When Farfetch acquired the London boutique business of Browns in 2015, it marked the onset of a new era for retail, illustrating how digital and physical stores could seamlessly integrate. This move, where a digital platform acquired a high-end fashion business, was a novel proposition, lending Farfetch both gravitas and the potential to be an experiential retail leader as one of the fashion industry's most formidable companies.
The retail landscape is constantly evolving, however, and what defines success today might take on a different meaning tomorrow. Farfetch, the luxury fashion retail platform connecting consumers with a global network of boutiques and brands, finds itself in a shifting scenario. Founder José Neves, who executed an ambitious business model involving the acquisition of not only Browns but also New Guards Group and YNAP, is now contemplating taking the business private. This decision comes in the wake of a significant drop in the company's shares, high debts and high marketing and operational costs. In essence the company is burning through its cash.
Freeing up cash
This potential shift could lead to the sale of Browns, a prospect that has piqued the interest of Mike Ashley from Frasers Group. While Ashley's group typically doesn't operate in the luxury sphere, the sale could offer a solution to Neves' liquidity challenges. Farfetch is currently facing the possibility of a downgrade and is under credit watch.
Standard & Poor's, a prominent financial services company specialising in credit ratings, noted regarding the downgrade: “We expect the group’s operating performance to have been weaker than anticipated in the second half of 2023 owing to lower demand for luxury products than predicted, given the slower recovery in China and a softer U.S. market. In addition, we expect efforts to monetise the group’s working capital position — by selling down inventory, monetising tax receivables, or securing additional sources of liquidity — will not materialise… We now view the company’s capital structure as unsustainable in the long term, absent unforeseen positive developments in trading conditions or additional sources of support," as was reported by WWD.
Critical financial metrics, including liquidity, leverage, profitability, and cash flow, play a pivotal role in any assessment. These metrics are used to evaluate a company's ability to meet its financial obligations, including interest payments on debt. Presently, Farfetch carries more debt than cash, and a potential sale of Browns could provide the company with much-needed financial relief.