Farfetch Limited (FTCH) CEO José Neves on Q1 2022 Results - Earnings Call Transcript

May 26, 2022 7:25 PM ETFarfetch Limited (FTCH)2 Comments
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Farfetch Limited (NYSE:FTCH) Q1 2022 Earnings Conference Call May 26, 2022 4:30 PM ET

Company Participants

Alice Ryder - Vice President, Investor Relations

José Neves - Founder, Chairman & Chief Executive Officer

Stephanie Phair - Chief Customer Officer

Elliot Jordan - Chief Financial Officer

Conference Call Participants

Doug Anmuth - JPMorgan

Stephen Ju - Credit Suisse

Oliver Chen - Cowen

Lauren Schenk - Morgan Stanley

Louise Singlehurst - Goldman Sachs

Operator

Good afternoon. My name is Christine Miller, and I will be your conference operator today. At this time, I would like to welcome everyone to the Farfetch First Quarter 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. Thank you.

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

Alice Ryder

Hello and welcome to Farfetch’s first quarter 2022 conference call. Joining me today to discuss our results are José Neves, our Founder, Chairman and Chief Executive Officer; Elliot Jordan, our Chief Financial Officer; and Stephanie Phair, our Chief Customer 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 important risk factors that could cause actual results to differ, please see the Risk Factors section of our Form 20-F filed with the SEC on March 4, 2022.

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.

José Neves

Hello, everyone. Thank you for joining us today. Our underlying business remains incredibly robust, in spite of our Q1 results being impacted by significant changes in the macro and geopolitical environment since our Q4 2021 call in February.

Specifically, there are three key developments that impacted our Q1 results and outlook. One, the war in Ukraine and our suspension of operations in Russia; two, the recent COVID-19 outbreaks and related recessions in Mainland China; and three, a double-digit decline in markdown GMV as the transition of the marketplace towards being predominantly full price accelerated.

Outside of these factors, our underlying business remains very strong. In Q1, our full-price marketplace GMV, excluding the China and Russia regions, clocked an excellent year-on-year increase of circa 20%. This is particularly impressive, considering the marketplace grew more than twice that rate in Q1 2021. And despite these headwinds, we continue to deliver digital platform GMV growth on top of one of our highest ever growth quarters in Q1 2021 for our two-year digital platform GMV growth of 65%.

Additionally, several key performance factors further highlight the strong underlying dynamics of our car business. We saw 100% retention of our top 100 brands and boutique partners. We achieved a take rate of 32%, our highest as a public company, having renegotiated 75% of our e-concession contracts. And so these brands lean further into the marketplace, closing 69% more inventory year-on-year, and our full-price business, which is the significant majority of our business, remains a growth engine powered by, among other factors, private clients where we enjoyed over 90% customer retention and AUVs of $1,200.

Taking a holistic view of our business, including our platform capabilities behind our luxury new retail vision to revolutionize the $300 billion luxury industry through the seamless merger of both offline and online shopping, our journey to become the global platform for luxury continues to make steady progress.

Before I update you on the various businesses within Farfetch, let me address the three main factors we faced in Q1 in further detail, starting with Russia. By the end of 2021, Russia has grown to become our third largest marketplace market, representing 6% of total GMV and an even higher share of the marketplace, where it posted more than 70% year-on-year growth. Naturally, we expected the continuation of robust growth from this market and our stoppage in Russia considerably in PV GMV growth.

We also believe the conflict had a spillover effect in Europe and CIS countries, where we have seen less buyer demand than expected. Based on the current status of this conflict, we have no expectations of reinitiating operations in Russia for the foreseeable future.

Moving to China, our second largest market, the rise of COVID-19 cases against the backdrop of a zero COVID policy increasingly impacted our growth trajectory. The majority of our Mainland China business consists of cross-border sales from Europe to Tier 1 cities, such as Shanghai, which serves as a major cross-border hub. And as such, we experienced significant disruptions in our delivery operations for the China market.

These recent lockdowns have been very different from those we've seen previously because of the impact on logistics. That said, our long-term thesis on China has not changed, as the second largest luxury goods market in the world, which is expected to become the largest by 2025, we continue to see tremendous opportunity in China and remain committed to building on our differentiated positioning as the leading Western luxury fashion platform in China.

Towards this, despite the more challenging environment, we are continuing our efforts to activate and engage customers, and we are happy to see that they are generally accepting delayed orders. More recently, we have also seen green shoots of a reopening, with orders being delivered to customers across more than 80% of the region on a GMV weighted basis and shorter delays in cross-border customs clearance.

