with SG&A cost declining quarter over quarter in Q3.
The fact that this was achieved in parallel with our continued investments in our new Sps and MTG strategic initiatives.
Also demonstrates the scalability of our platform.
And we're doing all of these whilst remaining focused on our north star.
Is the incredible opportunity to build the global platform selection re becomes more relevant and attractive than ever.
Another area of focus in the current environment has been on further expanding margins through a greater emphasis on disciplined growth.
As a result of this initiative Q3 gross profit margin increased 160 basis points year on year to 45%.
And digital platform order contribution margin expanded 580 basis points year on year to 32, 4% and we plan to extend these trading strategy through Q4.
In the current global macro environment, we are seeing continued digital media cost inflation for luxury, especially.
Especially in the U S as well as reports of higher inventories, indicating we're going to be having to a very promotional environment.
We've made the strategic decision of prioritizing margin profitability over growth in this promotional market.
Which is reflected in our revised full year 2022 guidance.
Overall, our achievements in delivering disciplined underlying growth.
Expansion of margins.
And reduction of the fixed cost base.
Position <unk> to emerge from this period as an even stronger business.
As such in 2023, we expect to return to solid growth.
While also delivering adjusted EBITDA profitability.
And positive free cash flow.
And we will continue to focus on these top priorities, while also supporting the strategic partnerships that we signed in 2022 for a launch over the next two years.
Neiman Marcus group, Ferragamo, Reebok and subject to regulatory approvals see small and why that.
We are tremendously excited about the future and are planning to share more details about our 2023 and long term plans in our upcoming capital markets day on December 1st and now I'd like to let Stephanie update you on our audience and.
The value we are bringing two brands.
Thank you Shannon and Hello, everyone today, I would like to take you through some recent developments.
<unk> into surplus.
Our outlook on the luxury customer secondly, outbound partnerships and the opportunity to further elevate the strategic value, we provide to them across our group.
I would like to begin by addressing health Apalachi consumer while.
While global macro questions of inflation and rising interest rates, we can overall consumer sentiment in luxury.
Luxury tends to be less impacted than the overall, the retail sector and we cater to and affluent consumers with less wanted to these pressures.
<unk> continued to exhibit strong interest in actually in Q3 as evidenced by the year on year growth in active customers driven by double digit growth in existing customers and from a high single digit growth in new customers, both new and existing customers also increased the number of items per basket, which is even more encouraging at this behavior over time.
<unk> had some stock keeping current agent with higher retention rates.
Well, our customers are highly engaged and the demand generation leverage delivered during the quarter indicate that we have become more efficient and interacting with them.
This is also a reflection of our investments in building our brand, which is to Kiki beneficial in times like these.
Private loans continued top sign other customer topline and exemplified the resiliency at the industry in line with last quarter, we maintained a 90% retention of our private clients, who delivered average order values of circumstance and 100 Donald on continued strong demand for high price point items, including our recent sale of a 900.
<unk> thousand <unk>, both in the evening.
During the call I can't we expanded our services to facilitate similar types of transactions by fashion <unk>, our proprietary and differentiated sourcing.
With the launch of fashion content on demand extending service to all private client styled warm.
Q3 also marked we emphasis on targeted in person events with a focus on private clients in September we hosted an event in Paris fashion week, which still hundreds of profit incentives and guests visit our stockpiles, which drove our social media reach of over $25 million as well as incremental TMT directly linked to the bank to.
Last week, we co hosted an event Makena domo as part of the overall partnership to introduce our private clients to the new Sangamo offering at the London Bond Street store and later this month, we will partner with Ipass <unk> in Miami engaging with our private clients, who have a strong affinity to IV, while leveraging the targeted marketing efforts, we are making specific U S regions.
Where we see growth potential.
On our industry pipeline, we continue to maintain strong relationships with brands and solid double digit increases in supply from our top 20, none NTT problems in Qt.
Recent hsni visited the Ceos of outbound icons.
Our conversations with them confirm that they're moving away from wholesale and believe in the pilot Multibank E concessions and model, which we pioneered in luxury and after syndicating by our marketplace and our E concessions as a servicer Fps suffering.
<unk> focused on growing owned direct to consumer they are also achieving partnerships and platforms that add value not only from a distribution standpoint, but also as a marketing partner. This is something which we have invested in over the past few years. As a result, we believe farfetch is one of the destinations they are prioritizing.
This is because <unk> had the ability to provide value to brands in multiple services across that group by leaning into our USP.
First at the innovation pipe and Indian see Marin fashion and tech as we develop new features we make them available to brands or we specifically launched new capabilities as part of broader partnerships. This quarter. For example, we are rolling out as <unk> is the handbag across our platform, which will benefit our top accessories bounds and improve the customer experience.
Second our global reach with <unk> over indexes in emerging markets, such as Mexico, Brazil, and the Middle East and offers access to beach into our brands may not have as strong a DTC presence.
