Farfetch Ltd (FTCH) 2019 Q3 法說會逐字稿

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Farfetch Third Quarter 2019 Results Conference call. (Operator Instructions)

I would now like to turn the call over to Alice Ryder, VP of Investor Relations. Ms. Ryder, you may begin your conference.

Thank you.

Hello and welcome to Farfetch's Third Quarter 2019 Conference Call.

Joining me today to discuss our results are José Neves, our Founder, Co-Chair and Chief Executive Officer; and Elliot Jordan, our Chief Financial Officer.

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 risk factors that could cause actual results to differ, please see the Risk Factors section of our annual report on Form 20-F, which was filed with the SEC on March 1, 2019.

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 press release and the slide presentation, both of which are available on our website at farfetchinvestors.com.

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

Thank you, Alice.

We have made great progress in Q3, capturing market share aggressively, whilst balancing our growth with improved margins quarter-over-quarter and beating guidance on both top line growth and adjusted EBITDA margin. We executed on the strategy we outlined to you in August to navigate the promotional environment with great success. Our decision to moderate our digital platform GMV growth from 44% in Q2 to 37% in Q3 was, in our view, the right approach as we delivered sequential improvement in margins and the strong debt-to-EBITDA margin guidance with less reliance on promotions. These results also demonstrate growth that is multiple times faster than our nearest competitor.

I am confident that this strategy will continue to deliver on both top line growth, strong market share capture, healthy unit economics, and as a result, places us on a steady path to profitability. And I believe this will be the case independently of how long the promotional environment will last.

Our Q3 results now include New Guards Group, or NGG. Going forward, we will report NGG's revenue generated offline in wholesale transactions as brand platform. Revenue from online sales across both channels, Farfetch.com and brand.com, will be defined as digital platform, previously referred to as platform.

Digital platform GMV grew 37% or 40% at constant FX in Q3, ahead of our guidance of 30% to 35% growth. We are growing twice as fast as the market, according to bank estimates of global online luxury growth, which is 20%. This strong market share capture is a result of our platforms' flywheel, the incredible network effect taking place in the Farfetch platform.

On the supply side, we believe Farfetch is the sole multi-brand luxury platform who can offer brands the advantages of a direct-to-consumer e-Concessions model, including full control over merchandising and pricing as well as higher margins as compared to the only alternative which is wholesale distribution.

More than ever before, luxury brands are choosing Farfetch's unique e-Concession model. Over the past year, 100 brands have directly joined the platform, including top labels such as Brunello Cucinelli, Stella McCartney, Acne Studios, Moschino and Golden Goose, among others.

As we said in August, we continue to see brands reducing their exposure to online wholesale in pursuit of their direct-to-consumer and e-Concessions channels. As a result of this tactical shift, in addition to signing new brands, we have also seen existing brands double down on Farfetch. At the end of Q3, our top 10 brands, which includes leading brands such as Gucci, Prada and Fendi, have more than twice as much direct stock on our platform than a year ago. The increased supply from direct brand partners, combined with continued growth of supply from our boutique network, has driven Q3 stock value up to nearly $3 billion, up more than 50% year-over-year.

On the demand side, the unique offering of over 3,000 designers, approximately 300,000 SKUs, which is roughly 8 times our competitors, and improvements in our best-in-class technology on service are fueling our customer growth, with active customers up 52% over the same period. This increased scale on both supply and demand further drives the flywheel dynamic of our 2-sided marketplace and generates massive amounts of data which ultimately spins this flywheel even faster.

With $1.8 billion of digital platform GMV and 1.9 million active customers in the past 12 months, Farfetch is the largest digital in-season luxury player in the industry. Being #1 puts us in a very strong position which allows us to now focus even more on our path to profitability whilst continuing to target sustainable growth and market share capture. At this point and roughly 1 year after our IPO, I'd like to take stock of the incredible features of our marketplace power business and how they not only remain intact, but in fact, has been reinforced.

First, we have AOVs in the region of $600 and take rates of circa 30%. This implies approximately $180 of commission per average transaction, which, together with strong retention and engagement, produces attractive LTV to cash ratios and payback on cash in less than 6 months.

Second, we are the only luxury marketplace at scale in a $300 billion global industry, with practically all our competitors being retailers. Not only this sets us apart as the most strategic partner to the leading Luxury brands, but we are also capturing market share from these retailers at a remarkably fast pace.

Third, we have built unique and proprietary technology logistics and data platforms, with incredible network effects, and have signed just under 500 brands for a total of over 1,200 luxury partners for our platform, with 100% retention among our top 100 brands.

Fourth, we are one of the very few western e-commerce companies which have demonstrated success in penetrating China, a market, which according to Bain, is expected to grow to represent 45% of luxury by 2025. In the last year, our presence in China has been going from strength to strength, and GMV growth has outpaced the overall marketplace, cementing China's position as the second-largest market for Farfetch.

