FARFETCH LIMITED 
Fitch Ratings has placed
The RWN reflects increased uncertainty around Farfetch's path to profitability after it recently announced that its prior forecasts or guidance should no longer be relied upon. Our rating case had considered management guidance and assumed that Fitch-adjusted EBITDAR would turn neutral to positive in 2023 before improving strongly over 2024-2025. Farfetch's failure to meet these expectations would increase liquidity and refinancing risks and could result in a multi-notch downgrade of the IDR and instrument rating.
Fitch expects to resolve the RWN once Farfetch has provided its missing 3Q23 results and an updated guidance on medium-term business performance and strategy. The extent of the rating downgrade would depend on our assessment of its liquidity position, with more imminent liquidity risks leading to stronger rating pressure. The rating may be affirmed if the recent performance and medium-term outlook are in line with our rating case but we currently see this outcome as less likely.
Key Rating Drivers
Guidance Withdrawn, Meaningful Execution Risks: Fitch sees high execution risks in Farfetch's plan to scale up its business and achieve strong and sustainable levels of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. We believe such risks have increased as the guidance withdrawal, in our view, suggests some weakness in implementation of the company's strategy and a more challenging market environment for online luxury goods retailers. The path to profitability has been delayed in the past and we will consider meaningful execution risks when assessing its new guidance and forecasts.
No Headroom for Underperformance: Farfetch has previously underperformed our forecast due to a higher fixed cost base, slower working-capital turnover and weaker demand recovery in
Profitability Improvement is Key: Sufficient improvement in profitability to enable a return of FCF to positive territory, is key for the IDR. For the rating to remain at 'B-' Farfetch needs to improve growth, profitability and cash generation from 2H23, reflecting the ramp-up of new partnerships and benefits from cost-cutting initiatives and working-capital management. Delays in reaching sustainable profitability may lead to a negative rating action as liquidity and refinancing risks will rise.
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 ongoing inventory clearance will weigh on gross margin for Farfetch's in-store and brand platform segments.
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, similarly for Amazon.com and Golden Goose. We considered lease-adjusted credit metrics for Farfetch due to its expansion of leasehold store network.
Farfetch is rated below Golden Goose and Birkenstock. Both Golden Goose and Birkenstock have strong EBITDAR margins (30%) and positive FCF, which are 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 will update its key assumptions for our rating case for the issuer once the company provides 3Q23 results and an updated medium-term guidance and strategy.
Recovery Analysis
The recovery analysis continues to assume that Farfetch would be reorganised as a GC 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%. The instrument rating is on RWN, reflecting the risk of a downgrade should our assumptions on GC EBITDA and enterprise value multiple change following the update of its business outlook.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
The rating may be affirmed and removed from RWN if the recent performance and medium-term outlook are in line with our rating case but we currently see this outcome as less likely
Factors that Could, Individually or Collectively, Lead to Downgrade:
Liquidity shortfalls and insufficient resources to fund operations or fulfil put options obligations over the next 18 to 24 months. More imminent liquidity risks would lead to stronger rating pressure and, potentially, a downgrade of more than one notch
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
Liquidity and Debt Structure
Limited Liquidity: Farfetch's liquidity is limited, despite a cash balance of
Fitch estimates that additional cash outlays may come from exercise of put options related to Farfetch China and Palm Angels in 2024 and 2026.
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
Farfetch has an ESG Relevance Score of '4' for Governance Structure due to key-man risk associated with the founder's close involvement in the company's operations and strategy, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
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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