This is particularly the case in China, where despite the overall macro environment. We believe it is a long term nutshell for community and our investment in localization and technology means we are the leading western luxury player in the strategic market.
And third I'll actually audience that we've become known as the platform for Gen Z and millennials as a marketplace. We can appeal to a variety of scientists statics and demographics and can therefore offer access to a broader range of the brand's collections, making us a more attractive partner for banks to work with who can choose to highlight pipes of debt collection by curation and.
Hi, Jason This is valuable from an ongoing commercial perspective around supply and a broad base to support the continued growth of our media solutions business.
We are encouraged by our recent discussions with brands, where they confirm that this aligns with how they would want to target our customers as well as how they structure their distribution. We believe this further positions farfetch as a partner who understands brands and their overall strategic goals from a commercial audience and technology standpoint, further cementing our ROA and <unk>.
Of their most strategic partners and the industry.
And now I'll hand, the call over to Elliot to discuss our financial results and outlook.
Thank you Stephanie and Hello to you all I'm pleased to share with you our third quarter 2022 results.
I wanted to start by addressing the impact of a stronger U S dollar year on year, which materially distorts, our underlying results, which I am very pleased with given the backdrop of a challenging economic environment.
There are four numbers to focus on all on a constant currency basis.
First our Q3 revenue grew 14% year on year.
Our digital platform <unk> grew 10% excluding Russia.
Our brand platform revenue grew 14% year on year at.
In our stores grew revenue, 54% year on year.
At the same time, our three business segments expanded gross margins year on year, and we started to crystallize the financial benefits of our actions to rationalize the cost base.
These results indicate a business successfully adapting to the current environment, whilst continuing to deliver underlying growth.
Our reported numbers deviate from these underlying results due to the continued strength of the U S dollar year on year, coupled with the financial impact of closing our operations in Russia earlier, this year as well as ongoing COVID-19 restrictions across China.
This means our reported GMB revenue and to EBITDA profitability are lower than we previously expected.
Whilst these factors will continue to challenge us in the next two to three quarters I am confident we will return to profitable growth in 2023.
With respect to Q3 2020 to profitability.
Contribution margin was up 580 basis points year on year to 32, 4%.
Reflecting ongoing efforts to drive margin improvement.
And our cost of technology, and operating overheads were lower quarter on quarter.
I'd like to walk you through the drivers behind the outperformance across all three business segments.
Starting with the digital platform.
Digital platform <unk> with $787 million.
Our reported decrease of 5% the same year on year.
Growth of 3% on a constant currency basis.
<unk> from the Farfetch marketplace, which represents the lion's share of digital platform GMP declines year on year across EMEA, largely due to the stronger U S dollar and closure of Russia.
<unk> also declined year on year in Asia Pacific due to the stronger U S dollar and ongoing COVID-19 restrictions in China.
And <unk> was flat year on year in the Americas with DMV and the U S down the impact of a deliberate decision to reduce demand generation spend by 20% year on year to focus on higher margin profitability from this key market.
Despite these headline figures I am pleased to report underlying order growth of 13% ex Russia, and 9% year on year growth in active consumers.
Active consumers increased quarter on quarter with gross adds up over 500000.
Offset by circa 100000 fewer active consumers due to the Russia market closure.
In parallel we have achieved significant efficiencies and our customer acquisition costs, which were down 18% year on year.
Supply remains equally as strong with both brands and boutiques continuing to increase overall stock value on the marketplace.
Which was up 25% year on year at quarter end to a record $5 5 billion.
I'd also highlight that average order value is circa 10% lower year on year at $530.
Which is predominantly due to foreign currency translation to U S dollars.
Third party take rate was 32, 6% 250 basis points higher year on year.
Highest as a public company.
This increase is attributable to our recent efforts to negotiate higher commissions, particularly from brand direct partners.
And continued growth in revenue of our high margin media solutions products.
First party Gms grew 4% year on year to $139 million and represented 20% of digital platform <unk>.
Q3, 2022 digital platform order contribution margin was 32, 4% an increase of 580 basis points year on year.
This increase was achieved by first strong third party gross margin of 70% up seven 120 basis points year on year, which is predominantly being driven by efficiencies in our shipping QTS and returns cost.
Secondly, we achieved efficiencies in demand generation expense with a 400 basis points reduction year on year to 19% of digital platform services revenue. This Q3, the lowest level in five quarters.
This improvement reflects initiatives to allow our customer acquisition and engagement costs, including a reallocation of spend towards lower cost markets more profitable transactions and at the annualized nation of the impacts of ESI restrictions.
These positive impacts were partially offset by clearance activity within our first party business producing lower gross margins year on year as a result.
Moving to the brand platform, we saw <unk> <unk> of $148 million.
A decrease of 10% year on year, but an increase of 5% on a constant currency basis.