Last, we are building a unique brand with strong cultural relevance. We want to be the first and the last destination for people who love fashion, the source of inspiration for fashion lovers, but also the place where you find that unique piece you were looking to buy and is available only on Farfetch.

The recent acquisition of NGG is a significant step in that direction, and the halo effect of the original content its brand platform will produce will create a unique DNA for the Farfetch brand. All of these features are very difficult to find in global digital marketplaces or platforms and position us uniquely to go after what is the $100 billion incremental opportunity in online luxury sales in the next 6 years.

Before I pass to Elliot, I'd like to briefly update you on NGG. Last quarter, we announced the acquisition of New Guards Group, and upon closing this transaction on the 9th of August, we created a new brand platform division for the business.

We believe NGG's existing and future brands will drive incredible cultural relevance for Farfetch. We believe NGG will elevate the Farfetch brand and increase organic traffic and customer engagement which will make Farfetch an even more attractive channel, not just for consumers but also for our brand partners.

The NGG current portfolio sold more on Farfetch in Q3 than any other single brand which demonstrates on one side the incredible compatibility of the 2 businesses from a consumer perspective, but also the extraordinary capability that NGG has of bringing the most sought-after labels to market, labels that were practically nonexistent just 6 years ago.

Off-White, for example, ascended to #1 most-searched luxury brand as per the Q3 listing date, ahead of more established heritage brands.

The NGG acquisition was also enthusiastically welcomed by our brand partners. They participate on Farfetch in part because we are a highly curative multi-brand channel. Brands recognize that by having the best collection of labels, Farfetch attracts a larger audience. And in fact, this is evident in our top position for [Lexa] among online luxury fashion destinations. Almost 70% of our multi-item transactions consist of multi-brand baskets, and brands seek to be in-channel with other attractive labels. This is why they participate in multi-brand channels such as department stores, for example.

New Guards operates as a platform. It uses a single common infrastructure and model to incubate and grow emerging talent into highly sought-after brands through a shared services model. They operate an asset-light model and procure manufacturing resources based on demand, and quantities are produced to-order. As a consequence, they are very inventory-light.

Since August, we have been working to integrate the brands in the New Guards Group portfolio onto our marketplace. We're pleased to once again have demonstrated our proficiency in integrating new acquisitions, with the entire New Guards Group portfolio now selling directly on Farfetch. This NGG supply has been consigned to our fulfillment by Farfetch warehouse in Italy and is now servicing customers globally. We have also made progress in our plans to replatform Off-White's e-commerce site, which is expected to be completed in Q1 2020. And we'll then proceed to replatform other brands in the NGG portfolio, giving them best-in-class global e-commerce capabilities.

This integration on the Farfetch platform will unlock exciting jobs, exclusive collections and an unrivaled range from NGG as well as future new concepts and brands which will be available only on Farfetch for our 1.9 million global consumer base.

Driving direct-to-consumer revenues for the New Guards brand is a tremendous opportunity to capture 1PO sales at a very profitable margin, and we plan to grow the e-Concessions and roll out websites for the portfolio throughout 2020.

Turning now to Elliot to discuss our Q3 financial results and outlook.

Thank you, José, and good evening, everyone.

I am very pleased to be presenting the Q3 2019 financial results which represents another strong quarter for Farfetch.

We have continued to extend our market-leading position, improved our unit economics and delivered better-than-expected adjusted EBITDA through continued operating leverage. The acquisition of New Guards Group has also contributed to a stronger financial position overall.

Group revenue has grown 90% year-on-year to $255 million and our adjusted EBITDA loss was $35.6 million, substantially better than our expectations. We now have 2 complementary platforms: our technology platform, which, going forward will be described as our digital platform; and since the acquisition of New Guards Group, our new brand platform. You will see that we break out the revenues and gross margins for each platform as well as from our stores.

I will now explain the performance we have seen on each platform, then cover our group technology spend, group costs and overall adjusted EBITDA position.

First, the digital platform, which outperformed expectations, with GMV growth of 37% year-on-year, improved unit economics quarter-on-quarter and expanded the strong active customer base which underpins future growth. The 37% year-on-year growth was broad-based and reflects our well placed investments into China, the Middle East, Japan, Brazil and U.S. markets, amongst others.

Our third-party take rate is stable quarter-on-quarter at 31.2%, with increasing underlying commission rates across our brand and boutique seller base, and growing income from our Media Solutions business mixed with a stronger share of GMV year-on-year on the marketplace from our brand e-Concessions and growth of our platform solutions white-label business.

Order contribution margin stepped up quarter-on-quarter from 28.1% in Q2 to 31.3% in Q3, which is a result of lower promotional spend and improved first-party margin, partially offset by investment into digital marketing.

