Farfetch Limited Price & Performance (FTCH)

Hello, and welcome to Farfetch's Q2 2023 conference call. Today's update will include prepared remarks from Jose Our Founder, Chairman and Chief Executive Officer Elliot Jordan, our Chief Financial Officer and Stephanie Fair, our Group President And Chair of NGG. Jose and Elliot will also be available to take questions following the remarks. Please note that unless otherwise stated, all comparisons on this Which can be accessed as part of the live webcast at farfetchinvestors.com. Following the call, the presentation will also be uploaded to the site. Before we begin, we would like to remind you that our discussions today will include forward looking statements. Actual results could differ materially from those indicated in the forward looking statements, And forward looking statements made today speak only to our expectations as of today. We undertake no obligation to publicly update or revise them. For a discussion of some of the important risk Factors that could cause actual results to differ, please see the risk factors section of our Form 20 F filed with the SEC on March 8th, 2023. In addition, we will refer to certain financial measures not reported in accordance with IFRS on this call. You can find reconciliations of these non IFRS financial measures to the IFRS financial measures in our earnings materials, Which are available on our website at farfetchinvestors.com.

And now, I'd like to turn the call over to Jose.

Hello, and thank you for joining us Today, I am delighted to be taking you through our Q2 results, a quarter which saw And thanks to the decisive actions we've already taken in terms of fixed costs, we are confident we remain on track to We adjusted EBITDA profitable and free cash flow positive for full year 2023. Before we dive into the details about our results and outlook, I think it's important to take a step back and Look at the long term opportunity for Farfetch. As the founder of Farfetch, I am proud to be celebrating our 15th Since our founding, our strategy has to build Farfetch to become the global platform for luxury by developing a platform with unrivaled Technology, logistics and data capabilities. And in parallel, we built a global community of boutiques, Brands and customers across all major luxury markets in the world. This strategy remains our North Star. And thanks to our progress on all of these fronts. Today, we occupy a unique leadership position in global luxury With an extremely exciting future ahead. Underpinning this strategy, luxury has continued to demonstrate its resiliency Still, the digitization of luxury is in its early innings with Digital sales just over 20% of the mix, but expected to expand to over 30% by 2,030.

This means Farfetch as a leader at the intersection of technology and luxury is poised for significant growth and This reinforces our confidence in our previously stated plans to Scale to a $10,000,000,000 GMV business generating approximately $400,000,000 in adjusted Since 2022, the decisive actions we've taken in light of these factors make me as confident As ever in our prospects for achieving these targets. The events of 2022, which led to the stoppage of our business Russia, then our 3rd largest market, a slowdown in China and adverse FX, all amidst Considerable macro volatility in the U. S. And Europe raised an imperative for decisive action. As a result, in 2022, we moved swiftly to implement a significant set of actions On costs and capital allocation, making profitability and cash generation a non negotiable priority Overgrowth after a 14 year stretch of rapid expansion. This is now as our philosophy for cost and capital allocation moving forward. These decisive actions our organization structure and a significant bolstering of our leadership team. And this June July, we went even further. We doubled down and executed the most significant cost rationalization in our history as a company. Specifically, the actions taken in the past 2 months are expected to eliminate $150,000,000 of planned 2023 fixed costs through the remainder of the year.

This means G and A and technology expenses are now expected to be a combined $800,000,000 for full year 2023 As compared to the previously guided $950,000,000 This delivers $50,000,000 in savings 2022, despite incremental resources to support the launch of Reebok And new FPS launch is planned for 20232024. Just in this last round, we've removed approximately 8 As a result of these reductions, as well as other cost cuts, costs related to some of our key teams, Such as our marketplaces, technology, finance, legal and people teams will be back to 2020 spend levels, Which means they have essentially rolled back 3 years of fixed cost expansion. And the cost of our operations, which provide end to end support of others are only expected to be 25% above 2020 levels, whilst order volume is running 60% higher Finally, NGG and FPS costs were also rationalized. As these reductions are structural in nature, we expect even greater savings for full year 2024, which we believe increases our ability to achieve our stated 2025 profitability goals. This also means we have made a range of business decisions, including Discontinuing beauty as a category on the marketplace and exploring strategic options for Violet Gray, Further reduction in our real estate footprint, closing several offices and unprofitable retail locations worldwide, And concentrating NGG's resources on key brands among several other actions across the Farfetch I want to emphasize a very important point here.