Brian platform revenue decreased 2% to $162 million the difference between <unk> and revenue being an addition of revenue from our partnership with Reebok, which commenced in March 2022.
The brand platform generated gross profit of $81 million at a 49, 8% margin an increase of 120 basis points year on year, which was driven by the additional economic benefit from the Reebok partnership.
Finally, and store GMB grew 35% year on year to $32 million.
And achieved gross profit of $19 million at a 70% gross margin.
In terms of our cost reduction initiatives I am pleased to report that we are starting to see that our efforts are taking effect.
During the third quarter at least delivered savings across our operations platform, our retail network marketing spend and corporate people costs.
Further cost saving opportunities will crystallize as we embed the new leaner and simpler operating structure and we expect to achieve operating cost leverage in 2023.
Overall, adjusted EBITDA was minus $4 million, however, on a constant currency basis, adjusted EBITDA would have been circa $5 million.
Loss after tax was $275 million after the following noncash items.
An increase in financing costs year on year due to unrealized FX losses.
An increase in depreciation and amortization year on year as we started to amortize the Reebok partnership licensing agreement in March.
Share based payments due to 2022 equity grants.
And an impairment charge on our ground business as a result of impacts of the macro environment.
Finally, we have taken measures to reinforce our liquidity position by issuing a $400 million five year term loan instrument.
This instrument can be repaid at par after 24 months, which provides valuable working capital over the near term.
Note that as part of this transaction, we are associated with the remaining $50 million of our February 2020 convertible instrument routine thing with whom we continue to have a strong relationship.
I would now like to cover our outlook for the rest of the year.
Our updated expectations for the full year 2022 on a reported basis.
Digital platform <unk> of $3 4 billion to $3 5 billion.
The decline of five 7% year on year.
Brand platform <unk> will be broadly flat year on year.
Digital platform order contribution margin in the range of 52% to 53% ahead of 2021.
Adjusted EBITDA margin of minus three to minus 5%.
With a year on year impact from the FX translation of the brand platform operating entity.
And cash on hand of $750 million to $800 million.
As of December 31, 2022.
Once again, the stronger U S dollar year on year is a significant impact on our expected reported figures.
This view also reflects a deliberate decision to step away from what we believe will be a heightened promotional environment across key markets during Q4.
This decision follows our previously stated strategy to drive a higher full price mix and maintain order contribution margin above 30% at the expense of GMB growth.
Despite this our actions to deliver operating cost efficiencies as well as our focus on short term growth prospects remain in place, meaning we expect to see a return to GMB growth in 2023.
This growth will accelerate as we progress throughout the year. In addition, we expect to achieve low single digit adjusted EBITDA margins and positive free cash flow in 2023.
We will provide the building blocks of this guidance as well as medium term expectations for each of our three platforms marketplaces.
And Brian platform on December 1st at out and no growth capital markets day.
And with that I'll turn it back over to Joe Zee for some closing remarks.
Thank you Elliot.
I am very pleased we are successfully navigating an unprecedented macro environment in 2022.
With the following strategic responses.
One <unk>.
Seizing this opportunity to redesign the entire manufacturing organization, creating stronger accountability around our three pillars marketplaces platform solutions and brand platform and furthering our enterprise readiness.
Two capitalizing on this reorganization to fundamentally transform the way, we allocate head count and restructure our fixed cost base.
<unk> exit 2022.
A much more efficient business and SG&A structure whilst.
Far.
Continuing to build on our mission to become the global platform for luxury which remains intact and in fact reinforce as a tremendous opportunity.
And five <unk>.
Demonstrating the scalability of our platform by reallocating headcount and investments to deliver on strategic initiatives, such as Reebok Neiman Marcus Group, Ferragamo and Ashish Mall line App.
Which we expect to complete in 2023 after regulatory approvals have been received.
I am extremely confident that these ongoing measures will make fast ACH emerge in 2023, as an even more powerful efficient and profitable business, which continues to lead the online luxury industry and on our mission to become a preeminent global platform.
And with that I'd like to open up for your questions. Thank.
Thank you.
We will now move into our Q&A session.
Those of you who are joining us via Zhang if you would like to ask a question at this time. Please raise your hands by clicking the raise hand button on the reactions at the bottom of your screen window. What are called upon please on mute you OTI to ask a question. Please be mindful that only one question per analyst will be allowed.
Keith.
We would like to take a first question.
First question is from will <unk> from Wells Fargo. Please on niche audience and ask your question.
Good afternoon guys.
Just a couple from me.
There's a bunch of macro headwinds impacting the business. Currently maybe you can just frame out how the underlying business is performing now.
And you gave some bread crumbs for 2023, maybe just discuss the underlying business.
Heading into 2023 as well.
Hi, this is.
I'll take that.
First of all.
It's really important to take a step back here and these have been.
Very.
Volatile three years.
With several world events.