Over the medium term, when COVID restrictions are eased, we also see an opportunity for Farfetch to catch up pent-up demand, which we expect will shift more towards online channels, as customers will be more likely to avoid crowded stores, shopping malls and flights to add a shopping destinations. But as we do not know how the COVID infections and associated restrictions will evolve, we remain cautious on growth from China in the coming quarters.

Finally, in 2019, we articulated the strategy to support the values of the luxury industry by transitioning the business to become primarily a destination for full price sales. Since then we have seen some super brands accelerate their transition and completely remove markdowns from our marketplace. This is absolutely a welcome trend, and we are pleased to report continued progress on this front, with full price mix of highest ever levels in Q1. However, the significant degree of full price transition did not make up for a greater-than-expected deceleration of markdown listings, and a 17% decline in markdown GMV. This was partly offset by full price GMV, which grew 13% and over 70% on a two year basis.

Excluding Russia and the China region, full-price GMV increased a very strong circa 20%, which reflects the strong underlying growth of this high-quality demand, particularly in light of a tough compare in 2021.

Our full price performance highlights our successful execution of the strategy to build the largest global online luxury fashion business, while operating it as predominantly full price. While this transition has caused some variability in our results, the silver lining here is that this is precisely the type of growth we want to invest in. Not only will this drive sustainable growth of higher margin revenue over the long run, but it also aligns us closely with the values of the luxury industry.

Once the full price transition stabilizes and begins to fully comp, we believe we'll have the foundation for returning to the 30% CAGRs we have historically targeted. I am delighted by the fact that our underlying customer and brand relationships are going from strength to strength.

Our leadership position continues un-assailed, and the tremendous opportunity to build the global platform for luxury is intact. In fact, there are many achievements to celebrate across the group.

Turning now to our platform, marketplace and brand platform. Starting with our platform, we are thrilled to have Neiman Marcus Group, NMG, as our newest FPS client. NMG represents the largest US online business for full price luxury fashion, and we are excited to partner with them to digitally transform their businesses.

The broad scope of the partnership highlights our expansive platform capabilities. FPS will re-platform Bergdorf Goodman's website and mobile app. Neiman Marcus will use select FPS modules, including foundational international services, and both Bergdof Goodman and Neiman Marcus will show the Farfetch marketplace.

Given the vast majority of Neiman Marcus' online business is in the US for Bergdof it is 100%. The international enablement of this powerful player in our industry is a significant opportunity for both businesses, complementing the strong online growth NMG has seen in US sales.

Additionally, we will invest $200 million in NMG to help expand its innovation and digital capabilities and enable us to participate in the equity upside, we believe our digital capabilities will help achieve. I'm truly energized by the prospects of partnering with the most prestigious luxury department store in the US, which is the largest luxury market in the world.

On the heels of this announcement and ongoing conversations with potential clients, momentum behind FPS is robust, and we are aiming to announce other enterprise clients in what I believe is going to be a great year for FPS.

Finally, we confirm that we remain in discussions with Richemont about the potential deal, which includes the leveraging of FPS to power Richemont’s Maisons and Yoox Net-a-Porter, YNAP, the participation of Richemont’s Maisons in Farfetch's marketplace and the minority investment in YNAP by Farfetch. However, there can be no guarantee that we will be able to sign this deal or any of the options under consideration. We will make further announcements if and when required.

Turning to the marketplace. The marketplace continues to have tremendous growth potential, and Stephanie will discuss the exciting launch of our new category, beauty. We continue to focus on offering our brands, global exposure and aim to be number one in all major luxury markets in the world. In Q1, GMV for our Americas region grew 20%, driven by higher customer engagement, full price sales and increased local supply. This reflects investments we have made into markets like Brazil, Mexico and Canada, but also continued strong growth in US, where we delivered 70% two-year growth.

In our EMEA region, our bet in the Middle East continues to pay off, with GMV growth in Q1 of 20%, partly offsetting a more muted growth in the rest of EMEA, which declined slightly driven by Russia. We also continue to see tremendous engagement with our brands, and this extends to Media Solutions, which grew revenue by a powerful 89% in Q1.

The third component of our platform strategy is within New Guards, our brand platform. In Q4 2021, we embarked on a project to change our B2B brand platform warehouse provider in Italy. This transition did not go as we anticipated, resulting in delayed deliveries of first-party original stock to NGG brand retail partners in Q1.

I am pleased to share that the transition is now complete, and with shipments beginning to flow again to our retail partners, we expect a partial catch-up on delayed orders to contribute towards more than 50% brand platform GMV growth in Q2.