Our North Star remains absolutely intact. Amidst executing the strategy of decisive action, we remain focused on delivering on all the strategic Initiatives discussed in our Capital Markets Day. Our 2023 FPS launches remain on track, including the continued global rollout of as well as Bergdorf Goodman, which is expected to launch in Q4. I am delighted to report that we launched 3 additional e Concessions as a Service brands for Harrods and that Harrods have also proactively initiated and Signed an early renewal of their FPS contract, which extends our partnership into 2028. Additionally, our announced transaction with Richemont continues to advance through the regulatory review process. We continue to work closely with regulators to obtain the final outstanding approvals for the transaction, As a reminder, approval is not required in the U. S. I am confident the combination of our decisive actions In terms of focus on profitability and cash generation and our unwavering commitment for our long term vision Will result in more big wins across our key strategic initiatives while driving us towards achieving our stated 2025 profitability targets. Turning now to more recent trends. I'm pleased to report Farfetch continues to grow in Q2 with digital platform GMV up 7% And a stronger profitability profile.

Total G and A and technology expense was 7% lower. And our focus on cash generation meant free cash flow was positive for the quarter. I want to highlight that across most regions, our marketplace business is performing very strongly. In Q2, GMV in EMEA grew double digits. And in the Americas, Our margins remain stable with digital platform or the contribution margin of 31% And brands and boutiques continue to double down on Farfetch with over 40% unit growth of supply. In U. S, GMV accelerated with Q2 performance sequentially better, although still single digit negative year on year together with a 10% reduction in demand generation spend. However, as in the case of many others in the luxury industry, we have seen a less buoyant luxury customer in the U. S. We have seen similar macro dynamics in Mainland China. Although we are seeing improvements with Q2 performance sequentially higher, GMV was also in single digit decline. The reality is that the recovery has not been as robust as we had expected when we reported our Q1 results. And as a consequence, we have also reduced demand generation investment in this region. Have similarly indicated China is not growing as quickly as previously expected after its reopening in December.

Whilst brands are reporting strong in store growth against comps during the previous year's strict lockdowns, Online sales have not recovered as quickly as expected by many in the luxury industry. The slower recovery in these 2 large markets offsetting the strong momentum we continue to expect in most other regions Leads us to moderate our second half twenty twenty three growth expectations for the marketplace. Our group outlook for 2023 also factors in recent developments in NGG's business, Which Stephanie will discuss. Overall, I am delighted to confirm Farfetch is growing. Our key strategic initiatives remain on track. And thanks to the decisive actions we've already taken in terms of fixed costs, We are confident about our objective to be profitable at the adjusted EBITDA level and generate positive free cash flow for full year Turning to our executive team and the evolution of our organization. Team Stone has joined Farfetch to assume the CFO role as Elliot Schaden ends his more than 8 year tenure at the end of this month. We're delighted to welcome Tim to Farfetch. He has 20 years experience at Amazon and was also CFO of Fard. Tim brings extensive knowledge of Best in class customer centric marketplaces and e commerce platforms, along with experience in scaling SaaS businesses, Proficiency in both 3P and 1P businesses and has a deep understanding of digital as well as physical retail.

He shares my vision of building Farfetch as a leading company at the intersection of tech and luxury. With a very strong profit and free cash flow generation profile for the long term. Tim is moving to London this month and will be a key member of the exec team taking Farfetch to its Next level. And he has big shoes to fill. Elliot lives us with the fondest of memories And will always be an important part of the Farfetch history. Having joined Farfetch as our first CFO And partnering with me to multiply our revenue by 16 times during his tenure, transition the company from private to public And leading so many amazing teams and projects. We have significantly strengthened our organization and leadership over the last 12 months. Overall, these additions of exciting talent fill our ranks with an even wider skill set, Hunger for success and huge amounts of energy as we approach a new, very exciting chapter for the Farfetch Group. And now, I'll turn over to Stephanie to update us on NGG.

Thank you, Jose, and hello, everyone. 4 years ago, we acquired NGG because we saw great potential behind combining its culturally relevant content creation platform With the Farfetch technology platform, and it has been a successful combination. Having recently added responsibilities of chair of New Guard's group To my existing role as Group President, I'd like to spend some time today updating you on the business. In particular, I'll focus on our Q2 performance, The recent organizational changes and update you on the brand portfolio and our recently launched Reebok Business. Starting with Q2 performance. In Q2, brand platform GMV decreased 41% to $63,000,000 This decline was driven by a phasing of deliveries from Q2 as wholesale accounts, predominantly department stores and retailers in the U. S. And U. K. Reduced intake deliveries due to heightened inventory positions resulting from the challenging macro environment. The phasing of shipments was also due to some onboarding challenges with the launch of Reebok, which have resulted in a slower ramp up. However, we expect a strong recovery of these deliveries to result in Q3 brand platform GMV of over $150,000,000 For the remainder of the year, we expect wholesale to remain under pressure as we have seen retailers adjusting their open to buys for the spring summer 24 season.