Whilst the broader backdrop of the quarter was characterized by ongoing higher-than-average promotional activity, we made a conscious decision to support the values of the luxury industry by reducing our use of promotions. Instead, we offered certain incentives and discounts in a targeted fashion to appeal to our more valuable and loyal customers. The result is order profitability in line with our expectations, and we continue to develop the proposition to improve this position over the longer term.

As I have reported in the past, we have historically seen payback on customer acquisition spend well within 6 months. This continues to be the case with the acquisition cost of the Q1 2019 cohort now fully recovered 6 months later. This strength gives us ample headroom, and our superior marketplace data insight allowed us to reinvest into customer engagement strategies to drive retention and frequency of shop as well as increasing our online presence, boosting downloads of our app and broadcasting the Farfetch proposition to a wider audience on social media channels. All of this work puts us in a very strong position which we believe underpins healthy customer acquisition and cohort values moving forward.

Turning to our brand platform, which we are reporting for the 2 months of August and September 2019. Brand platform GMV and revenue for these 2 months totaled $63 million, reflecting shipments to retailers against the full winter 2019 order book. This was primarily driven from strong demand for Off-White, Palm Angels and Heron Preston. Gross margins on these shipments were 44%.

We are expecting scale benefits to support gross margins moving forward, have a strong order book for spring/summer 2020, and production levels and finished goods on hand are well set up to meet the Q4 revenues, which I will cover later.

Now, moving to our cost base. Technology expense grew 17% year-on-year to $22 million, with continued development of consumer-facing product and increasing focus on our platform enterprise solution being built in partnership with Chanel and Harrods, the latter of which remains on track to go live in the first half of 2020. There are no material technology costs from within the New Guards Group.

SG&A grew 61% year-on-year to $94 million, incorporating an increase in costs from within the underlying digital platform business plus the addition of brand platform, SG&A cost. In Q3, we have grown our offline marketing spend ahead of sales as we continue to drive awareness of the Farfetch consumer proposition. This has been offset by significant efficiency improvements across our customer service and production teams year-on-year, driving leverage. The combined cost position is 41% of adjusted revenue compared to 52% of adjusted revenue in Q3 2018.

Overall, this means our underlying adjusted EBITDA position was better-than-expected at a loss of $35.6 million or negative 15.6% of adjusted revenue compared to 28.7% in Q3 2018 and ahead of the 18% to 20% range previously guided, with outperformance across both the digital platform and brand platform businesses.

The bridge from underlying adjusted EBITDA to operating loss includes a $22 million credit to the P&L within other items, the quarterly share-based payments charge of $32 million, depreciation and amortization of $35 million and net financing costs of $6 million.

The credit and other items arises from the revaluation of stock-based liabilities for acquisitions that will be satisfied in Farfetch shares. The share-based payment charge of $32 million reflects an ongoing charge of $50 million per quarter for equity award, partially offset by an $18 million reduction to the provision for cash-settled options and associated employee taxes.

The $21 million sequential increase in depreciation and amortization primarily relates to the amortization of intangible assets we have acquired throughout the year to date, and the year-on-year movement also includes charges in relation to IFRS 16. The resulting loss after tax for the quarter was $85 million, $0.28 per share.

Cash on hand at the end of the quarter was $318 million, a reduction of $361 million over the 13-week period. Primary outflows relate to the $256 million net cash component of the acquisition of New Guards Group and $21 million in relation to completing the financing aspect of the Toplife acquisition. We also have a $300 million secured loan commitment which remains undrawn.

Looking ahead to our final quarter of the year, the most exciting quarter of the luxury industry, with gifting and winter clothing a key feature of customer shopping missions. We are pleased with the results quarter-to-date, with strong customer engagement delivering results in line with expectations.

We, therefore, want to reiterate our previous guidance of GMV growth of 30% to 35% year-on-year across the digital platform. Brand platform GMV is expected to be between $80 million to $90 million. At an adjusted EBITDA level, we are expecting a Q4 adjusted EBITDA loss of $21 million to $31 million, which is an improvement over previous guidance, reflecting the overall stronger position of the Farfetch Group.

José?

Thanks, Elliot.

I am very pleased with the progress we made during Q3, delivering growth and EBITDA ahead of our expectations, stabilization of our unit economics, expanded relationships with brand and boutique partners, and initial synergies from New Guards' integration with Farfetch.

I'm very proud that we've completed chapter 1, the first 10 years of Farfetch, having built the industry leader in online in-season luxury and the only luxury tech platform at scale in an industry of retailers.

In spite of our market leadership, we keep capturing market share aggressively. I believe we are uniquely positioned to capture the lion's share of the incremental $100 billion online luxury sales. That Bain estimate will materialize over the next 6 years. This #1 position allows Farfetch to now focus even more on our path to profitability, which as you can see today is well on track. Thank you.

(Operator Instructions)

And our first question is from Doug Anmuth with JPMorgan.