Beyond this, New Guards continues to drive newness and excitement behind our brand portfolio. With the fashion industry returning to the catwalk in-person after two years, Palm Angels, Ambush and Off-White each held highly acclaimed shows to showcase their Autumn Winter 2022 collections. And Off-White became the first Farfetch business unit to begin accepting cryptocurrency, which is now live in the Paris, London and Milan flagships. The brand also announced the appointment of Ibrahim Kamara in the new role of Ad and Image Director, where he will support image, design and styling for the brand. Ibrahim is also the Editor in Chief of Dazed, and his years of experience working with Virgil Abloh and Off-White team to style their shows ideally position him to take the brand forward.

In March, New Guards also completed its Reebok agreement with ABG and kicked off the year long collaboration with ABG and adidas to transition the brand and the New Guards. We believe this to be a profitable multi-hundred million dollar deal for NGG and also a great addition to our digital platform since we will prioritize a digital DTC strategy going forward.

With our warehouse transition now resolved, we are expecting our brand platform to deliver stronger results through full year 2022 and continue to be a strategic driver of both organic customer acquisition and unique offerings on our marketplace.

And now I'd like to pass the call to Stephanie for all things brand and customer.

Stephanie Phair

Thank you, José, and hello, everyone. It is my pleasure to share with you an update on the customer side of our business in the first quarter, during which the Farfetch marketplace growth outpaced the rest of the digital platform driven by existing customer growth and the acquisition of over 400,000 new active consumers. I would like to update you on our initiatives across key customer areas of focus we highlighted on previous calls, including the launch of Beauty and the advertising sales via our Media Solutions business unit.

In April, we launched Beauty on time and on budget in the US and Europe simultaneously for the Farfetch Marketplace, Browns and Off-White. This launch broadens our reach to an estimated $70 billion segment of the personal luxury goods market and enables brands to operate across multiple channels through an e-concession model or a wholesale model through Browns and Violet Grey, giving us access also to smaller independent brands. This combined model is a significant differentiator as we are the only global destination partnering with beauty brands through an e-concession model, leveraging our fulfillment by Farfetch capabilities and providing brands an online direct-to-consumer channel, as the overall industry continues to shifts its strategy in that direction.

Another differentiator is our positioning, where we leaned into our values as a company and our community-first approach, with multiple points of view from our Global Beauty Collective, a group of industry experts with large social followings, to a customer community where our own customers can share feedback and tips, our launch offers a fresh approach, which brands have responded to very positively.

We continue to expect Beauty to be a significant driver of customer engagement and acquisition, enabling us to attract a new base of luxury customers and expand their share of wallet. We believe that this will also help us build stronger relationships with brands and provide further opportunities to ramp up our Advertising and Media Solutions business.

Beauty brands have already started to buy into our proposition, with significant launch campaigns on Farfetch from brands, including Charlotte Tilbury, Dr. Barbara Sturm and Gucci Fragrances. Overall, our Media Solutions business continued to gain traction during the quarter, growing 89% year-on-year by offering brands such as Ralph Lauren, Valentino and Dolce & Gabbana, a unique channel to amplify the reach and success of their collections to a highly engaged luxury audience.

Not only do paid brand campaigns generate high-margin revenue, but alongside our editorial investments, they are also part of our overall Farfetch brand building efforts and help drive that emotional connection to Farfetch and the brands we carry. Our overall marketing initiatives drove year-on-year acceleration in traffic growth on the Farfetch marketplace. However, we faced a small decrease in customer retention. This softening was principally in our Bronze tier, which includes the majority of new customers acquired during COVID and is in line with historical repurchase behaviors for new customers. It is worth noting that due to our halting of operations in Russia and restrictions in China, we could see a decrease in customer retention through the rest of the year. It is important to highlight, however, that our most valuable customers, our private clients, maintained over 90% retention and delivered higher AOV and conversion rate compared to the previous year.

In addition, during the first quarter, the mix of GMV from private clients increased year-on-year. We continue to focus on growing the space by providing them unique services, such as fashion concierge, which once again broke its own record for our largest ever sale, with a $2.4 million watch for a new customer from the Middle East. This is a valuable customer tier that generates more revenue than the entire businesses of many of our closest competitors.

At the top of the funnel, our success in positioning Farfetch has led to increased year-over-year brand preference and consideration among our peers. Building on this traction, our latest campaigns starting Kim Cattrall and Josh Hartnett, which was amplified across multiple channels, mainly in the US, went viral, receiving approximately 600 million impressions, thanks to its cultural relevance.

And now I'll hand the call over to Elliot to discuss our financial results and outlook.