This is reflected in our revised 2023 expectations for the brand platform, which Elliot will cover. It's important to note, however, that this dynamic is specific to wholesale. In NGG's digital direct to consumer channel, GMV grew double digits during Q2. Moving on to NGG's organization changes. Since taking this role, Following the recent transition of the NGG founders, I have been spending time with the team in Milan reviewing the business strategy and operations And have begun implementing actions to streamline NGG and allocate resources to optimize profitability. First, we have cemented a strong and capable leadership who have been at NGG over the past few years. We also restructured NGG to function more efficiently as an operating platform to service existing and future brands within the portfolio. This, along with our plans to further integrate NGG with the Farfetch platform, has enabled us to reduce NGG's headcount to 2021 levels. Going forward, we will also focus our resources and efforts on the brands with the greatest scale and profitability profile. As a result of these actions, direct G and A for full year 2023 at NGG is expected to decrease double digits percentage As compared to our original expectations for the year, and we expect some of these savings to carry into 2024 for a stronger profitability profile.

Moving to Reebok. We are pleased to have launched this brand across direct to consumer and wholesale channels in May. While there have been some initial challenges in transitioning the business from Adidas, with the process fully complete, We are focused on the underlying opportunity to tap into NGG's brand building talent and expertise to reinvigorate this heritage brand. We expect the initial transitional challenges to result in Reebok now delivering approximately $200,000,000 Across both the brand and digital platforms in 2023 and remain enthusiastic about the brand's prospects, Which is supported by the strong consumer and partner engagement since launch. We're also excited to have launched in July the first iteration of Reebok's premium line. This line is the prologue of the full launch of products and collaborations expected next year. Overall, we continue to see significant strengths within NGG, a business that has contributed to the growth and profitability of Farfetch, Delivering GMV growth at a 20% CAGR from 2018 to 2022, ahead of luxury industry growth of 7% over the same period. We believe that brands within the NGG portfolio will continue to be forces of culture in the industry and that our recent organizational changes Led by a very strong management team, we'll also allow NGG to operate more efficiently, drive profitable growth, And unlock further synergies with the overall Farfetch Group.

And now, I'd like to pass the call on to Elliot, who will discuss our financial results and outlook.

Thank you, Stephanie, and hello to you all. I'd like to summarize what we have achieved across Q2 And then break out our expectations for the rest of the year. There are several key points to highlight from within the quarter. First, the digital platform is delivering growth with digital platform GMV up 7% and digital platform services revenue Up 10%. In addition, digital platform order contribution margin remained strong at 31.2% Despite macroeconomic and promotional headwinds, the rationalization of the business since 2022 Has delivered significant savings in the cost base, which is lower year on year and will continue to deliver financial benefit Across H2, and we have achieved positive free cash flow driven from a stronger working capital position. Overall, our use of cash has improved by $316,000,000 versus Q2, And we finished the quarter with $454,000,000 in cash and cash equivalent. Finally, the brand platform experienced delays in shipping wholesale orders, meaning approximately $50,000,000 in revenue At a circa 50% gross margin has moved from Q2 to the second half of the year. This movement had an associated impact on adjusted EBITDA and inventory levels. Looking at the P and L in Q2, we achieved GMV of $1,000,000,000 A 1% increase on a reported and constant currency basis.

This growth was driven from the digital platform, which Accelerated growth to 7%. Brand platform GMV declined 41% due to delayed wholesale shipments As retailers phase back deliveries of fallwinter23 whilst they clear through their springsummer23 inventory holdings. This decline in GMV had an impact on revenue, which declined 1% year on year And gross profit, which declined 9%. Demand generation expense has improved year on year by 6 And total G and A and technology spend improved 7% to be $14,000,000 lower than last year And $15,000,000 lower than Q1. We achieved adjusted EBITDA Of minus $31,000,000 which was $4,000,000 better than Q1 due to the growth of the digital platform And sequential reduction in G and A and Technology spend. The decrease in EBITDA versus last year Was due to the delayed brand platform shipments, which we are now expecting to recognize And H2 revenue. Let's look more closely at the performance of the digital platform, Which has seen strong momentum in Q2. As I said earlier, the digital platform GMV growth accelerated to 7 This was driven by strong underlying growth from the marketplace and double digit growth from Farfetch platform solutions. With the addition of GMV from Reebok and Ferragamo, which took effect across Q2, The digital platform grew slower than expected, driven by the U.

