Farfetch Said to Be Mulling Browns Sale as Credit Rating Takes Hit
Farfetch is mulling the sale of Browns, according to industry sources, as it seeks to raise money and calm growing fears in the market, which have been made all the more acute by a debt downgrade.
But it’s not clear how far even a sale the brick-and-mortar boutique, which is said to have drawn the interest of distressed investor Mike Ashley, would go toward solving the luxury e-commerce platform’s problems.
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Standard & Poor’s downgraded its rating on Farfetch’s debts to “CCC-plus” from “B-minus” and set the company on creditwatch with negative implications.
The negative outlook “reflects a possibility of a downgrade by one or more notches on what we see as escalating risk of a liquidity crisis or an insolvency event, including debt restructuring, or if we are unable to obtain information indicating a level of liquidity and earnings generation sufficient to alleviate our concerns,” S&P said.
Debt ratings are often more important than stock ratings as they can impact just how much it costs to raise additional financing. As of June 30, Farfetch listed borrowings of nearly $917 million on its balance sheet.
Under the S&P definition, a “CCC” rating is “currently vulnerable to nonpayment.”
“In the event of adverse business, financial or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments,” the rating agency.
That puts Farfetch is dangerous territory — although the whirlwind surrounding the company has already made that clear.
Last week The Telegraph in London revealed that founder, chairman and chief executive officer José Neves was working with J.P. Morgan to take Farfetch private, pulling it from the New York Stock Exchange. That briefly buoyed the struggling company’s stock, but Farfetch then took the extraordinary step of canceling its third-quarter financial update and pulling its guidance for the year.
Compagnie Financière Richemont, which was set to close a long-awaited deal to pass the baton on Yoox Net-a-porter to Farfetch later this year, said that agreement might not come to fruition as it distanced itself from the troubled company.
At least on the surface, that leaves Neves, who controls more than 71 percent of the company’s voting rights, scrambling to find a way forward in a weakening luxury market.
S&P said in its downgrade: “We expect the group’s operating performance to have been weaker than anticipated in second-half 2023 owing to lower demand for luxury products than predicted, given the slower recovery in China and softer U.S. market. In addition, we expect efforts to monetize the group’s working capital position — by selling down inventory, monetizing tax receivables or securing additional sources of liquidity — will not materialize….We now view the company’s capital structure as unsustainable in the long-term, absent, unforeseen, positive developments in trading conditions or additional sources of support.”
It’s a precarious position that has at least some dealmakers taking a closer look at the various pieces of Farfetch.
Industry sources in London said Frasers has the cash on hand to purchase Browns.
A source added that Browns’ high-end positioning could help Frasers burnish its reputation and add a luxury halo to its upmarket fashion retail chain Flannels chain of stores. Frasers also owns the British retailers Sports Direct and sporting goods store Lilywhites.
Farfetch declined to comment about its plans for Browns or the debt downgrade. Frasers Group did not respond to a request for comment on Tuesday.
Meanwhile, Browns is also seeing some high-level changes.
Ida Petersson has left her position as director of men’s and womenswear buying.
WWD has learned that Petersson’s departure was set to be revealed following Farfetch’s third quarter, which never came.
Petersson’s next career move is expected to be revealed at the end of January, and her successor at Browns has yet to be named. Petersson has been a high-profile figure at Browns since she joined in 2016 from Net-a-porter. A front-row fixture known for her love for kitten heels and bright colors, the Swedish-born Petersson has been instrumental in keeping Browns on-trend and relevant.
While Farfetch’s business has long been viewed with some skepticism, it was able to press on with a string of high-profile hookups from Alibaba to Richemont to Neiman Marcus. But the company started to lose key backing among the investment crowd this year.
After peaking with market capitalization of nearly $25 billion in 2021 — when Wall Street was tripping over itself to invest in e-commerce — the company now has a market cap of about $461 million. Shares fell 8.5 percent to close at $1.18 on Tuesday.
Baillie Gifford U.K. Growth Trust — a division of Edinburgh-based fund firm — was Farfetch’s largest outside investor in February, owning 47 million shares, or 13.3 percent of the company.
But the fund’s managers Iain McCombie and Milena Mileva acknowledged last week that the stake in Farfetch had been sold and that hindsight showed them to be “overly patient” on an investment that had proven to be a mistake.
“The business, through a series of deals and new initiatives, had become too complex and management, despite its admirable vision and ambition, appeared to be struggling with execution,” McCombie and Mileva wrote in an interim update. “This really mattered as, after years of heavy investment, the business required a clear path to profitability.”
Farfetch’s troubles has industry experts scratching their heads over just how the situation might be resolved.
One financial source said that the “specialized fashion assets” could be of interest to another tech platform, but that the company’s cash burn would likely prevent a private equity player from stepping in.
“This is a business that gets squeezed — lower consumer demand and higher expense — by high interest rates, or put another way, maybe only exists in a low interest rate environment,” the financial source said.
The turmoil might open up some new opportunities for outside players like Frasers and its Flannels network of stores in cities including Manchester, Glasgow and Newcastle. It opened a 10 million pound London flagship on Oxford Street in 2019 opposite the mass market Sports Direct store.
Ashley is the founder of Frasers Group, and while he may have turned over the CEO title to his son-in-law Michael Murray, he remains an active — and controversial — figure in British retail.
Known as the Grim Reaper of the high street, Ashley specializes in buying stakes in distressed companies, or brands that sell through his retail chains, often at a steep discount.
The sale of Browns would be a largely symbolic failure for Neves. Although the store is not large, it was supposed to act as a laboratory for Neves’ experiments with cutting-edge retail technology.
Neves purchased Browns in 2015 and used it to test his Store of the Future, a setup that would enable retailers to move seamlessly between the physical shop floor and the e-commerce site.
It was also a bid to leverage precious consumer data; help fine-tune retailers’ marketing strategies, and woo a new generation of shoppers accustomed to buying in physical and virtual spaces.
Farfetch purchased 100 percent of Browns from the founding Burstein family in a cash-and-shares deal, although the terms were never disclosed.
At the time, Browns’ annual turnover was 14 million pounds, or $21.3 million. The Burstein family, which founded the store in 1970, continues to hold shares in Farfetch.
Under Farfetch, Browns has had its ups and downs.
In 2021, the store moved from its original premises on South Molton Street to a 300-year-old building on Brook Street in Mayfair in the former Colefax and Fowler building not far from Claridge’s.
The Farfetch team filled the new space with flowery carpets, glam rock gold walls and whizzy features such as smart mirrors, luxury fashion displayed on screens, and a dedicated app to promote the Store of the Future technology.
In 2017 it opened another London outpost, a conceptual retail space called Browns East, in Shoreditch. The store closed in 2022.
In a twist, Simon Burstein has opened a pop-up shop for his retailer, The Place London, in one of Browns’ former premises at 26 South Molton Street. The Bursteins still own the property. The shop will remain open through the end of January.
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