Elliot Jordan

Thank you, Stephanie, and hello to you all. It's good to speak with you today. I'd like to share with you the key points underpinning our Q1 2022 financial performance. As Jose explained, the change in the broader operating environment since our last call, along with the operational issues we experienced in our brand platform warehouse, impacted our growth.

But I'm delighted to report that we moved quickly to adapt to the macro headwinds, have now resolved the warehouse challenges and continue to build on our leadership position within the global luxury industry.

Overall, we achieved group GMV of $931 million, an increase of 2% year-on-year and up 52% on a two year basis compared to Q1 2020. This position reflects 2.5% growth in digital platform GMV driven by strong growth in the Americas, the Middle East and Korea, offset by a decline in GMV in Russia, parts of Europe and Mainland China; an 11% decline in Brand platform GMV due to a transition of our logistics operations, which has caused shipment delays during the main spring/summer 2022 selling window and in-store GMV growth of 62% year-on-year as we saw an increase of customers engaging with our connected retail formats as well as contributions from new store openings.

Adjusted revenue was slightly stronger in terms of year-on-year growth, up 7% to $436 million. Again, this revenue was driven by strong growth in stores, 16% first-party revenue growth, in line with the previous quarter, 89% year-on-year growth in revenue from our Media Solutions Advertising business and higher underlying commission rates from our e-concession third parties on the digital platform.

As a result, third party take rate on the digital platform was a near record high of 32%, up 230 basis points year-over-year. We estimate the warehouse transition hampered revenue performance across Q1 by circa $40 million, with brand platform revenue 11% lower year-on-year to $100 million.

Gross profit grew 4% year-on-year with gross profit margin of 44.8%. The 75 basis points year-on-year decline in gross margin is driven by a lower first-party digital platform margin due to increased markdown activity, following the sharp slowdown in demand from Russia and China.

Brand Platform gross margin also declined year-on-year due to inventory provisioning in light of the warehouse delays. However, these factors were partially offset by third-party gross margin of 71%, up from 66% last Q1, as we continued our efforts to better recover the increasing costs of operating the third-party business through higher commission levels, higher pass-through of shipping cost to customers, and strong demand for our high-margin media solutions product, especially following the launch of Beauty.

Digital platform demand generation expense as a percentage of digital platform services revenue was stable year-on-year at 21.5%, despite paid search cost inflation and the continued shift in spend to longer payback, upper funnel media spend. This has resulted in higher customer acquisition costs versus previous quarters.

In addition, we have shifted paid media spend from Russia to other global audiences, albeit at a higher cost of sales percentage given the efficiency we had gained from having a strong share of the Russian market. As a result, digital platform order contribution margin was 32.7%, a second consecutive quarter of sequential improvement. On a year-on-year basis, order contribution margin declined slightly due to the decline in first-party gross margin.

Our operating cost grew 11% year-over-year to $198 million. This increase was driven by an investment in our people to ensure salaries are keeping pace with increasing global rates as well as an increase in our brand marketing spend towards broadening our audience for the marketplace, investing behind the launch of Beauty, and driving additional brand awareness for our first-party original brands in particular, Off-White and Palm Angels.

Adjusted EBITDA declined from minus $19 million in Q1 2021 to minus $36 million, primarily due to the year-on-year decline in brand platform revenue. Profit after-tax was $729 million, including a non-cash benefit of the revaluation of items held at fair value of $908 million.

In terms of liquidity, we ended the quarter with cash and cash equivalents of $938 million. As is the case every Q1, we saw a working capital outflow over the quarter as we unwound the Q4 marketplace creditor position.

In addition, our stock on hand balance is higher this quarter due to the Brand Platform shipment delays, lower-than-expected GMV on the marketplace against our first-party stock buy, and the addition of stock for our first-party beauty offering via Browns and Violet Gray.

Despite the factors impacting our Q1 performance, there are incredible strengths worth highlighting across the digital platform, which delivered GMV of $810 million. On a two-year basis, this GMV is up 64%, inventory from suppliers is up 82%, and active customers have grown 78% to $3.8 million. Average order value on the marketplace was $632, up from $618 last year and $571 the year before. These AOVs reflect the stronger full price mix across the marketplace, because of this, we are delivering the highest level of take rate since the IPO, and third-party gross margins were above 70%, reflecting the strength of the core marketplace model.

I'd now like to discuss our full-year 2022 outlook. Given how our top line growth has been impacted by the change in demand from our second and third largest marketplace geographies, we are completing a review of business priorities. This means focusing on markets, categories and initiatives that show strength and rationalizing spend across parts of the business to match the new macro environment.