S. And China on the marketplace and as GMV from Reebok ramped up less quickly than anticipated. The marketplace performed well with a 7% increase in active consumers to 4,100,000 as we added over 550,000 new consumers in the quarter, and orders per customer increased slightly an average order value to $5.62 due to a higher markdown mix year on year. Digital platform services revenue increased ahead of GMV at 10% due to an increased mix of first party revenue and the addition of Reebok direct to consumer sales on the digital platform. In addition, we saw an increase in 3rd party take rate by 60 basis points To 31.8%, which we believe reflects the value we are providing partners on the platform. Digital Platform order contribution margin was 31.2%, down 50 basis points, Principally due to a reduction in first party gross margin due to action we are taking to reduce inventory levels, Plus, the increased mix of first party revenue at a lower gross margin, offset by a significant reduction in demand generation expense to 18.1 percent of digital platform services revenue Compared to 21.1 percent last Q2, we continue to improve new customer unit economics With lower customer acquisition costs year on year and engagement costs on existing customers have also improved year on year.

These savings are driving a higher LTV over CAC ratio with 3 month LTV over CAC improving year on year for each of the last three quarters. Looking ahead, we are adjusting our near term expectations across H2 to reflect An updated assessment of the luxury market in the U. S. And China. This means moderating our GMV growth expectations. However, our focus on operating the business off a lower cost base means we continue to expect to deliver profitability in 2023 With up to 1% adjusted EBITDA margin, GMV is now expected to digital platform GMV to be approximately $3,850,000,000 up 10% year on year. This assumes continued strong growth across most markets, offset by ongoing mid Single digit decline in the U. S. And China for the rest of 2023. On the brand platform, We are now guiding to GMV of approximately $450,000,000 broadly flat year on year. This estimate reflects ongoing macro headwinds affecting wholesale orders of existing brands, Offset by incremental GMV from the launch of Reebok this year. We continue to expect GMV growth to improve Into Q3 and then Q4, supported by underlying growth in the marketplace and additional GMV As Reebok's direct to consumer channel strengthen and FPS starts to service Bergdorf Goodman in Q4.

The guide at GMV also reflects the expected catch up in delayed brand platform shipments from Q2. On G and A and technology costs, we're now guiding to circa $800,000,000 this year, which is a $150,000,000 saving Compared to the initial guidance, as we continue to drive cost savings across the business, this Should result in costs $50,000,000 lower than last year, which delivers a return to operating cost leverage. Revenue growth is expected at 8% to 10%. On margins, our forecast for digital platform order anticipated improving gross margins and more efficiency in demand generation expense versus 2022. Inventory actions and a higher Reebok mix means gross margin on the brand platform is now expected At 46% to 48%. On cash, we expect to deliver positive free cash flow And have taken the opportunity to expand our existing Term Loan B facility with expected net proceeds of Approximately $180,000,000 boosting our overall liquidity. We now expect to deliver cash and cash equivalents of over $800,000,000 at year end. This position is driven from higher GMV growth and profitability Compared to H1 and further improvements in our working capital position, particularly within Q4. It only leaves me to thank Jose, the Board, and everyone at Farfetch for all of the memorable moments and fantastic achievements We've shared over the last eight and a half years.

It has been an honor to be part of a business which I believe is positioned at The center of gravity of growth in the luxury industry over the longer term. I'm delighted to be passing the CFO baton to Tim, who has the experience and leadership skills to help guide the business through its next phase of profitable growth. I wish all my talented colleagues at Farfetch all the best. And with that, I'd like to pass the call back to Jose For his closing remarks.

