A fashionable offering

by Scott Denne

Nabbing a valuation beyond its last venture round will be challenging for Farfetch, the latest consumer company to take a step toward the public markets by unveiling its IPO prospectus. As it bids to join the NYSE, Portugal’s Farfetch flaunts enviable growth and a favorable macroclimate, although its valuation will need a substantial premium above its peer group to have an up-round.

In operating an online marketplace for fashion brands and luxury boutiques, Farfetch generated $481m in trailing revenue. The company’s last venture round valued it north of $2bn, or 5x that amount – a steep hill for an e-commerce vendor, considering that such outlets rarely fetch above 2x from Wall Street. Online furniture seller Wayfair, for example, trades at about 2x – Groupon and JD.com trade below 1x.

Yet Farfetch has several factors working in its favor. For one, there’s a complementary economic environment. According to 451 Research’s most recent VoCUL: Consumer Spending report, in each of the past six months, over 30% of consumers have said they plan to spend more in the next 90 days. And 451 Research’s forthcoming Global Unified Commerce Forecast expects more of that spending to flow online (16% CAGR through 2022) than offline (2% CAGR). (We’ll be hosting a webinar to preview that report in September, readers can sign up here.)

Also, digital retailers specializing in clothing and fashion tend to be valued higher – by both acquirers and public investors – than the broader e-commerce category. According to 451 Research’s M&A KnowledgeBase, online retailers sold in the past 48 months fetched a median 1.1x trailing revenue. In recent sales of fashion-related sites, valuations have come in higher. Younique hit 2.5x in its $600m sale to Coty last year and Farfetch’s more mature rival, YOOX Net-A-Porter, landed 1.7x in its January sale to Richemont.

On the public markets, Stitch Fix, a personalized fashion retailer that went public last year, trades just above 3x. Farfetch would likely pass that marker – its topline expanded 55% compared with 33% for Stitch Fix and it has gross margins barely above 50%, whereas Stitch Fix is closer to 40%. Still, to match its private valuation, the would-be public company would need two full turns above Stitch Fix. That may not be, well, farfetched, but it’s a stretch.

Buying a new look

Contact: Brenon Daly

In any business, it’s tough to take the old and make it new. In fact, that sometimes requires a little outside help. That came through in Walgreens’ purchase Thursday of Drugstore.com. After all, here is Walgreens – a 110-year-old chain that’s the largest drugstore in the US – saying it can’t necessarily get its online business where it wants it to be on its own. So the company is set to hand over $429m in cash for Drugstore.com to bolster its online sales.

As an aside, the deal caps a run by Drugstore.com that in many ways embodies the whole Internet Bubble. It was a hot IPO back in 1999, just five months after opening its virtual doors. Sales were still in the single digits of millions of dollars when it went public. Of course, investors couldn’t get enough of the freshly minted equity – at least not until the Bubble burst in 2000.

After that, shares never again traded in the double digits. Walgreens is set to pay $3.80 for each share of Drugstore.com, more than twice the market said the stock was worth the day before the deal was announced. The kicker on Drugstore.com is that the company was probably more highly valued when it was a tiny startup in a frothy era than today, when it is a business generating about a half-billion dollars in sales.

Actually, this is the second transaction in a month that has seen an Old Economy company pay up to join the New Economy. In mid-February, Nordstrom threw $180m at HauteLook to get into the private-sale marketplace. (Terms also include a potential $90m earnout for HauteLook.) To understand the motivation, consider the relative age of the two sides in the transaction: Nordstrom opened its first store in 1901, while HauteLook went live (in the digital parlance) only in 2007.