We have already restricted planned headcount growth, reduce spend on projects with longer-term payback and began pruning back areas of the business that are not catered delivering our immediate goals, or are not delivering intended results in the near term. This activity will mean we can continue to play to our strengths, leverage the investments we have made to-date, and ensure we can deliver the right balance between supporting future growth and focusing on stronger profitability and cash flow.

As a result, we are revising our expectations for the full year, reflecting global demand expectations for the rest of the year with weakness in China, no sales from Russia and a balanced view on demand from other markets, we expect to grow digital platform GMV by 5% to 10% year-on-year, with stronger growth expected in the second half of the year versus the first half.

Digital Platform order contribution margin is expected to be circa 30% of Digital Platform services revenue, assuming markdown activity continues on the first-party business in response to the slower top line growth. For the brand platform, we now expect 10% to 15% GMV growth, taking into account the Q1 result and continued demand for our luxury brands. We will limit operating cost growth to be below the level of growth in adjusted revenue, delivering leverage, and we will maintain our focus on being profitable at the adjusted EBITDA level, keeping margins at 0% to 1% of adjusted revenue.

Finally, we expect to see an improvement in working capital for the rest of the year, as we reduce inventory holdings and normalize our receivables position. We aim to end the year with strong liquidity above $650 million as at December 2022.

And with that, I'll turn it back over to José for some closing remarks.

José Neves

Thank you, Elliot. The rest of 2022 will be a period of focusing on further rationalizing our business with a view to output stronger profitability growth in years to come, as our 30% CAGR long-term growth path resumes once we comp these external factors [ph]. We have seen incredible strength in our core marketplace business outside affected regions, with near-record take rate, record full price mix, higher AOVs and tremendous two-year growth figures, with strong momentum across the Americas and Middle East.

FPS is going from strength to strength, acquiring new enterprise-grade clients, and the brand platform is back to strong growth and preparing for a blockbuster 2023. Farfetch continues to be the largest tech platform tailored for our $300 billion luxury industry in a un-assailed leadership position, with all our multiple strategic opportunities poised to deliver strong growth and profitability for years to come. Building the global platform for luxury is our long-term opportunity, which not only remains intact, but that we are more committed than ever to deliver on.

And now we'd like to open up the call to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take the first question from Doug Anmuth with JPMorgan. Doug, please unmute your audio to ask the question.

Doug Anmuth

Thank you for taking the questions. First, I was just trying to understand on the topline guidance, just thinking about the underperformance for 1Q, but more so I guess for the full year with the guide coming down, how much is related to the three big factors you mentioned versus potentially software consumer in Europe and the US, and how you're thinking about that for the rest of the year?

And then just secondly, the 0% to 1% adjusted EBITDA margin. Do you just walk us through some of the areas where you expect to rationalize some of the expenses and perhaps some examples of how you'll do that as you go through the year? Thanks.

Alice Ryder

Hey Doug, Alice here. Good to speak to you today. Yeah, I mean, broadly first quarter was entirely down to the three factors that we've outlined earlier. Russia and sort of adjacent countries, I guess, that have been impacted by what's going on there in Eastern Europe, the China lockdown and then there's quite a sudden acceleration on full price from our e-concession partners, which obviously we celebrate. This is fantastic for us exactly how we've positioned the business to drive full price for our e-concession partners over the last couple of years.

You'll remember we made that strategic shift, and we're seeing not only the growth in the full price above 20% in the quarter, but more e-concession partners joining the platform. We've now got over 1,400 partners on the platform and over 600 of those are direct e-concession partners and their stock is up substantially year-on-year because they're seeing the strength coming through from the direct-to-consumer offering.

So, we're really delighted to see that and are pleased that our partnerships are growing. And they're obviously spending significant amounts with us in terms of media income as well to have that up 89% year-on-year to really strengthen the take rate at 32%. So those were the factors in Q1. If we look ahead for the rest of the year, the bulk of the revision to guidance is down to, again, those three factors. We have effectively taken $750 million out of the digital platform GMV for the full year. And over 80% of that is Russia, China. The rest, broadly in this shift to full price.

And we have factored a little bit of caution in from other macro factors as well. Obviously, we need to make sure that we're, I guess, taking into consideration what's going on in terms of consumer sentiment and leave a bit of space for us to trade into that. So that's what's going on there in terms of the guidance.

In terms of 0% to 1% adjusted EBITDA margin, absolutely. I mean, I think the key thing here for investors is that, despite delivering growth of 5% to 10% in the digital platform, lower than we would have expected, we are taking a good look at where we're investing our money and where we're deploying our resources.