Thank you, Elliot. Over the past 15 years, we have built a leader at the intersection of luxury and technology with incredible competitive advantages and huge opportunities for growth. Nonetheless, the current macro environment requires decisive action. We have shifted our paradigm of cost and capital allocation to prioritize profit and cash generation as nonnegotiables, Whilst still maintaining our North Star intact, we've redesigned our organization our business, all whilst delivering against our key strategic initiatives, Which makes me more confident than ever in achieving our previously stated 2025 goals Of scaling to a $10,000,000,000 GMV business, generating approximately $400,000,000 in adjusted EBITDA and strong free cash Hello and continuing to make progress in our mission to be the global platform for luxury. I want to extend a huge thank you to all Farfetch's who built the amazing company we are today And who have embraced the need for decisive action and are working relentlessly to build We'll now move on to our Q and A session. For those of you who are joining us via Zoom, if you'd like to ask a question at this time, Please raise your hand by clicking on the raise hand button at the bottom of your Zoom window.

If you have dialed in via phone, use star 9 to raise your hand and star 6 to mute and unmute. Once called upon, please unmute your audio to ask your question. Please be mindful that only one question for analysts will be allowed. Thank you. To start, we'll now take our first question. Our first question comes from Doug Anmuth from JPMorgan. You may unmute and ask your question.

Thanks for taking my questions. I just wanted to ask, is the $160,000,000 in savings that you talked about, is that fully Incremental or is that including any of the previous cost reduction that you just got? And then what can you think about the Hey, Doug, would you mind repeating your second question? It didn't come through.

Sorry, I apologize. Is there anything structural from the declines in the U. S. And China Hi, Doug. This is Jose. Great to talk to you. So in terms of the Actions that we've taken, we always said 2023 was our year of execution. And I'm glad that we are delivering against the strategic initiatives, and the ones we haven't delivered yet are on track. Procterf Goodman for Q4, kasthier.comnetaporte, etcetera slated for 2024 regulatory approval Pending, but with good news from UK, China, Italy and others. And to your question, as part of The execution focus, we have, taken action in the last 2 months, which is a continuation of the Decisive actions that we've taken, starting in 2022, the €150,000,000 cut It's versus our guidance. So we guided the market to 950,000,000 From $850,000,000 in 2022 to support the new initiatives and launches. So I think what is very pleasing to see is that we are absolutely delivering these new launches and on track Whilst being able to actually reduce the planned SG and A to $800,000,000 this year, Which is $50,000,000 less than last year. So that's the plan. And you can see Already sequentially, the SG and A line from Q4 into Q1 into Q2, You can see already the results of the actions we've taken last year.

Now the actions we've taken in June July will continue to Obviously, be reflected. So we're on track to that $800,000,000 Which really demonstrates, you know, a relentless focus on execution and efficiency. And all in all, I think it's important to take a step back, and I'll touch on U. S. And China, which is your second part of the question. To take a step back, and Farfetch is going to grow this year. The digital platform, our car business is going to grow double digits, 10%, To be precise, the it's going to be a record year in terms of GMV at 4,400,000,000 GMV, the highest In our history as a business, a record year in terms of adjusted EBITDA, a year of positive free cash flow. And therefore, whilst the macro headwinds in U. S. And China are definitely Making us more prudent in terms of the outlook for the second half of the year, there is a lot of health in our car business and And incredible advances in terms of delivering on our strategic initiatives. The U. S, I don't think this is Farfetch You've seen the luxury industry, many luxury companies in double digit negative in the U.

S, Wholesale doing worse than direct to consumer. And that's what We see also in our business, in fact, the good news is that the U. S. Is accelerating sequentially, and we are In single digit negative, it's still a negative, and therefore, this is obviously, less Voliant than what we would have hoped for. And a very similar picture in China. I think it's well publicized. The Chinese economy Didn't bounce back to the extent that everyone expected after the lockdowns. In store growth for luxury is strong, but of course, it's not apples for apples because these stores were all closed last year. What we hear in the industry and what we're seeing in our own platform is that the recovery Is not as explosive as everyone thought it would be. We had some green shoots. We were In positive growth quarter to date when we spoke to you last time, which was encouraging, but we're now on single digit negative. So We believe that the right thing to do is therefore to be prudent and adjust our plans And also just our spending, we've reduced demand generation spending double digits in the U. S. We've reduced it in China as well In face of the macro environment, which is across the industry, it's not Farfetch specific.

So China is improving and with a sequential improvement. We believe it will be in single digit negative Based on everything we're seeing and taking a balanced outlook for the rest of the year, long term tremendous opportunity, obviously, And we have an impressive consumer proposition when we continue to see, incredible potential in that business and in the partnerships We have in that country. Short term, there's, these, movements that need to be navigated, but we've, as a business, I believe that we've taken the decisive actions in face of the current macro environment. And again, we're going to be on double digit growth for the car business, a record year in terms of GMV profitability, generating cash. And therefore, whilst not as fast growth as we originally expected In face of the macro environment, it's still going to be a strong year for Farfetch.