Cove is the one in Ukraine.
The strength of the dollar inflation et cetera.
And and we have been navigating these these very volatile times and.
Very successfully.
We broadly doubled the business in the last few years, both in terms of GNP and in terms of revenue.
This is significant significantly higher then.
Our peers beat online luxury or even.
Our luxury brands and so the comps are different I just want to highlight that.
And there were a few uncontrollable this year.
Russia, the stoppage in Russia.
China Covid restrictive policies.
And FX to name the three most powerful.
Macro factors impacting our our performance.
Hum.
The underlying business to your question is.
He is still growing so if we exclude Russia, even if you leave all the other macro factors China effects, just excluding Russia.
We will grow this year.
And and we have if you look at the underlying business we have.
As shown data points here, so we've added.
Last quarter, another 500000 customers, where we can continue to add new customers to the platform with lower demand generation costs.
In terms of others as you have pointed out excluding Russia August went up 13% last quarter and.
This is a good metric because obviously with all of those who are with us.
In fact, the impact of.
On FX on the average order value.
And our most valuable customers, our private clients, we keep above 90% in terms of retention.
$1100 average order value.
That's including the FX impact without the FX impact will be even higher so very very solid.
Underlying business in spite of.
The general macro environment, which is of this.
And and then on the controllable we are absolutely taking every action that we feel needs to be taken here.
We are taking this this year of macro volatility as an opportunity to reorganize the company.
We've outlined that in May and then in more detail in all of this we've done a complete reorganization redesign.
While the perpetual leadership and of the <unk> company.
And that allows us to unveil strategic opportunities to shrink costs.
Prune initiatives.
Rebalanced headcount, reducing head count.
In certain areas of the business.
And allowing us to rebalance that head count to the new initiatives that we've signed that that we're going to launch in 'twenty 'twenty three 'twenty four.
You already see that in the <unk> line, which is shrinking quarter on quarter. This is ongoing. So you will continue to see the results of this cost discipline.
The other controllable is our strategy in terms of full price and we are absolutely continuing to focus on.
Our higher quality customers and higher quality sales.
We've reduced the demand generation spend.
We've increased margins, we have the highest take rate on record since we're a public company.
Highest.
Are the contribution margin in the last five quarters.
Of that 80 basis points year on year. So this was a deliberate action to protect our margin and profitability and although this really sets us sets us up very well for 2023.
We believe that we need to have our eyes firmly firmly on our north star.
And the huge opportunity is building the global platform for luxury remains intact.
Key initiatives.
Underpinning our 2023 growth plans.
To your question in 2023.
We expect to be back to growth.
That's driven by the continuing strength of the core business as we lapsed. This macro factors, Russia. It's a mathematical equation, we will lapse at by I am asked next year.
China, each improving quarter on quarter of course, we don't know exactly how the situation will pan out.
But is it seen double digit decline this year again from Q2 to Q3, we already saw an improvement.
Even if it goes until flat territory next year, it will be a tailwind.
But we need to have modest expectations there of course.
But we will eventually lapse that China impact as well.
FX, obviously, there's always at historical levels, and where we're forecasting we do our budgets, obviously on a constant FX basis into 2023.
And so we believe that we will have.
Positive impact from these lapsing of the macro factors and the car business, where we have strong data points and exiting 2022 and of course, we have this new science deals. These are not castles in the AD is a signed deals that we are on track to deliver.
Ferragamo revolved into the first half Neiman Marcus group in the second half.
And obviously pending regulatory approval completing the huge mall in winding up deal and prepared and on track to deliver on those as well.
And with all of that and the cost rationalization that we were doing this year.
We are very very confident that we will go back to EBIT profitability, which we achieved last year.
And you can see by looking at 2020, where we had positive cash flow in this business when we normalize lumpy and we will normalize won't be in 2023 and when <unk> grows.
This business generates cash and this has been the case historically and we think.
Very very confident that we will go back to that cash positive scenario.
Look we're well funded to go through these macro volatility we will end the year with $800 million in the bank.
And with a very energized team and a new RFP to go after all these opportunities.
And that's it's on that basis that we are very confident about 'twenty 'twenty three and ahead.
Ahead of us.
Yeah.
Yeah.
Our next question will be Doug Anmuth from Jpmorgan. Please Amit your audio and ask your question.
Great. Thanks, so much for taking the questions.
I guess, just first thinking about.
Digital platform order contribution up sequentially, and then and then up about 500 basis points year over year can you just talk about the potential to get further efficiency gains on your marketing spending and customer acquisition costs and <unk>.
Further gains as well on on take rate due to media solutions and then secondly.
Secondly, just on China, any expectations kind of for what that will look like as things hopefully open up more and as this period, giving you more more time to strengthen the offering and the <unk>.
Platform. Thanks.
Sure.
Hey, Doug Elliot here.
Taking with you.
