Farfetch has a positive first quarter, but the cost of funding is mixing up the accounts company

For the first time in history, Farfetch was able to close accounts for a quarter on a positive adjusted operating result. If the financing costs weren’t a heavy burden on the bookkeeping, there would be nothing else to say.

The company founded by José Neves today presented its annual financial statements for the fourth quarter of 2020. Given the adjusted operating profit, the company appears to have reached a milestone even earlier than expected, which can be considered historic.

Despite the pandemic, and certainly with the help of the push the pandemic has given online commerce, the digital platform that sells luxury fashion has broken records on several metrics. In terms of operating income, i.e. before interest, taxes, depreciation and amortization (EBITDA), excluding any items that the company does not consider part of ongoing operations (and thus calculating Adjusted EBITDA), it made $ 10.3 million or $ 6 .46 million euros at the current exchange rate. Or between October and December it had a positive adjusted operating result, which is a first in those 12 years of life.

However, when it comes to accounting for a publicly traded company like Farfetch, which has been in the New York market since 2018, the same accounting standards are followed for everyone. And among those where the company is required to include on the income statement the weight of convertible debt it has on its balance sheet, which has grown to unprecedented numbers in 2020 thanks to $ 600 million (493) funding Million euros) signed by Chinese Alibaba and Swiss Richemont.

In the same year that revenue exceeded $ 3,000 million and consolidated revenue reached $ 1,700 million (EUR 1,400 million), 2020 accounts will close with a negative net income of more than $ 3,300 million. On the positive side, sales increased 49% in 2020 to nearly $ 3,200 million.

In the year of the Great Birth, in which the world lived at home for months because of the Covid-19, more and more customers, both sellers and buyers, were dependent on the digital platform built by Farfetch, emphasized José Neves during the results presentation.

In addition, Farfetch’s income, both for the commission charged to the 1400+ luxury boutiques sold on this platform, and for the income collected from the websites to which the company is sent through Farfetch Platform Solutions technological services sold by retailers like Harrods.com ended with a growth of 64%.

It is this growth capacity of a company that already has more than 5,000 employees worldwide and has acquired 500 new customers online in the past three months that inspires the stock market to continue to appreciate Farfetch.

In the past 12 months, the price has increased more than 500% (a year ago it was worth $ 9.87). This very valuation shuffles all accounts as the overvaluation of the stocks exacerbates the weight of convertible debt on the balance sheet, forcing them to declare their worst net result yet with an annual loss of $ 3,333 million ($ 2,736 million) from euros ).

It may seem counterintuitive to the common man that, given such an annual loss, José Neves’ team would be so happy to produce the accounts. Or that Farfetch’s shares on the stock market didn’t drop outrageously when those results were announced (they fell 2.84% to $ 62 after Thursday’s session ended). To understand this scenario, a more technical explanation is needed as 82% of the loss is an accounting result.

In 2020, the company continued to pay stock options, that is, stock options, to its employees. With the value of each share increasing by more than $ 38.65 in the past year, the company had to raise nearly $ 80 million to cover those costs. This provision must be recorded in the accounts even if there is no direct outflow of funds.

Most notably, Farfetch received $ 300 million from Alibaba and $ 300 million from Richemont last year. In return, these two companies can convert this debt into shares when that convertible debt matures (in 2030).

The 600 million equates to around 18.6 million Farfetch shares at a price of $ 32.29. As of December 31, 2020, at the end of the fourth quarter, the stock was trading at $ 63.81. In accounting terms, if the debt were to be repaid (which under certain conditions can only be done at the request of Alibaba and Richemont from 2026), Farfetch would have to readjust the value as the shares have risen. The expenditures would be $ 1,186 million, 586 million more than the initial debt of 600 million.

This amount is to be recorded in the annual financial statements. Therefore, due to adjustments alone, Farfetch had to register $ 2,643 million in the account, both from this and from previous financings (Tencent and Dragoneer).

Without this weight, the financial result would have resulted in a loss of $ 689 million. Don’t worry, José Neves or investors who know that the company had $ 1,500 million in liquidity at the end of 2020 and, most importantly, that Alibaba’s entry with 770 million Chinese is a big open door to the world’s largest luxury market for customers.

After a year that has affected so many companies around the world, Farfetch shows that its business model has not only resisted but expanded, and guarantees two new partners that will help fund and facilitate the next chapters of business expansion .

“For Farfetch, convertibles are possibly one of the best funding options. In general, sharing the company with world leaders in e-commerce can generate many partnerships and open doors to the Chinese online market and Richemont’s luxury goods expertise,” comments Paulo Rosa, chief economist at Banco Carregosa, “I don’t know how much the bank could lend or whether it would be able to issue normal bonds, but it is certain that these are two options that would not open up the largest online -Market in the world, the Chinese, one of the best reference companies in the world for luxury goods. ”

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