Our next question comes from Jason Helfstein at Oppenheimer. Please unmute your audio and ask your question.

Thanks. So, the guidance suggests significant second half share Improvement versus your luxury peers relative to street numbers, even though you've lost here for now, like, So, I assume some of the catalysts is some of the inorganic stuff around Brand platform, but I mean, can you unpack how much of the of that second half is brand platform Persis, we'll call like organic share gains and why investors should have the confidence that you can execute on those kind of share gains Just given recent performance and kind of the new guide down, etcetera. Thanks.

May I ask your office under here?

Hi. I think we should take a step back and really look at the performance In terms of a a a slightly longer term perspective, in terms of the brand platform, for example, The brand platform NGG, as a business, we we grew 20% CAGR, between 2018 and 2022. That's 3 times faster than the rest of the luxury industry, which grew, at 7%. If we look at Farfetch, the digital, the car business, you have a very similar picture. So this is a business that consistently Over a 3, 4 year period has gained market share. Of course, 2022 was a challenging year. We stopped business in Russia, which was 8% of our marketplace sales, our 3rd largest market. And China went into a negative territory, which was a wide Spread phenomenon in the luxury industry. And therefore, I think what we're seeing is Strength in terms of our car business outside the U. S. And China, the car business is growing double digits. In the Americas, we grew 20%, excluding U. S. In EMEA, we grew double digits, with some markets In Southern Europe, growing faster than 20%. Overall, even including the U. S. And China, we grew customer 7%, Autos 9%.

We grew supply, which is the supply that brands and boutiques make available curated luxury supply on our platform by 40%, four-zero Year on year, these are all absolutely demonstrative or very strong competitive advantages, Which will continue to drive market share capture over the next 3 years. And with the decisive actions we've taken in terms of Cost and the fixed cost base in a much stronger profile in terms of profitability as well.

Our next Question comes from Ashley Helgans from Jefferies. You may unmute and ask your question.

Hey, thanks for taking our question. I just wanted to touch on the beauty business. There's been a couple headlines in the press lately that you guys are looking to wind it down. So just any comments there? Thanks.

Yes, that was the decision. We In face of the current macro environment, and in fact, we started this set of decisive actions in 2022. You will remember in 2022, we've done headcount reductions. We've also We organized the business, redesigned our organization. We strengthened our leadership team with several new executive Additions to the team, and this year, we are doubling down on that, new paradigm of prioritizing Profitability and prioritizing cash flow generation as a non negotiable. Beauty was a decision based on that New approach. We have been incredibly successful at category expansion. I just want to remind everyone who's listening This call, we have the largest menswear luxury destination in the world. We are the largest kids Luxury destination in the world, a category we started from 0 just a few years ago. We are We have a very healthy and profitable and fast growing high luxury category. We've recently Announced sales of watches for $2,500,000 fine jewelry sets for $1,000,000 So we're really servicing The high jewelry category in an incredible way. We're adding to that with the Richemont partnership, with Cartier, Van Cleef and all the watch brands Shining our marketplace, obviously as soon as the deal completes and we do the necessary integrations.

So we have to make strategic decisions here. And when we have categories which are paying off, and categories Such as Hyatt Luxury with incredibly high AOVs and higher profitability versus investing the same dollars in beauty, which Obviously, a lower AOV and more challenging profitability and unit economics. It was a decision that we've made. It was, In my view, absolutely the right decision to discontinue the beauty category on the marketplace to focus on All the other categories which we have launched and where we're seeing a lot of success.

Our next question comes from Stephen Ju at Credit Suisse. Please unmute and ask your question.

Great. Thank you. So, Jose, I guess more of a very big Big picture question. So I think one of the bullet points in the release was Highlighting your supply growth of 40% year over year, but your active customers grew, I believe, 7% and order growth was Around the similar amount. So maybe these latter two metrics are a horrible proxy for demand growth, but This also at the same time makes us worry about what might be rising imbalance between supply and demand on your marketplace, Particularly as you've turned off demand gen spend in the U. S. So can you talk about whether you feel like Farfetch Is still a materially better channel for brands as well as retailers to market the merchandise? Or is this demand something that we should be thinking about and worrying about for the future? Thanks.

