Image: YNAP

Monday morning brought the news that FarFetch will go public. The 10-year old London-based e-commerce site – which was founded by Portuguese entrepreneur Jose Neves, alongside of whom Net-a-Porter’s founder Natalie Massenet acts as co-chair – has long been rumored to be in the process of going public and as of this week, is said to be aiming for a valuation of as much as $5 billion, although the company has not yet disclosed the number of shares it will sell or the offer price per share.

While FarFetch – which has yet to turn a profit, and in fact, according to Monday’s 250-page regulatory filing has “experienced losses after tax of $29.3 million and $68.4 million in the six months ended June 30, 2017 and 2018, respectively, and losses after tax of $61.8 million, $81.5 million and $112.3 million in the years ended December 31, 2015, 2016 and 2017” – has been readying for its debut on the New York Stock Exchange, its closest rival, London-based Yoox Net-a-Porter, was, until recently, in the process of delisting from the Borsa Italiana stock exchange following the culmination of a takeover offer launched by Richemont.

The Swiss conglomerate – which owns Cartier, Chloé, Azzedine Alaïa, and Piaget, among other brands, and which previously owned 25 percent of YNAP – offered up $3.32 billion in January for full control of the e-commerce retailer to better compete in an expanding online market for luxury goods. The Richemont acquisition has brought YNAP’s valuation to approximately $6.2 billion, according to Reuters.

All the while, YNAP – which was created in 2015 as a result of the 6-year-long merger of Yoox, Italy’s sole “unicorn” (financial lingo for a privately held billion-dollar start-up) with then-rival Net-a-Porter – has been on a path of expansion. In the past few years alone, the e-comm giant has trotted out private labels, and celebrated the year-anniversary of its London-based 500-person staffed Tech Hub, which is working “to accelerate innovation and deliver best-in-class technologies,” including in the customer service space.

In April 2016, YNAP announced that it was partnering Emirati real estate titan Mohammed Alabbar – by way of his Alabbar Enterprises company – in a move expected to push its growth in the UAE, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman. And as a recently as this spring, it added a high-end jewelry and watches component to Net-a-Porter, which it expects to bring in $124 million in revenues by 2020.

As a whole, the company’s results in 2017 – which saw revenues grow 11.8 percent to roughly $2.5 billion with 3.1 million active customers (compared to 2.9 million the year prior), and the outlook for 2018 – “put us on track to meet our five-year plan target and we expect an improvement in adjusted core profit margin between 30-70 basis points this year,” YNAP CEO Federico Marchetti, who founded Yoox in 2000 and became YNAP CEO at the time of the merger, told Reuters this spring.

Nonetheless, YNAP has been routinely pegged as the less optimal of the two, particularly by Luca Solca, a Business of Fashion columnist and the luxury goods head for BNP Paribas, which along with Goldman Sachs, JP Morgan, Allen & Co, UBS, Credit Suisse, Deutsche Bank, Wells Fargo, and Cowen, is underwriting the FarFetch IPO. Solca took a markedly strong stance against YNAP in a February 2017 article on BoF, entitled, The Trouble with Yoox Net-a-Porter, in which he stated, “Net-a-Porter risks being left behind by the industry’s changes” when it comes to technological advances in the industry and luxury brands’ strategies.

Solca further noted, “New models are emerging that potentially fit better with the strategies of luxury brands,” with “one such model [being] operated by FarFetch,” due to its practice of aggregating but not “holding any inventory itself.”

Unlike typical retailers, Farfetch serves as a connector of boutiques and consumers. When a consumer places an order on Farfetch, it is then passed on to the boutique that has the item(s) ordered to complete fulfillment and shipping. Product stock and pricing info on Farfetch also relies on feeds from boutiques. FarFetch takes a whopping 25 percent commission from its boutique partners per sale, while being able to avoid the expense of holding stock and potentially have to off-load unsold merchandise at the end of the season. 

CNBC notes that traditional “marketplace” companies, such as eBay, Amazon, and Alibaba, “often trade at a higher premium than traditional retailers.” The $5 billion valuation that FarFetch is said to be aiming for “would take advantage of that premium, pegging Farfetch against them.”

This marketplace aggregation “model is certainly working,” Solca wrote for BoF, with FarFetch “growing at 60 percent per year and looks to be on course to overtake Net-a-Porter as the largest online aggregator within 24 months.” And the model has certainly attracted investors for FarFetch, including Condé Nast, the parent of Vogue magazine; Felix Capital, which has also invested in Goop and the Business of Fashion, among others; Index Ventures, which has invested in Glossier, Business of Fashion, and Grailed; Carmen Busquets, an investor tied to Business of Fashion, Moda Operandi, Felix Capital, and Lyst; and of course, former Net-a-Porter founder (and current FarFetch co-chair) Natalie Massanet’s fund Imaginary Ventures, which has taken a stake in FarFetch.

In another article in November 2017, BoF questioned the accuracy of analysts’ sizable valuation of YNAP, noting the emergence of two new rivals – Farfetch and MatchesFashion – which serve as “severe threats to [YNAP’s] dominance” as the sole leader in global luxury e-commerce.

Interestingly, the repeated stance by Solca and BoF that YNAP is the inferior player compared to FarFetch comes in stark contrast to at least a handful of analysts and big institutions, which have said the opposite. For instance, Michelle Wilson, an equities analyst at ‎Berenberg Financial, stated early last year that the German investment bank “considers YNAP [to be] undervalued.” Around the same time, other institutions, such as Morgan Stanley and New York-based Jeffries, also put forth favorable projections as to the strength of YNAP. Morgan Stanley, for one, reported that it viewed YNAP as “having the potential to deliver [earnings before interest and taxes] margins ahead of its peers [including FarFetch] on a three year review.”

Thereafter, in June 2017, Berenberg reported that “investor fears that competition restricting growth [for YNAP] … particularly FarFetch … are misplaced,” and that “the strength of YNAP’s business model is underappreciated.”

Still yet, as recently as this spring, Bloomberg’s Andrea Feldsted, in an article, entitled, Farfetch’s Farfetched Valuation, questioned whether the giant will “really [be able] able to crack online luxury retail without becoming a big spender itself.”

As of now, “Farfetch’s cost structure has greatly exceeded its gross profit growth in dollar terms,” according to Crunchbase’s Alex Wilhelm. He further noted, “The firm’s ‘selling, general and administrative’ costs grew from $125.8 million in the first half of 2017 to $208.8 million in the first half of 2018. The firm’s resulting ‘loss after tax’ grew from $29.3 million in the first six months of 2017 to $68.4 million in the first six months of 2018.”

With this in mind, Feldsted, quips, “It is hard to see how [FarFetch’s] investment needs will wind up being as slim as the cigarette pants on its site.” In fact, she claims that FarFetch’s prospective valuation, which relies heavily on “capital-light” model of not holding inventory but instead connecting consumers to third-party stockists and taking a cut of the sale, “might prove to be quite farfetched.”

So, which giant is the better bet when it comes to online luxury? With FarFetch set to hit the NYSE block before the end of the year, investors will be left to decide. In the meantime, Marchetti told WWD last year, “Frankly, we operate on a different scale [than FarFetch], with sales of two billion, 10 times higher, but we appreciate the competition; it keeps us on our toes.”