Wanted to ask 2. First, just can you comment a little bit on China? I know, José, you talked about how you're positioned there, obviously, on a longer-term basis. But just curious if you're seeing anything from a macro perspective there, just given some weak numbers that have been out in the market.

And then second, Elliot, if you could talk a little bit more about that path to profitability and some of the key areas where you're thinking about improving efficiency over the next several quarters.

Doug, thank you for your question. China is firing from all cylinders, really. It's -- we're very, very pleased with the performance. Our own channels, the Farfetch iOS app, the Android app, our WeChat presence are delivering extremely, truly strong results going ahead -- growing more than the average of the marketplace.

I think, clearly, our unique proposition to the Chinese consumer, which is real-time fashion, 3,000 designers, 300,000 SKUs, localized -- fully localized staff with local payments, local data center, it's paying off. And we don't really see any impact of macro factors. And so we expect China to continue to deliver very strong growth.

And Doug, on the path to profitability, absolutely. I think, obviously, we've delivered a really good set of numbers across the quarter and have raised our expectations for our profitability and the EBITDA position in Q4 on the back of what I think is a very strong position to be in.

We've always been focused on the path to profitability. Clearly, being #1 was a big focus for us as well. We are now #1 in terms of online luxury. And you'll remember back at the IPO, we laid out how profitable this business could be over the longer term as we take this position of leadership within an expanding industry.

And so the path to profitability is quite clear. It's about continuing to grow GMV on the back of our superior customer proposition and expanding market. It's about lowering customer engagement costs through use of our data insights, exclusive content on the platform. And obviously, now that we've got the exciting brands from New Guards Group on the platform, and in the future, exclusively available for Farfetch, that provides us with an even better customer experience with opportunity to drive organic growth in a way we've not been able to drive that before.

We obviously will continue to drive our high-margin income streams, the Media Solutions business, in particular. The white label business delivers very high-margin income streams as well. And then back on the marketplace, reducing the unit cost of shipping, significant opportunities around our logistics. Our partnerships to reduce the cost of shipping, the unit cost of production and other order-related costs as well to continue to drive our order contribution up to that 60% audit contribution target there, I'm still very confident in over the long term.

And then for the rest of the business, it's about continuing to drive the operational leverage that we've been delivering against an infrastructure that we have already built, really, to take the lion's share of what we believe is a $100 billion incremental online luxury opportunity.

And so now that we are #1 and clearly extending our gains, this allows us to continue to capture market share at a pace that I think others are unable to achieve and now focuses the business even more on that path to profitability moving forward.

As José said on the call just now, we're close to $600 AOV on a reasonably regular basis. We've got a 30% take rate. We've got 1.9 million active consumers. And those mature cohorts are delivering in excess of $100 per order contribution. So we're at the start of what I think is an amazing growth opportunity, and as we've said, really profitable in a distance that's not too far away now.

Your next question is from Geoffroy De Mendez with Bank of America Merrill Lynch.

Congrats on the results. I have 2 questions for you. The first one is on the gross margin at the New Guards Group. I think when you announced the acquisition, the gross margin was at 55%. And now, it's at 45%. I heard you say that there might be some seasonality, and you saw a potential improvement going forward. Can you talk a little bit about this and if we can go back to the 55% gross margin?

Also on NGG, is there any way you could share with us the like-for-like growth on a comparable basis? Obviously, you only had the acquisition for 2 months out of 3, but that would be interesting to see how fast the business grew.

And the second question and related to this is more on the promotional activity. Could you elaborate a little bit on the differential between Q2, which was obviously very promotional in that Q2 margin and what you've seen in Q3?

Yes, absolutely. So on NGG, as you quite rightly pointed out, it was a 2-month period, so I'm a little bit reluctant to provide too much information on such a short period. But just on the gross margins, that is in relation to what was exactly shipped over that 8-week period as opposed to what you'd normally see across a full season shipment. So the mid-50s is a gross margin that I'm very comfortable with moving forward.

As I said just before, we've got scale benefits coming through in terms of our supplier base, in terms of the production facilities that we tap into. So very confident with that position. But it dipped down just for the 8-week period because of the various shipments that we had with the various commercial partners that we supplied over that period.

Again, reluctant to share year-on-year growth rates because it was such a short period, but I will say it's in the high 30s in terms of year-on-year growth against a comparative period last year.

In terms of the promotional environment, so yes, you'll remember last time I spoke about the percentage of spend on promotions against GMV effectively doubling year-on-year from Q2 '18 to Q2 '19. What we saw in Q3 year-on-year was a 60 basis point step-up in terms of our spend on promotions. So substantially less than the earlier position that we had. Much closer to the position that we were at last year. Still some promotion. More last year, but substantially reduced versus what we had seen was the big impact that hit us in Q2. So a really good place.

Quite pleased, actually, that even though we did pull back substantially on the promotions, we still outperformed on the GMV growth rate. And obviously, that helped drive the order contribution up back into the 30% area which is a much better place for us as we move forward.