Thank you. So it's a really good question And allows me to talk about the strengths of the Farfetch business model. Farfetch is unique in the luxury industry. When you don't you really don't see the luxury industry adopting other marketplaces such as Amazon or Etsy or eBay or or other platforms. So this is an industry that, remains, unpenetrated by, by the giants, In terms of the marketplace, space, and 2, the multi brand online luxury destinations That competes for eyeballs with us, they're all retailers, or 80%, 90% retailers with a very small component of Ovi Concessions. We're exactly the opposite. We're around 80%, 85%, 3P. So this unique marketplace drop shipping model, which is unique in this industry, this is what brands want. And brands have Direct to consumer in curated elevated multi brand platforms such as Farfetch. And this is what's driving the 40%. And also because of the drop shipping model, we are connecting to the inventory Pipeline, if you want, of the brands. For example, with Kering, we've launched a revolutionary Integration, where we're now integrated with, with the carrying distribution centers, which power brand.com, As well as other direct channels in a fully automated way, we already have dozens of integrations with the Karyan brands Across the group in various ways, this integration is driving part of that 40% growth, for example, but it's really across Our top brands, but this means that there is no incremental inventory risk.

So we're tapping on inventory, Which is part of the brand's ecosystem, if you want. And this allows us to scale up very, very fast As the demand ramps back up again, so the fact that the supply is there, means that we have ample supply without Taking any inventory risk or burdening our brand partners with inventory risk, we're able As a marketplace, to adjust very quickly and boost our revenue and GMV, once The macro environment becomes more favorable in some of our key geographies.

Thank you.

Our next question is from Oliver Chen at Cowen. Please unmute and ask your question.

Hi. Thanks a lot. And Elliot, it's been great working with you. Regarding the brand platform, what's I had with inventory management and inventory relative to sales and how should we think about merchandise margins and promotions there given Less than expected revenues there. And on the digital platform order contribution margins, How are you thinking about demand generation and also the headwinds as we model that going forward? Thank you.

Hey, Oliver. Thanks very much. It's been a pleasure working with all the analysts as well. Just Diving into your question. So, on the brand platform, there's a couple of things happening here. Obviously, the Delayed shipments from Q2 going into the second half has had an impact on revenue, a flow through down to profitability and, of course, On our inventory balance at the end of June, which is higher than it would have been had we shipped those orders. So Once those orders clear through across Q3, we would expect that balance to come down. Plus, also, as we ramp up our sales for Reebok, the initial inventory that we bought in As part of the handover from the previous operators of Reebok, we will start to sell through that inventory and push Through shipments of that inventory bringing down the balance, also that's on hand at the end of June as that position starts to build. On top of that, we are having to do a little bit of additional provisioning and clearance. And you can see that in the adjusted guidance with the gross margins for the brand platform having now Come down. We are expecting those that position now to be that sort of 46% to 48% gross margin Versus the 49% we delivered last year.

So that is already factored in our forecast in terms of the profitability of the brand platform. The expectation is that, that balance of inventory will be significantly reduced as we trade into the end of the year, Which obviously helps drive some of the working capital benefit that you see in the forecast for the second half as well. So all sort of points to much tighter inventory going into next year. Obviously, with the reduction in expected orders for the brand platform, Form, we are also producing less and getting factories to produce less as we start to fulfill those orders going into next year. So that again helps bring our inventory position down by December. In terms of the digital platform, Still very pleased with the overall position on order contribution margins there, just down 50 basis points year on year. And for the full year expectations, we are maintaining guidance there of 33% to 35% order contribution margin, which will be a step up From 32% last year and that is down to savings within demand generation. We're becoming significantly more Efficient within our demand generation engine, we have pulled back, of course, as you would expect in the 2 markets that we're seeing Broader macro challenges.

So, in the U. S. And China, we continue to retreat in terms of spend. That drives efficiency and our Our ability to deploy money elsewhere and demand generation for Q2 just gone, you saw that number come down by $4,000,000 on an absolute basis, Despite the fact that the GMV on the digital platform was up 7% and for the rest of the year, we're expecting this Sort of 7.5% of GMV level, which is what we achieved in Q2 to carry on, which means a Saving versus last year. Last year, the demand generation was at 7.8% of GMV. So we're driving this 10% growth for the full year With lower level of demand generation spend as a percentage of GMV, which is coming through from the efficiencies. The offset here, of course, is the 1st party gross margins. Again, that's under pressure year on year in Q2 as we clear through some inventory. We're starting to see that improve towards the back end of the year, and it helps Drive up our overall order contribution margin. And then lastly, as the clients on Farfetch platform solutions Ramp up Ferragamo already live, Bergdorf Goodman coming later this year.