Look I think as I've spoken to investors a number of times, we see significant opportunity as we move forward on order contribution.
There is broadly sort of five leave us to see the order contribution expand you touched on two very big levers, obviously, improving our media solutions income again, the record level of revenue this quarter, but still running below 1% of overall GMB.
And we benchmark ourselves to other marketplaces that.
That sort of move in a 45% of <unk>. So we see significant upside there we've got <unk>.
<unk> and very strong relationships with the brands across the industry.
Clearly the sort of stock level is up as well to $5 5 billion. The relationships are strong and end with Rick would meter income. They see now $3 9 million active consumers is very desirable to be in front of them. We would continue to see that grow.
That falls through to order contribution with significantly higher levels of margin.
And take us towards our longer term targets of 60% over the long term because it's higher than that in terms of accretive to order contribution and demand generation again, great savings year on year. The team has done a fantastic job to spot areas of opportunity to drive efficiencies.
We were down 20% in terms of Spain, and the U S.
And the <unk> impact on that was significantly less than that so we were able to drive improving margin in that market and focus on really the high end customer.
We've seen great retention at the top end of the customer base. The private client is up 90% over 90% retention.
<unk> within that group as well when you sort of.
Obviously in the U S. You don't need to adjust for currency, but more broadly when you adjust for currency. The spending is strong in that client base and others that we target online with the vet, so excess customers at gold platinum silver seeing good efficiencies from that higher LTV customer bracket, which we're very very focused on.
When you do remove your demand generation spend as we have done year on year by bringing it down to the lowest level in five quarters at 19% of <unk>.
Revenues.
Youre effectively removing that sort of marginal incremental customer that isn't that valuable and we're seeing lots of promotions.
Into the next quarter, we're not going to participate in that high level of promotional activity again that will mean.
<unk> will be weaker than previously planned, but we'd rather not invest in those.
Those customers and see how margin decrease the plan is to hold our order contribution margins are well above 30% in the quarter hit the <unk>.
Leave us just to touch on obviously, the first party business again very heavy can clearance activity at the moment, so low levels of gross margin in the 20% range.
It's not where we want to be long term, we would expect to be able to return that gross margin up to industry levels of 35% to 40% gross margin.
As we clear through this excess inventory this inventory came about because of the slowdown in sales in Russia and in China, which were unexpected we have to clear through that stock over the seasons, but they would see that margin improve Dana as we move forward and we'll touch on this a bit more at the capital markets day on December 1st.
The plan is to move away from first party.
<unk> and sales and more towards third party draw.
Driving our GMB growth moving forward the GMB on third party. The gross margin I should say on that was 70% this quarter very very strong up 700 basis points year on year.
Thanks to shipping efficiencies so.
<unk> there of improving order contribution margin shift away from first party to higher gross margin third party business and through the efficiencies the fulfillment team delivering on our shipping model with improving relationships with a broad mix of carriers with more localized supply roofing returns to the consolidations.
<unk>, where we can deliver more efficiency in terms of unpacking, all helping to drive savings in <unk>.
Returns in our outbound shipping and <unk>, which were down 700 basis points as a percentage of digital platform platform revenue. This quarter, then I will touch on Fps again, a big feature of the capital markets day.
We will be breaking out the economics of if piece for our investors to say as we add incremental <unk> of this part of the platform, we see very accretive order contribution margins flowing through and we will expand order contribution margins over the near to longer medium to longer term.
And then lastly of course underlying commissions, you've seen that underlying commissions improve again.
To help boost the take rate up to 32, 6% that's with renegotiations on brand partners.
We're bringing up the lower level take rates and commissions.
To help the overall blended mix so lots of opportunities to continue to see that number move over the near term.
On China, maybe Joseph Yes, I'll take the China question.
Look I think China is an amazing opportunity.
Second largest luxury goods magazines in the world Brown, 30% of the luxury industry.
<unk> is expected to be as much as house is Kim.
Here, we have a tremendous opportunity as we have a very unique competitive advantage, we're really the only western player.
That has invested many years and has a fully localized.
<unk> seen the market local apps driving the majority of our business there.
An incredible team on the ground the incredible consumer proposition both cross father.
And domestic.
And that's very unique in the west and landscape and then our partnership with the other game in town, which is Alibaba <unk> luxury pavilion. So really the two platforms that are driving.
The online luxury story in China.
Im very happy with the with the luxury pavilion.
It's growing ahead of our marketplace.
And.
Hitting the milestones and the goals that we had set with Alibaba and <unk> when we did the joint venture.
Overall, we are very bullish about the long term.
We think this is stu.
Current.
Situation in consumer sentiment is temporary we are vigilant on the situation and and monitoring.
But this is not a reason to retreat at all from that market, we will continue to invest in and an incredibly localized.
Experience for our customers and capitalize on our unique competitive position in that market.
Okay.