Your next question is from Louise Singlehurst with Goldman Sachs.

Just again, just following up on that promotional environment. Elliot, I think you mentioned something about a much more targeted approach to, I presume, the cohort that you're after in terms of the promotional spend. Can you just talk about the use of Farfetch Access now trying -- is that now much more useful in terms of data, understanding that you're obviously not yet annualizing that.

And then I wonder if you can give us an example of the dialogue that you're actually having with the brands. Because presumably and as we're seeing in the Black Friday period, the promotional environment is unrelenting across the platforms. And I just wonder if there's any examples that you can give us on that?

And then just finally, on thoughts just post New Guards, now you've had it understandably for a short period of time, but anything that you can tell us about the working capital demand? Is it still as you expected in terms of the acquisition time, 95% of the product being made-to-order so the working capital stays in control? There's nothing in there that you've seen that would change your commentary on that? That would be wonderful.

Sure. Louise, I'll let José cover off conversations that he's having with the brands. Let's look at promotions, though. So what we did is we used our spend more wisely and targeted the more loyal customers that either are within our Access loyalty program or sit within the top tier. Our 1% of customers there are our VIP customers are driving 20% to 25% of our GMV. And rewarded those customers with free shipping, obviously, which is part of Access, but also with some targeted basket promotions and savings that make sure -- as I said last time, we kept and retained the more valuable customers but we didn't give away promotions to new customers or customers that only shop with us when we're on promotion as those customers there really don't drive the LTVs up, don't drive the order contribution over the longer term. And those were the customers that effectively was the difference between 37% year-on-year growth in Q3 and 44% year-on-year growth in Q4. So we stopped doing that with customers that don't shop, really, with us and used the money more wisely on the Access customer base.

Access is going super strong. So we are now up to over 60% of our Access consumers are regularly accessing the awards and the rewards that they get, figuring out how they move from one tier to the next. The AOV on customers that sit within the Access program is some $100 to $200, on average, higher than customers that don't sit within the Access program. And that's obviously driving a much better part of the GTV. And the frequency of shop from those customers is higher than customers that are outside the program as well. So we're very pleased with how that investment in effectively free shipping and basket-level promotions is driving retention.

Before I talk to -- I'll let José talk about the brand, so on NGG, you will see when you get to the details of the balance sheet that we've got stock on hand at the end of the quarter. That stock is already made and is really for dispatch to drive the Q4 numbers. I said now it's about $80 million to $90 million of revenue in GMV from that product, where we've got $25 million of stock really to ship. So we're at a really good place to get that product dispatched and get the cash-in over the next quarter to drive the positive or negative working capital, the favorable working capital, however, you want to say it, that comes from that proposition.

So yes, we're very pleased financially as well as operationally and strategically how that acquisition has already started to impact on the business.

Louise, thanks for your question. So I think we made the right decision, in my opinion. We protected the values of the luxury industry, sided with the brands on their request to control the level of promotions and help them move increasingly from reliance on online wholesale to direct-to-consumer and e-Concessions. The results were even better than expected, and I think we found the formula. We found the formula that balances growth, steal market share capturing growth multiple times the closest competitor. And this formula, I believe, will work no matter how long it lasts in terms of the promotional environment.

So the conversations with the brands are extremely healthy. We -- this year and just recently, we launched Prada Linea Rossa as their exclusive global multi-brand partner for that new line. We are -- we have this year launched exclusives with Balenciaga, with Burberry. We have an ongoing program with Gucci called Gucci Open House. And the brands are very exciting, very excited to see tremendous growth in their e-Concessions. At the global base, we are capturing, for example, in China, a Chinese consumer that is 29 years old on average and spending even more per basket than our average of $600 AOV. So this is the true luxury customer in China in the demographics that is absolutely the sweet spot for the brand.

The result of all of this is conversations around absolutely doubling down on Farfetch. You see that from the data and the numbers with the inventory more than doubling for the top 10 brands, and we expect this trend to continue.

I think the end game is highly, highly favorable to Farfetch. This is the luxury industry. Brands will have to protect price integrity. They will have to contain promotional activity. The online wholesale channel doesn't allow them to do that. They completely lose control, obviously, after they pass the title to the online retailer. And now, we are -- they have an alternative at scale. And I think that -- we don't know, obviously, the transition, how long it will take. We now have the formula to navigate the competitive landscape. As and when that transition materializes, we think we stand to be a big winner from all these dynamics.

Your next question is from Eric Sheridan with UBS.

Thanks for the additional level of detail on the GMV and the gross profit breakout there.

Following up, though, looking at digital platform GMV as well as sort of gross profit and order contribution margin, any sense of how to think where we could go over the medium-term on those metrics versus what you laid out originally through the IPO process as investors sort of continue to understand how the business evolves and develops, especially on the gross profit margin line and on the order contribution margin line, not only just in Q4 but maybe looking out over the next couple of years?