We're cutting our cost according to the macro environment and leveraging effectively the investments we've made. To date, the platform is delivering fantastic leverage outside of our spend on brand and the salary increases that I noted earlier on in terms Q1. And so, we're making sure that we absolutely deliver on that leverage as we move forward.

In terms of adjusting the spend versus original plans, we completed an entire review of business priorities from top to bottom. We've already restricted headcount growth, as I've said. And where we were going to put some money into projects that probably would have delivered more payback next year or the year after, we've decided to hold back on that spend and wait until things look better in terms of top line growth, and we see an acceleration into next year.

Obviously, with the Reebok deal and then Neiman Marcus, live next year as well, we're going to see much stronger growth in 2023, and that's the time to invest in some of these longer-term initiatives that we definitely want to do. But now this isn't the year to do it. So anything with longer-term payback, we're sort of phasing back.

And then, also, looking at other areas of the business that maybe haven't delivered intended results to date and perhaps phased back spend there. We've got some amazing talent across the organization and just redeploying that talent into our short-term priorities, we'll see our ability to grow our cost base under the revenue growth.

Obviously, still growing. We're still going to have more Farfetchers at the end of this year than we did at the end of last year, but just focusing that amazing talent on the priorities for us for 2022 and early 2023.

Doug Anmuth

Thank you, Elliot.

Operator

Thank you. Our next question is from Stephen Ju with Credit Suisse. Stephen, please unmute your audio to ask your questions.

Stephen Ju

Hi. Great. Thank you so much. So, I think, Elliott, two quarters ago, you talked about anticipating incremental supply to come into the marketplace. So we see Neiman Marcus as part of that supply as well as beauty. But, clearly, there's other stuff in there that was part of those plans. So do you still anticipate some of the supply to come in, or has that expectation changed along with the guidance?

And José, given everything you just talked about in regards moving Farfetch to more of a full price destination, well, what kind of impact do you think this will have on seasonality, which, to some degree, is driven by the release cycles, but also the promo cycles and speaking of things that the traditional -- that can break the traditional sort of seasonality cycle, can you give us an update on Farfetch BEATs because I get that, that effort was probably delayed due to the pandemic? But it seemed like such an interesting way to engage the consumer every week instead of every season. Thanks.

Elliot Jordan

Hi, Stephen. I'll do the first question. Obviously, we're delighted to be able to have the stock from Neiman Marcus on the platform next year. This is a 2023 deliverable. It's a partnership that is super exciting because of its positioning within the US market, still the number one luxury market. And for us, it's our number one market, was growing 20% plus in the last quarter. There's still lots of opportunity for Farfetch to grow in North America. And so we see that as an amazing gateway for us to unlock even more supply and demand in that space.

But before that, we are actually seeing very, very strong levels of stock on the platform. So as I mentioned earlier on, in the last couple of years, we've seen something like 80% growth on the platform. This quarter versus last quarter, we've seen a significant step-up in the number of SKUs. So the range is growing over 20% this Q1 versus last Q1. And we've also seen significant depth increase year-on-year as well, again, north of 25% extra depth on the platform from the growth of the e-concession business.

So as we look to trade this year, we've got plenty of stock. We're just obviously revising our demand expectations because of our decision to close down the number three market in Russia, of course, and the sort of continued pressure on demand in China as a result of the logistics challenges getting product into in the market. We see as José was mentioning, customers in China ready to shop when, I guess, they can. Farfetch's selection is really and waiting for them to buy. And so we just need to make sure that we're available for that pickup as soon as soon it's available.

Operator

Thank you. Our next question is

José Neves

Thanks, Stephen.

Operator

I’m sorry.

José Neves

Yeah.

Operator

Our next question is from Oliver Chen with Cowen. Oh, I'm sorry.

José Neves

Sorry, there was a second question from Stephen. So I'll go and answer that question. Hi, Stephen, so I think it's a really good question in terms of seasonality. The industry has changed a lot in the past few years. In 2019, we clearly stated that we were going to actually lead on this shift towards more drops, more frequent refreshing of collections. Most brands don't think in these rigid two seasons, then it became four seasons. And now brands really think about constant activations and constant jots of product. Farfetch is an incredible platform for those jots, reaching a global audience, the largest global audience for luxury.