Our next question is from Lauren Chung from Morgan Stanley . Please Omniture audio and ask your question.
Great. Thanks, I wanted to ask about the reorganization and expense discipline. When do you expect the full effect of that to be seen is there any quantification around the gross savings that you're expecting there.
And then are there any further actions that you think can be taken or are all of the changes are behind us and now it's just about endpoint to the P&L. Thank you.
Yeah.
Hey, Lauren.
Yes, I mean.
So as I said earlier on we've done a top to bottom review.
The overall structure of the business.
And.
The first output is.
It's effectively the new reporting structure, the new ownership of the various.
Aspects of the platform. So we have clear ownership over.
The marketplaces and the brand platform and then in terms of the supporting platforms to deliver against those profitable.
Growing units.
<unk>.
As arranged ourselves around the operations the technology in our business services, all again with clear Ownerships.
And what that's delivered as significant opportunities for cost savings, particularly around streamlining.
Those various aspects of the business.
Globally.
Some of those are already in there you've seen.
Klein in terms of spins a quarter on quarter of $8 million the risk continue to flow through over the next few quarters as we work through the sort of continued changes across the business and aligning ourselves around those those structures I think what's important is if you look at our numbers we are dry.
Giving a levered in some areas of the business again this quarter and as we move into next year, we will be driving leverage across all areas of our spend up through 2023. So if you look at technology year on year for Q3, including the capitalized element only up one 6% in terms of Spain driving operating leverage.
Form operations, Spain was down quarter on quarter, driving operating leverage year on year, our brand spend came down year on year.
Sorry came down quarter on quarter, and again driving operating leverage year on year I'll spend on warehousing because of the efficiencies driven from the logistics team down quarter on quarter and driving leverage year on year and of course touched on.
Customer acquisition spin down 18% year on year, driving significant operating leverage and demand generation savings driving order contribution up there as well so we're seeing the fixed come through.
There will be more to flow through there are actions that are ongoing to see that flow through in savings Steve Hoppe as we move through the next few quarters I don't want to quantify that exact number because we are using some of those savings to reinvest.
Near term growth clearly the partnership with Reebok has started off well and we will start to see trade from that relationship across Q2 next year and we're also obviously focus very heavily on our fantastic new clients that <unk> will be going live with starting across.
H, one and then to H two next year as well. So there is some reinvestment of the savings there is.
But there is leverage coming through now and very pleasing to see.
Yeah.
Thank you.
Okay.
Our next question is from <unk> and hospitals.
Citation around.
Please limit your call ODM and ask your question.
Thanks for taking my question.
And any comment on the current trading.
How youre seeing in terms of the customer the categories and geographies.
Yes.
Yeah I'll take that.
So as we sort of said earlier on.
The three sort of main geographical groupings that we present.
To investors is Europe middle East.
In Africa.
It wasn't a decline year on year, largely due to the translation from U S dollars and of course, the closure of the Russian market important to note and remind everyone that Russia was about 7% of <unk> on the marketplace for 2021, so a significant removal of <unk> across 2020.
Two we will annualize that negative headwind in the back end of Q1 so.
From sort of March onwards, we will be the like for like again across Europe , Middle East and Africa.
On Asia Pacific, China actually is the main sort of driving factor there in terms of decline year on year again. This is due to the ongoing restrictions around COVID-19.
We are seeing slightly better results.
The year on year decline.
<unk>.
Less severe in Q3 than it was in Q2, so thats promising in terms of green shoots of growth the demand clearly there and when our business model of cross border packages frees up in terms of trade, we would expect to see a good level of pickup as Jos.
<unk> touched on earlier around China, being a significant market opportunity for us.
In the near term.
In the Americas, what were seeing overall, the grouping is flat broadly flat year on year.
It's being brought down a little bit by the U S. Our number one market. What we started to see across Q3 was a heightened level of promotional activity from the competitive set.
I would note a number of other.
Players in the space have had the gross margins impacted they've been reporting negative gross margins not farfetched, our gross margins up significantly year on year, because we are not following this.
Promotional activity, what we're seeing and would expect now is that Q4 is going to get worse.
Lots of stock out there.
At the moment in terms of inventory of products and.
The only has to be cleared across the next quarter, we would expect that to be promotions.
Fitch wont be following those promotions will be maintaining.
Of value of margin and customer value and that will come at the expense of <unk> in the U S across the quarter ahead, that's a deliberate decision to maintain our focus on full price for all participants on the platform and drive our own margins. The other thing we're seeing is very high.
Media inflation year on year. So there is significant growth in costs again because of the competitive environment.
We've again successfully navigated that with.
An 18% reduction year on year customer acquisition cost that's led to this demand generation reduction year on year of 17%, which is driving the order contribution margin up by 590 basis points as well as obviously the strength of the third party gross margins as I touched on before.