Sure. Eric, as I said on the last call, we are forecasting that the promotional environment with the industry will last what is now 2 to 3 more quarters. Clearly, the work that we did over the last 13 weeks to pull back on promotions is the right thing to do, and it is helping with the order contribution position.

But I would say that we have to be wary of what the next 2 or 3 quarters might look like. So now, we're back into the 30% order contribution, that's a good place to be over the next couple of quarters. And then as we execute on the broader offering around exclusive content to bring down our cost of digital marketing to drive organic traffic, as we are able to pull back even further on promotions as the industry starts to reset itself about those promotions 2 to 3 quarters out, we'll be able to improve the gross margin position of the marketplace, which is obviously where our promotional spend hits us.

And of course, what we haven't done as yet is really drive leverage on our logistics network. That's still a big part of our delta in the revenue to the gross margin position. And we've got a number of work streams that will help us push that, including improving the logistics flow with the Fulfillment by Farfetch model as we are now testing and rolling that out by having more localized facilities using third-party logistics providers to get the cost of shipping down. We will also be able to revisit how we do our shipping, which carriers we use, how we use air freight versus other means of shipping, how we might use local carriers in a better way. There's quite a lot of opportunity to drive savings within that position.

And then, of course, lastly, it's around the first-party business margins and mix. Clearly, we're growing the first-party business faster than the overall business. At the moment, it's now 12% of our GMV at a lower gross margin than the marketplace. As that starts to moderate over the coming months with Harrods coming onboard next year in H1, that's obviously a 3P model, the mix will drop, which will improve the overall blended gross margins, and the 1P gross margins can grow through better price points, et cetera, et cetera. So a number of different levers.

I think it's worth pointing out, as I said last time, our more mature customer cohorts are already at 55% plus as an order contribution. That shows us how we can get there in terms of the path towards 60%. Obviously, it's around organic traffic, higher basket sizes, lower returns rate. And of course, when we start to sell more of the product that New Guards Group has produced for the group, the first-party original product that comes at even higher margins as does the Media Solutions business.

I will stop there because I'm probably rambling, but as you can tell, there's a lot of levers for us to pull to get back to that 60% position.

Your next question comes from John Blackledge with Cowen.

A couple of questions. Just any color on expectations for the holiday? And given the U.S. is a decent part of the overall business, do you expect any impact from the shortened holiday season here in the U.S.? And if so, is that baked into guidance?

And then on China, just any update on the JD integration on Toplife? Any color on impact on the China business?

John, yes. So holiday season, we're very confident in the offer. We had a good start to the quarter with regards to our Singles Day offering earlier on this week, and that went really well. So we're very pleased with how that's kicked off.

Clearly, the next 7 weeks are key to this quarter. There's a lot of activity coming our way, but we -- with some of the exclusives that we've got, the Prada lines that we are the exclusive third-party distributor, we're very excited about that. Obviously, some of the collections that we have out of Off-White and Palm Angels, very excited about that. And we now have just under 500 direct brand e-Concession relationships, and we work very closely with those suppliers to put the best holiday offering forward over the season. And clearly, party wear, gifting. It's a very exciting part of the luxury industry -- time for the luxury industry.

So we're very confident about that and delivering that 30% to 35% GMV growth year-on-year across the digital platform.

Touching on China. I think for us, what is extremely, extremely exciting is the absolute validation of product market sheet. Our own channels, the Farfetch app, primarily, because China is an app business. As a result of considerable investments in a local data center, 350 staff in Beijing, Shanghai, and certainly, Hong Kong as well, creating on top of our API an app that is incredible and that is as fast, as sleek with local payment systems, completely localized. All of that is paying off, and we're seeing this extraordinary traction from Chinese consumers. Very high AOV, higher than the average of Farfetch, so higher than $600. Materially, younger customers. It's extremely, extremely exciting.

On Toplife, we are very excited with the proficient integration that our teams demonstrated. It launched only a few months ago. As I said, it's a 2020 focus, and it's a channel we're optimizing. It will be the cherry on top of the cake, but the cake is, I'm pleased to say, growing very fast. So very good news from China all around.

Your next question is from Jason Helfstein with Oppenheimer.

Two questions. First, José, can you talk about geographic price protection to the extent 1P e-commerce retailers are not respecting this. How are you enforcing this on behalf of your brand partners? And then to just clarify, do you only enforce for your brand partners?

And then, Elliot, maybe talk to us a bit about kind of future potential cash needs. Based on most Street models, the company would need to raise capital in, I think, late 2020, early 2021. How are you thinking about this? And then to the extent if you limited the size of the 1P business, can you get working capital to be a source of funds versus a use of funds? And then anything you can do to reduce CapEx ratio?

So on what we call geo pricing, we have developed industry-leading tools for brands and retailers to manage the pricing. We do not set prices. We're a marketplace. So for the most part, 90% of our turnover roughly is 3P. The price is as set by the seller.