As an example -- for example, Balenciaga, the Balenciaga YEEZY GAP collaboration, which we dropped with them exclusively, we're constantly having [indiscernible] especially for our private clients, but also for the general Farfetch customer. So this is something that we work very, very closely with the brands, adjusting to a very, very different calendar. And I'm really delighted that it's paid off and you see full price growing 20% outside mostly in China. You see, in spite of a decline of a minus 17% decline in markdown, we still posted overall growth, and this is on top of a 60% growth, like an absolute record part that we had last year. So this is something that obviously is fantastic news for our brand partners, which is also bringing advertising dollars. We had a jump of 89% in our advertising revenue in Q1. So that constant activity of bringing new products, new concepts that we outlined in 2019 and that we continue to do, including bids that were that -- you still have that in your list, watch the space.

And later this year, we'll have news on that. But we continue to be the platform of choice for the hardest releases, the most coveted capsules and full price, which is already predominantly our business continues to go from strength to strength. And we believe that it's more than needed to offset the decrease in markdown. And of course, at the point, we will comp over, right? At the point we will lapse over this transition, and that unlocks tremendous growth potential on top of the already strong market share capturing growth that we've evidenced in the past few years.

Operator

Thank you. Our next question is from Oliver Chen with Cowen. Oliver, please unmute your audio to ask your question.

Oliver Chen

Thanks very much. Hello. Regarding your comments on customer retention decreasing, that seems like it could be quite a risk factor, if you could elaborate on that just given the sensitivity to LTV and churn. And you called out cost inflation in digital marketing. It sounds like you're navigating it, but would love your thoughts on risk factors. Elliot, as we model GMV for the stronger second half based on your guidance, what underpins your conviction on a stronger second half? Thank you.

Stephanie Phair

Yes. Oliver, I'll take your first question about retention. So yes, this is the first quarter where we've really seen a softening in retention, but I think it's important to understand that it's not across the board. It really is focused on a large base of our Bronze customers. And these are the customers that, by and large, were acquired at very, very high levels during the pandemic. So we got a very, very high influx of new customers. And actually, their retention rates are very much in line with what you would expect new customer retention rates. But because it's such a large space, that's the impact on our overall retention rate. But it's very important to note that actually we've seen increasing retention in other tiers of our base, in our access terminology, our Silver, Gold, Platinum.

And for our private clients, we see a continued very strong retention rate of over 90%. So it's sort of a story of multiple sides there. And I think it was to be expected. We always knew we would acquire a lot of customers, and we always knew that pos-pandemic or in the transition out of the pandemic, we would focus a lot on retention. And we've got a very strong road map to increase retention, for example, increasing three-month repurchase rates, which are a very good indication of what will be longer-term repurchase rates. So that’s on the retention rate and something that we look at quite carefully.

In terms of cost inflation, absolutely, this is something that we see. We've pointed out to some of the factors in the past as to why we've seen cost inflation. There's absolute change in the marketing landscape, where the cost of lower-funnel marketing channels is increasing because there are more players coming online and because of all the IDFA privacy regulations, for example, those lower-cost channels are no longer as efficient.

So we are seeing that. That said, we are managing our overall marketing spend. And for this quarter, it's absolutely stable as a percentage of adjusted revenue. So we are managing it. We are fortunate to be a very global company. We have an extremely nimble demand generation machine that allows us to point our marketing spend to markets that are more efficient and to manage the way we invest between lower funnel, mid-funnel and some of the success we've seen in our top funnel brand campaigns.

Elliot Jordan

And Oliver, that's part of the strength and confidence around H2 in some respects. We've had to divert pretty quickly our demand generation spend away from Russia and away from China. And I would say, we have more opportunities around injecting that money into the markets that are performing well to get more out of that spend. It was a pretty sort of sudden change that was needed over March for us to move that money.

And the teams are working through how to sort of maximize and drive more GMV as we exit this quarter and into the second half. So there is some benefit to come through from where we're redeploying our resources. But also, when you sort of look back at the annualization of last year, we obviously annualized, as José just said, 60% growth in the quarter just gone that dropped to 40% for Q2. And then the second half last year was growing around 22%, 23% across the two quarters.

So having those lower levels of growth, particularly in the marketplace versus what we've just exited in Q1. Q2 was very similar in terms of marketplace growth last year. We would see a step-up in our ability to drive growth across Q3, Q4. This sort of a number now provides us with roughly 20% CAGR now over the full year. We've just delivered 28% two-year CAGR out of Q1. So if we now obviously focus on the 10% top end of the guidance, that would be 20% CAGR over two years and very much where we expect to be given that we've lost a couple of markets for this year, but the rest of the markets are showing signs of strength.

Oliver Chen

Thank you for those details. Best regards.

Elliot Jordan

Thank you.

Operator

Thank you. [Operator Instructions] Our next question is from Lauren Schenk with Morgan Stanley. Lauren, please un-mute your audio to ask your question.