We're navigating lots of moving parts out there as a global business, there's lots of lots to deal with but phosphate. So I think it's fair enough beta than most I think the key number here, while I say that is.
The constant currency revenue growth of 14% year on year that matches very well with other players in the space who of course get the benefit of reported in euros with a stronger dollar. So the reported numbers, obviously inflated versus underlying numbers, whereas ours are impacted so overall we're doing.
Well and again as Joe as I touched on before on a three year basis pre pandemic to now basically doubled the business.
And accelerating the growth of that because of our strong Q3 in the last couple of years. So we are doing very very well to navigate the moving.
Tides here.
<unk> the industry.
Thank you.
Our next question is from Lindsay come from UBS. Please Amit your audio and ask your question.
Hi, Thank you for taking my questions.
One on the accounting part, especially in terms of the cost reduction benign.
The G&A expense and the.
Stock based comp expense I don't see a downward trend on accumulative basis, So I must be missing something.
That's one and then the second thing is on FBS timing and Joseph you mentioned.
Yes.
Especially neiman Marcus expect in the second half so that would mean a transition time or close to maybe a year. After the deal was signed.
But after the deal was completed when we think of why now how long do you think that transition time.
Okay.
Thank you.
Hi, I'll take the first one good speaking with you.
The share based comp is the reason why youre not seeing the savings quarter on quarter. When you add the two together share based comp is obviously something we've spoken about with investors quite a bit over the year to date, we like most of the <unk>.
Technology players in the industry have seen a volatile stock price and.
That has meant that we've had to increase.
The number of units that were issuing to <unk> key.
Key talent in terms of the contributed grounds for 2022 because of the lower share price. The volatility also in terms of how those options are values means that there is a year on year increase in terms of the <unk> charge for that share based compensation. That's obviously.
Noncash and the dilution effect of those she is well understood by investors in terms of my conversations with them and they're very comparable with others in the market as I see it other companies facing the same issues around share price reduction.
<unk> overall.
<unk> is below 10% last couple of years, it's been circa 5% in line with our target and we would expect all share based.
Burn in terms of.
<unk> shares to get back down towards 5% and lower over the near term as most other players as well.
In terms of adjusted EBITDA. The key focus of what is happening underlying in the business I E. The cost that we can control that is we have quarter on quarter. We've seen these savings of $8 million again as I said, a widespread changes across the organization to drive efficiencies.
Clear accountability of the deliverable results as we move into 2023 and leverage year on year across key platforms within the organization.
Thanks, Elliot and maybe on the on the timing.
Yeah, I'll take I'll take that question. Thank you.
<unk>.
So.
I think.
The timing for Neiman Marcus group.
Is compatible with.
The size of this client I mean, we're talking about a multibillion dollar company.
One of the largest players in luxury with a very sizable online operation.
And therefore, our complex operations as you would imagine.
So we think that the timeline is actually very very good compared with.
Similar enterprise offerings from <unk> labs have enterprise grade.
Companies and we would expect that to be the case also with the with lineup.
We're engaging with regulators as we said we.
We will lose in several jurisdictions upon announcement.
And we will keep you were pacing in terms of the timing.
Okay.
Thank you so much.
Youre welcome. Thank you.
And Paul I remind you of one question per analyst.
Thank you. Our next question is from Louise single Ash from Goldman Sachs. Please mute your audio and ask your question.
Hi, good afternoon, everyone.
We will stick to my one question diligently actually if I could just ask a question back on demand generation.
It was quite a bit I guess year on year, and then I realize it doesn't see.
Finding more efficiency in that cost line.
Insurance, if you can give us that there's no risk.
Putting the constant having that impactful consumer acquisition.
Please.
Net retention I think Stephanie you talked about the 90% retention at close to private clients.
As Henry Kaestner days straight to the high <unk>.
In other words.
Did you say Indian customers at the entry level or does the data tell you something.
Obviously much more efficiently.
Michel can some of the entry level and base. Thank you.
And I know it takes.
Take some of that so I think yes.
Taking taking us back a couple of quick as and when we discussed our strategy. We've always said look we have the capability thanks to investments in.
In marketing tact to really acquire a lot of customers and we began to elevate the current period, we really leaned in and acquired a lot of customers that Hasnt stopped we continue to acquire those customized 13 of 500000, we retain.
Solid number.
But I think this is also a deliberate strategy to really lean into him most.
Valuable customize and valuable at Tiger content with new customers and we're starting to see that we've seen it particularly in the U S. You saw.
<unk> stated that a drop in media spend doesn't correlate the exact dropping in.
So we're really seeing efficiency there so.
So I think where we're really leaning in is our retention if I can we've been talking about retention and our effort. It's just what we do but we've really been leaning in to that of the last.
So everything from increasing personalization and curation driving sales from the App, where you really see at strong retention and really focusing on those higher cohorts.
Speeding up you talked about and then move into a higher count like speeding them up or access.