Having said that, it's extremely easy on Farfetch for a retailer to adhere to geo pricing. They just need to tick a box. And obviously, we only work with the best multi-brand boutiques. All of these boutiques are known to the brands and authorized by the brands who sell on Farfetch. There is a mutual respect that -- in some cases, decades of relationship between the brands and these boutiques. And we've been able to manage that very, very in harmony in the platform.

What's happening out there, it's -- you are right. There is indiscipline from the wholesale -- the online wholesale channel. But to my point early on with Louise, this plays in our favor. More and more, the brands are trying to phase out online wholesale. Not only it's less profitable as a channel, they book half of the revenue. They have much lower margins. But they lose complete control of pricing and geo pricing and control of merchandising.

Now they have an alternative, a multibillion alternative at scale globally with a very exciting customer base, now 1.9 million active customers. And this is extremely exciting for the industry. So I think we will be the beneficiary of protecting the values of the industry. And of course, this has meant that we moderated growth and -- but we found the formula. So really, really satisfied with that and satisfied with the way we're managing the geo pricing as well.

And Jason, just on cash, I'm very comfortable with where we are on cash. So obviously, we closed the quarter at $318 million of cash. I'm expecting to close the year, so end of December, at around $300 million of cash as well. That's obviously actually benefiting from some of the working capital benefits that come through from the marketplace over the fourth quarter. And we also have the EUR 300 million secured loan facility which at the moment is undrawn but available to us to provide more financial flexibility and liquidity. So both of those positions puts me in a very comfortable position.

We obviously will benefit from the New Guards working capital position, as I was explaining with Louise, moving forward. And in terms of your question around CapEx, you're probably already seeing, actually, when you go through the detail there, the capitalized development spend was $16 million in Q3. That was against $20 million in Q2. So we've already brought that down. There was around $8 million worth of plant and property capitalization. That's offices that we completed in Shanghai and New York in the time period, and that's not to be repeated. So we've got savings there in terms of our CapEx as we move forward.

And so I think we're in a really good place around that position, so I'm not worried about where we're at. And that gives us good headroom through to becoming cash flow positive.

Your next question is from Edward Yruma with KeyBanc Capital Markets.

I guess, first, you mentioned that the pull out in promotional activity allowed you to kind of disinvite maybe those most price-sensitive consumers, I guess. Did you see any change in buying behavior, maybe your most loyal or habituated consumers given some of the pullback in promo?

And then I guess, second, as you kind of dig in on the New Guards business, any sense as to whether investments are necessary, either from a capital perspective or from an expense perspective to kind of continue that rate of growth?

Yes. Let's talk New Guards. So they operate under a very asset-light model. They haven't got production facilities, so where the product is made is in Europe, near Europe suppliers. We obviously were using scale benefits to drive better input prices. They haven't got warehouses that they've built for themselves, so there's no CapEx requirements there. And they operate from a very -- what's the word I'm looking for? They're not flashy as their office in Milan. It's very prudent in terms of cost management. They don't need to expand significantly their head office facility. So I'm very comfortable with the guidance that we have around CapEx to include the New Guards operations.

In terms of promotions and how do customers behave, I'm actually quite pleased to say that our more loyal customers, given that we sort of allowed our teams internally also to focus on how to broadcast the full price offer in new and in-season products through editorial and through our marketing to our customers and our private client teams, our Fashion Concierge teams, we're able to then target the customer base with what is an amazing full-price offering and a really strong in-season offering. So we actually saw our top 1% customers buy more full price than we have in the past. So we were very pleased there.

The noise of promotions allowed us to focus on offering to the customer a bit of proposition, and they bought into that proposition which is why we've outperformed.

Your next question is from Ike Boruchow with Wells Fargo.

Two questions for Elliot, I believe. Just on Harrods next year, is there any more information you could give us, as it's coming closer, I'm thinking specifically about GMV contribution, take rate contribution margin? Is there anything that can help us as we try to factor that into our models for next year?

And then I apologize, Elliot, I know you've had this question asked a couple of different ways, but I'll try another way. A lot of focus on the time line to positive EBITDA. I guess, the consensus number has positive EBITDA implications for fiscal '21. I guess my question is does that seem reasonable? Or are there puts and takes that we should consider?

Great questions. I'm not providing guidance around Harrods for next year today. We would normally talk about 2020 on the next call, which is still the plan. But what I will say is that when we've talked about the long-term growth of this business being a 30% to 35% GMV growth, that obviously includes bringing on new clients for the Black & White team, includes Harrods, obviously. So if you've got the sort of long-term 30% to 35% in your numbers, that's a good place to be.

And also, in terms of take rate, the 29% to 32% take rate that I've talked about on a number of occasions also includes the growth of our Black & White business as well. So those numbers are already including the expectations for Harrods.

