FARFETCH LIMITED 
Fitch Ratings has affirmed
The Outlook is Stable. Fitch has also affirmed
Farfetch's 'B-' rating remains supported by its leading position in the global e-commerce personal luxury market, where it is well-placed to capture growth opportunities due to its established and geographically diversified online marketplace platform. However, the rating is constrained by a delay in profitability improving due to disruption in selective luxury markets (US,
The Stable Outlook also reflects our expectations of sufficient liquidity after the add-on placement to fund growth and Farfetch's put option liabilities, should they be exercised in cash. The company has some discretion over how to finance the exercise of the put options but we will treat higher-than-expected cash outflows negatively in our analysis, especially if debt-funded.
Key Rating Drivers
Performance Below Expectations: Farfetch underperformed our forecast in 2022 and 1H23 due to a higher fixed cost base, slower working capital turnover and weaker demand recovery in
Projected Profitability Improvement: The 'B' rating is predicated on management's commitment to achieving sustained profitability. We assume an improvement in growth, profitability and cash generation from 2H23, reflecting the ramp-up of new partnerships, ongoing cost-cutting initiatives and working capital management. We project EBITDAR margin to increase to 4% in 2024 and to above 10% in 2025 (2022: -4.3%), driven by growing economies of scale, contribution from new partnerships, potentially including certain Richemont brands and the investment in YNAP (in each case subject to regulatory approval) and cost improvements.
Cost Reduction is Key: As Farfetch has lowered its revenue guidance, we view a reduction in general & administrative (G&A) and R&D costs as key to deliver breakeven EBITDAR in 2023. In 2023, Farfetch plans to cut these costs to
There was some reduction in G&A and technology costs in 1H23 but Farfetch needs to make stronger progress in 2H23 to meet its target. Inability to reduce costs would delay reaching a sustained positive margin and would be detrimental to the 'B-' rating.
Inventory, Fashion Risks: Farfetch is exposed to fashion and inventory risks due to its first-party sales, where it takes the ownership of inventory. This results in cash flow volatility and creates pressure on gross margin. In 1H23, the inventory position was higher than expected and while we expect stock levels to reduce by end-2023, ongoing inventory clearance will weigh on gross margin for Farfetch's In-Store and Brand Platform segments.
No Headroom for M&A, Dividends: Our rating case does not incorporate cash payments for M&A or shareholder remuneration and we treat them as an event risk. Should this risk materialise, it would create significant pressure on the rating. Farfetch's liquidity is limited and we estimate there is no headroom to absorb such cash outflows, despite the recent
Leading Market Position: The rating is supported by Farfetch's position as a leading global platform for the luxury fashion industry, underpinned by good geographical diversification and an established presence in fast-growing markets. Farfetch's wide and growing portfolio of leading global luxury brands creates competitive strength, which together with sophisticated digital infrastructure, enables the company to reach a global online audience and ensure customer traffic. The platform is also equipped to service third parties by providing tailored direct-to-consumer solutions for luxury brand producers and retailers, underlining Farfetch's strong in-house capabilities.
Platform Enabled by Technology: We view Farfetch's in-house digital e-commerce platform and owned well-invested and established digital infrastructure as a fairly high barrier to new entrants achieving similar competitive strength and scale. We believe Farfetch is also protected to some extent from competition from online giants, like
Enterprise Valuation Supports Financial Flexibility: Our rating reflects that some of the intrinsic strengths in Farfetch's business model are reflected in its enterprise value (EV) of
Meaningful Execution Risks: Fitch sees high execution risks in Farfetch's plan to scale up its business and achieve strong and sustainable levels of profitability and free cash flow (FCF) generation. In our view, the path to profitability has been already delayed not only due to external factors, such as exit from
We continue to rely on management's commitment to reach
Derivation Summary
Farfetch is the leading global platform for the luxury fashion industry and shares some traits with consumer goods and non-food retail companies as it sells products online and through directly operated retail stores. Fitch does not rate direct competitors of Farfetch. However, we have considered companies such as
Fitch uses its Non-Food Retail Navigator to assess Farfetch, similar to Amazon.com and Golden Goose. We considered lease-adjusted credit metrics for Farfetch due to its expansion of leasehold store network.
Farfetch is rated two and three notches below Golden Goose and Birkenstock, respectively. Both Golden Goose and Birkenstock have strong EBITDAR margins (30%) and positive FCF, partially offset by their product and supplier concentration. Birkenstock's higher rating reflects its larger scale and product positioning that is historically less subject to fashion risk.
Farfetch's credit profile is weaker than that of
Amazon.com is an investment-grade company with a global e-commerce platform, significant scale, solid diversification in product and geography, and conservative leverage.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
High organic growth supplemented by ramp-up of new partnerships with Ferragamo,
Regulatory approval of the YNAP transaction, with GMV from marketplace and platform solutions services to Richemont brands and YNAP contributing to Frafetch's revenue and profits from 2024
EBITDAR turning positive in 2023 and trending to
Sustained improvement in working capital management, leading to inflows under working capital inflow over 2023-2025
Capex of
No dividends or new acquisitions to 2026
Cash payments under put options not exceeding
RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that Farfetch would be reorganised as a going concern in bankruptcy rather than liquidated. Farfetch's GC EBITDA is estimated at
Farfetch's
After deducting 10% for administrative claims, our principal waterfall analysis generates a ranked recovery for the senior secured debt, in the 'RR1' category, leading to a 'BB-' rating for the TLB, three notches above the IDR. The waterfall analysis output percentage based on metrics and assumptions is 91%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Maturing business model, leading to EBITDAR margin above 5% on a sustained basis
Visibility of deleveraging trajectory with EBITDAR leverage below 6x on a sustained basis
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Liquidity shortfalls and insufficient resources to fund operations or fulfil put options obligations over the next 18 to 24 months
No visibility of EBITDAR reaching at least
Material debt-funded acquisitions, larger-than-expected payments under put options or shareholder distribution, leading to erosion of the cash position
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Limited Liquidity: Farfetch's liquidity is limited, despite the cash balance of
Issuer Profile
Farfetch is the global leading marketplace for personal luxury fashion, including clothes and accessories, with an annual GMV of
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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