<unk>, Netherlands, which we're hearing and then really focusing on that private client and it's something that the industry in general does and we are doing we have a very large private client business.
To work with and in fact, our private client business is actually as big a business is the entirety of <unk>.
We really have.
A huge base to work with and we're doing now.
Neither then come back with a targeted event at with private clients. He jumps that we've done in store than.
We've really focused on particular markets in the U S, where we're seeing that whether it was in may with NPD launch and with Miami at Houston Atlanta.
Yes, I think.
What you will see is a drop off in the lower value, but where the real focus on the long term value.
And two milestones.
So are you seeing that retention rates increasing.
And then the 90%.
The historical levels that you can share.
Share with us just numerically on those retention rates.
So look retention rates and given all of the macro factors given the volatility we would love to see them higher that broadly and temporarily flat mostly.
Will it down by the way.
<unk> as you might expect again, we acquired a huge number.
Those customers that were seeing some encouraging facts so.
More items per basket from theirs.
That's a very good indicator of future loyalty and future repurchase so even with <unk>, it's not that we're not focusing on them. We are driving that but of course, we're seeing better ROI from our assets in the higher tiers.
We have time for one more question. The final question will be from Stephen Ju from Credit Suisse. Please Amiga audio and ask your question.
Okay. Thank you so much so.
And sorry to belabor the point on the demand generation cost here, but it does sound like the CAC in North America, and maybe the U S.
<unk> scratch it at higher and higher and very rarely does the cost of media ever come down so.
Should we be thinking about a slower pace of customer growth overall.
And also should we be thinking that the prevailing environment in the U S will spread to what may be currently your lower cost regions. As your competitors also look to those customers as well.
Hi, Stephen Yeah, it's worth focusing on this what we're seeing obviously is the.
The media inflation is very high in the U S because of the competitive environment.
Being able to bring our customer acquisition spend so the dollar per unit of customer required.
Acquired customer is down 18% year on year. So we've been able to drive efficiencies despite that media inflation by effectively expanding our mix of channels, we're using a lot more social media and influencer and other channels to move away from.
Paid search or search engine marketing spend and that is helping us to alleviate some of this increased inflation and bring down the actual absolute per order CAC and obviously thats brought down overall demand generation sustained in terms of over $1 as well so far that's not impacted on new customer acquisition.
We had over 500000, new customers in the quarter again with 9% up year on year in terms of active consumers. Despite the fact that Russia has.
Impacting us by about 100000 customers in this quarter in terms of negative impact. So overall, we feel like we had the right balance in Q3 and the team is doing a great job not to sort of chase those sort of lost margin or customers that ultimately aren't going to deliver the life.
Value that we want to achieve from.
The customer cohorts that we're acquiring I think importantly, we are seeing that drive.
Particularly given the gross margins are up and the take rate is up we're seeing this stronger.
Level of three months LTV.
For the customers that we're bringing in.
Quarter on quarter. So that's very good and as I say the kicks down for Q3, So I would expect to see an improvement again on three months LTV versus the first half.
Whilst we are adding these customers and as stefanie touched on driving retention.
As good as we have I think there is significant upside in retention. If you look at our numbers and we will go through a bit more in terms of cohort information on December 1st at the capital markets day significant upside there in terms of frequency of shop, and being able to retain customers as we move forward. So I think we've got it right.
It's one of the highlights for me out of Q3, the bit about the U S. Clearly it.
It's very promotional going into Q4, we'll let spray to Australia I think there is maybe a slight chance that we see some.
Highly competitive environment across Europe .
I would probably reference other retailers that have see it as being Theres. This return to store there's been this.
Wave.
U S tourism into Europe , because of the strong dollar and the weak euro that maybe that will reverse as we move forward and that could cause a little bit of promotion, but now I am.
Really starting to gain deep into the Crystal ball here so.
Putting numbers on it but I think we just have to trade through clearly with.
<unk>.
These numbers Q4 that will be in decline year on year, but as we move into 2023, the underlying numbers prove we'll be able to grow as we move forward.
The <unk> clients that will go live will add.
<unk> growth.
Onto the underlying marketplace and if he is like for like growth will annualize. Some of these negative headwinds at some point through through the year. The U S dollar strength.
Too much into the future, but at some point will be less of a headwind and we will see the reported number really returned to strong growth and profitability back again next year.
As we as trade through this this exciting opportunity ahead of us. So yes, <unk> now on what we can do to set ourselves up right for 2023.
And we look forward to taking you through the building blocks of that guidance on December 1st and we also want to take you through a little bit more around medium term expectations of each of the platforms.
Broken out for marketplaces broken out from our first party original brand platform business, So counterweight to that and I'm sure investors will be looking forward to that as well.
I think on that will probably say good night and look forward to speaking to you over the next couple of weeks.
Okay.
See you on the capital markets day, everyone. Thank you.