Profitability, yes, again, a great question. I think as I said earlier on, we're -- overall, we're very pleased with how we've been able to deliver across the quarter. That gives us more confidence for Q4. I wouldn't normally provide guidance for 2020 and beyond. I'm not going to provide guidance for 2020 and beyond. But your date of 2021 being breakeven, I think [fact check] has the consensus overall at that position. That seems about right to us at this point in time.

Your next question comes from Lloyd Walmsley with Deutsche Bank.

A couple on New Guards. When you acquired it, you said it was growing, I think, 55% in the first...

Lloyd Walmsley, your line has gone mute.

(technical difficulty)

Your next question is from Stephen Ju with Credit Suisse.

(technical difficulty)

Okay, ladies and gentlemen, my apologies for the loss of audio there. I can move on to the next question.

And that next question is from Marvin Fong with BTIG.

Just a couple of housekeeping ones. Just based on -- did you say how the operating margin of New Guards worked out in the quarter? Was that consistent with what you had previously guided to last quarter?

And second, did you -- can you call out any particular noise in the third quarter with Hong Kong or Japan as some of the other luxury houses have called out? Did you see anything unusual that drove or hurt the 37% platform GMV growth?

Marvin, yes, so just in terms of New Guards Group, we are not breaking out fully the EBITDA of the brand platform as all the costs now are all combined in. But what we did see in terms of the outperformance versus expectations for the quarter, that was across both the brand platform and the digital platform where both parts of the business did better than we thought they would do at the operating margin position.

Yes. So just to answer your question around China, Japan, Hong Kong, et cetera, we have not seen any material impact on trading. We continue to see growth coming from the APAC, including Mainland China, Hong Kong, Japan. Obviously, it's an unfortunate climate for physical retail in the region, and our partners have commented with us. In terms of the online dynamic, we're not seeing that. And we're also growing very, very healthily in other parts of the world, Latin America, Middle East, Russia, with very notable strong growth. So the 37% GMV growth, 40% on constant FX was really broad

(technical difficulty)

And your next question is from Lloyd Walmsley with Deutsche Bank.

All right. Hopefully, you guys can hear me now. And forgive me if I missed a bit of the call.

But the question was on New Guards, I think, it was growing 55% in the first half, you said it was high 30s in 3Q. Can you give us a sense for what growth is implied in that Q4 guidance for $80 million to $90 million of GMV and how to think about growth in New Guards going forward more broadly?

And then on the digital side, how -- can you walk us through how New Guards owning it, is driving GMV on the digital side? Are you benefiting at all from the ownership position, plugging in more lines or more inventory or anything like that you can give us a sense on?

Yes, Lloyd, and apologies, the call cut us all off there for a period of time.

As I said, it's an 8-week period that we're reporting for New Guards, so I don't want to sort of use the numbers that we had as an extrapolation forever more. We should let the business get up and running, and then we can talk to it more.

But that guidance of $80 million to $90 million for Q4, that is roughly 30% to 40% year-on-year growth as well. So what I've guided to is what we've seen over those 8 weeks, and clearly, that's not too dissimilar to what I guided to when we last spoke, reflecting how we are obviously bringing the business on board and letting that settle through as we start to trade the business on that side of things.

In terms of the digital platform, obviously, we haven't focused on the first-party original over those 8 weeks because it's obviously just started, very focused on that as we move forward because we think that, that's an exciting way for us to engage with customers and clearly will drive higher contribution margins as a result.

But as José said earlier on, if you pull together all of the product from New Guards Group that was sold via our boutiques that purchased New Guards product before we acquired it, that third-party original product, i.e., original product created by New Guards but bought and then sold on the platform via third parties, that was just under 5% of our overall GMV. So as José said, combined, the biggest brand, bigger than any one single brand, but still less than 5% of the overall GTV, which gives you a sense of the upside opportunity we can have when we start to really focus on it on the platform.

And just to complement, from a more qualitative side, having these integrated -- having the brands integrated on the platform will allow us to start to have very exciting jobs, very exciting exclusive capsules in the future as New Guards adds new concepts and new brands to the portfolio. Potentially, some of those will be available only on Farfetch and our network of connected boutiques. And this, I think, will have a tremendous effect on the Farfetch brand, creating a very unique DNA.

And from a financial perspective, as you can imagine, the margins are tremendous. We're here talking from factory to consumer via platform that is already paid for. So the margins at scale, you will see flowing straight to the fixed cost base are very significant. So that's very exciting. But we're equally excited on the halo effect that this will have on the rest of the 3P business.

Ladies and gentlemen, this does conclude the Q&A period. I will now turn it back over to Alice for any closing remarks.

Great. Well, thank you, everyone, for joining us today. We look forward to updating you on our Q4 progress when we speak to you in the new year.

Ladies and gentlemen, this does conclude the call. Thank you for your participation, and you may now disconnect.