The Ratings Game: Farfetch says luxury shopping has permanently moved online, shares jump

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Farfetch shares have skyrocketed 347% in 2020 as luxury shopping has moved online. (Augment Retail store shown above.)

Farfetch

Farfetch Ltd. FTCH, +5.69% says luxury shopping has gone digital and it’s not going back to its traditional brick-and-mortar ways even once the coronavirus pandemic is past.

“We believe we’re witnessing a paradigm shift in the way people buy luxury,” said José Neves, chief executive of the luxury e-commerce retailer, on a late Thursday earnings call, according to FactSet.

The British-Portuguese fashion retail platform sells products from over 700 boutiques and brands from around the world.

Farfetch surveyed newer customers, finding that nearly half (45%) said they will continue to do more of their shopping online now that they’ve grown accustomed to it, and 23% said they would now be doing most of their shopping online.

Farfetch is also drawing in an attractive demographic: nearly two-thirds of its shoppers are millennials or Gen Z.

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“This clearly indicates that the luxury industry will not go back to the same normal as we did with pre-COVID-19, and affirms my beliefs that we’re witnessing a major acceleration of the sustained online adoption I have anticipated when I founded Farfetch 13 years ago,” Neves said.

Brands and other retailers are taking note, Neves said, with Farfetch Marketplace gaining attention.

Moreover, Neves said the company is focused on full-price sales rather than promotions and discounts. This “has made Farfetch a particularly attractive channel for new and existing partners, many of whom see this year’s challenging environment as an opportunity to take actions needed to tilt their distribution strategy away from wholesale towards direct-to-consumer.”

Farfetch shares jumped 5.7% in Friday trading after the luxury e-commerce company reported a 71% jump in third-quarter sales.

Certainly, the luxury category isn’t the only one to make striking gains during the coronavirus pandemic. Grocery, home goods and generally most other merchandise categories have seen their sales rise online.

Online transactions increased 248% from Jan. 2020 to Oct. 2020, according to data provided by technology and marketing company PowerChord.

EMarketer expects U.S. e-commerce sales to surge 32.4% to $794.5 billion in 2020.

“Many consumers have either shopped online for the first time or shopped in new categories (i.e., groceries),” said Cindy Liu, eMarketer senior forecasting analyst at Insider Intelligence, in a recent report. “Both the increase in new users and frequency of purchasing will have a lasting impact on retail.”

The luxury category has been slow to make the move to online. But now, e-commerce giants like Alibaba Group Holding Ltd. BABA, -1.31% and Amazon.com Inc. AMZN, +0.59% have also been making inroads in digital luxury, with Alibaba recently announcing a partnership with and investment in Farfetch.

Read: Farfetch shares soar after $1.15 billion Alibaba, Richemont, Artemis investment

KeyBanc Capital Markets says Farfetch is one of its “favorite growth stories in e-commerce.”

Analysts there rate the stock overweight with a $65 price target, up from $50.

“We think the platform is the leading luxury platform, and with a mere mid-teens e-commerce penetration, secular tailwinds remain very strong,” analysts led by Edward Yruma wrote.

“Continued protraction in traditional luxury department stores, in-market purchases, and consumer preference should give Farfetch some of the strongest sustained growth in our coverage.”

Oppenheimer analysts also raised their Farfetch price target, to $52 from $32.

“Farfetch’s marketplace has the potential to disrupt the luxury fashion industry which has lagged in technology adoption, as millennials and Gen Z consumers become a higher percentage of consumers,” analysts said.

“We believe Farfetch is well positioned with a first-mover advantage to capture market share in the personal luxury fashion goods industry with an estimated tangible addressable market of $430 billion by 2025.”

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Oppenheimer rates Farfetch stock outperform.

JPMorgan analysts note that Farfetch is guiding for digital gross merchandise volume (GMV) of $880 million to $910 million in the fourth quarter, year-over-year growth of 40% to 45%. That’s down from 60% growth reported in the third quarter.

“The deceleration from 60% in 3Q is driven by some caution around the holiday promotional environment and uncertainty from the recent virus spike, which could have a bigger impact on apparel purchases in the winter,” JPMorgan said.

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“Importantly, Farfetch believes this rate of growth implies continued share gains of online luxury, and can be achieved while remaining disciplined and not chasing customers in a potentially more promotional environment.”

JPMorgan rates Farfetch stock overweight with a $62 price target, up from $48.

Farfetch shares have skyrocketed 341% for the year to date. The Amplify Online Retail ETF IBUY, +1.27% has gained 88.6%. And the benchmark S&P 500 index SPX, +1.36% is up 11% for the period.

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