Of course, that product, the business to business product runs at a higher gross margin And a higher order contribution margin on the digital platform driving that 33% to 35% overall for the full year. So very confident in those numbers.

Thanks so much, Elliot.

Our next question is from Ed Yrum at Piper Sandler. You may unmute and ask your question. Hey, thanks for taking the question. 2 for me first. I guess on Off White, kind of any comments on the performance of the brand, the health of the brand Now that we're a couple of years past the untimely passing. And then just as a follow-up on YNAP, I know that there's a mechanism to reduce The dilution from the transaction, I guess, given that the stock is at a very different point than when the transaction is announced, does that still hold? Is there a certain time the deal needs to be closed by to make sure that Those mechanisms hold in place. Thanks.

Yeah. I'll take both questions. We don't break out performance on the brand by brand, but the Consumer demand around Off White and Palm Angels remains very strong. What we See is 2 different pictures in terms of wholesale versus direct to consumer. So wholesale Always overshoots in both directions. So we saw very fast expansion of our wholesale business. As we said, 20% CAGR from 2018 to 22. The brands are very popular in the U. S. And in the U. K. So we have Great customers in the American department stores and also boutiques in the U. K. And Europe. And with the macro headwinds hitting U. S. Department stores and the U. K, naturally these customers are reducing There are others across the entire luxury spectrum. And you saw this in multiple commentary From practically all luxury players in terms of the health of the wholesale segment, Especially in the U. S, but also in the U. K. So if you look at the direct to consumer, the in aggregate, the NGG Direct to consumer digital sales are up double digits. And I think this shows That there are 2 stories here. There's one story in terms of the consumer appetite for these brands, which remain strong.

They continue to be In the list of our top brands and also the new direction has been Evolving with Yves Kamara now firmly installed as creative director, Activating his community, obviously, in Palm Angels, nothing changes. We have Francesco Regazzi and Stefano, who Created the brand really from scratch to what is one of the success stories in past years. So the portfolio is very strong. Reebok, we're very excited with Reebok. We did a small preview of Reebok Luxury Collections to some luxury boutiques, this summer and was extremely well received. This is a brand that hasn't done anything really in the premium So it's Greenfield, and it's Greenfield's R2024 and beyond. And NGG with Cristiano having been over 20 years at Nike in their premium luxury Nike collaboration Department and now over 3 years at NGG, he's the right guy to really make Reebok, Make sneaker history here. And therefore, we remain very confident over the long term plans for NGG and for the brand platform. And we're going to navigate the this very short term in the case of Reebok, one off transition issues from Adidas. And in the case of Off White Palm Angels and other brands, really a wholesale headwind, which we were always We always say that the future of the brands is more direct to consumer than wholesale.

So while our focus is really Ongoing direct to consumer precisely because wholesale always has these movements of overshooting in one direction and another. So this this, continues to be the the strategic direction for, for the group. Absolutely confirm. The share price has and the share count has been fixed. So we don't have any extra dilution, and it's around 11% of, of of dilution for Farfetch for 47.5 percent, of share capital at YNAB. That's what's on the deal, and that's what's going to be executed independently of where the share price is, as soon as we get regulatory approval. And of course, you have other guardrails in this transaction in terms of The ability to, the option to acquire the remaining of, of the company over 5 years With the requirement for the company to be profitable for full consolidation in terms of a put in year 4 and 5. So those those strong guide rails absolutely remain in place. We think this is a great partnership, and, we're very excited with Launching replatforming, not just Net A Porter, but also Cartier dotcom, which are going to be the 2 first launches, The teams are working around the clock, building these great new platforms for these Flagship brands.

And after that, we'll continue with the rest of the Richemont and YNAP portfolios, which obviously this time next year Means that the Farfetch platform will power the largest online destination in luxury, that's Farfetch. The 2nd largest online destination in luxury, that's YNAB. 1 of the 3 largest luxury conglomerates in the world, that's Richemont And 2 of the most iconic luxury department stores in the US and Europe as Harrods and Bergdorf Goodman. So this is an incredible roster of clients for A best in class luxury SaaS platform, and that's what we're excited to be delivering against.

Thanks, everybody. That's time on the call, so we'll have to wrap up there. Thanks for joining the call, and it's a pleasure to hand over to Tim,