Lauren Schenk

Great. Thank. One on FPS, if I could. I think the market's been a little bit concerned that you'll have to continue to make these large investments in order to get partners to join you. So maybe talk a little bit about the NMG investments specifically and then, more broadly, the strategy going forward if you expect to make these large investments with each new partner? Thank you.

José Neves

Thank you, Lauren, and I'll take that question. The short answer is no. This is a very unique deal, but let me correct your question. You said, to make these large investments in order to get partners to join us that's absolutely not the case. We wanted to make this investment because we believe that this innovation partnership is going to unlock tremendous equity value for all of Neiman Marcus Group shareholders, and we want it to be one of them. So this is absolutely for us the right allocation of our capital in terms of a truly unique partnership. This is a very unique partnership.

We always said that luxury new retail is our vision. It consists, in our belief, that offline and online modes of shopping are converging, so the lines are blurring between the physical experience and the digital experience. We articulated that vision in 2016, moved to implement that vision at Chanel, as you know, and then with other companies. And this is a tremendous opportunity because Neiman Marcus is the preeminent luxury physical retailer and digital retailer in the US, so around one-third of their sales are digital. So at $1.3 billion, give or take, of online luxury sales. They are one of the largest players globally and the larger player in the US in terms of the physical store coverage together with Bergdorf Goodman covering every single large luxury city in the US.

It's a tremendous opportunity, the opportunity to really revolutionize the luxury shopping experience in US, which this partnership uniquely unlocks for both us and Neiman Marcus Group is going to be historical. So I think this is what is exciting us. We are teaming up in a long-term partnership to replatform Bergdorf Goodman to provide foundational FPS modules to Neiman Marcus Group, to bring this multibillion-dollar luxury retailer to our marketplace globally.

That's another angle of this partnership is the internationalization of their sales. These online sales are happening primarily in the US in the case of Bergdorf Goodman, 100% in the US. They don't sell internationally. US is a large market that is about 25%, 30%. So that's 70% of opportunity out there for them to expand. And Farfetch is a perfect partner, as we're present in all these large luxury markets in the world. So you can start to get an idea of the magnitude of the incredible power of this partnership once you start putting these numbers together, right?

So this is the best FPS deal we could do in the US. This is the best partner to revolutionize luxury retail in the largest luxury market in the world. This will unlock tremendous shareholder value for NMG. We definitely want scheme [ph] in the game on that one.

Lauren Schenk

Great. Thank you.

Operator

All right. We have time for one more question. The final question will come from Louise Singlehurst with Goldman Sachs. Louise, please unmute your audio and ask your question.

Louise Singlehurst

Hi good evening José and Elliot, thanks for taking my question, and getting the last one in. I'm going to come back to the guidance, if I can, 5% to 10%. I suppose, simply we'll all trying to understand is the magnitude of the difference and where it's coming from.

If we think about Russia, we know that, that was 6% of GMV. China, I presume, is around high teens. Europe and the US for luxury consumption has been super strong year-to-date. So, can you just help us understand if this is a message more on China and the outlook or more conservatism more broadly from the guidance given at the end of February?

I think the key here for everyone on the call is to try and understand what is Farfetch-specific versus your views of the market underlying. I know it's difficult to give us that particular color, but there must be some further information that you can help us understand the context? Thank you.

Elliot Jordan

Hi Louise, yes, I definitely want to make sure everyone's understanding where we're. I mean, as I said earlier on, we've taken about $750 million out of the full year guide. And if you had 30% in your numbers, that would have been sort of $4.8 billion GMV, 10% growth now is $4 billion of GMV. So, just over $750 million is coming out.

The vast majority of that is China and Russia. So, Russia, as you said, 6% of overall, actually slightly higher as a percentage of the share on the marketplace and growing much faster than the marketplace overall. And the estimate for Russia for us internally was that it would have grown ahead of that 30% overall growth rate. So, the expectation in terms of that $4.8 billion in terms of a full year number for this year was that Russia would have taken even more share in 2022 than the 6% overall that it did in 2021.

The same is true for China. China, as you know, has been a big market for investment for us, growing much higher again than the overall platform growth over recent years. We were obviously expecting to see some fantastic results coming out of the second year on Tmall, the Luxury Pavilion with Alibaba. Because of all the learnings we had last year, we were poised to put those learnings to work and see some fantastic growth out of China. So we were expecting that market to take even more share in the budget than we hedge in 2021. So you take Russia out entirely for the rest of the year. You take a more muted view on where China will be. And at the moment, obviously, it's most likely to be negative year-on-year in terms of GMV. That's a pretty big impact to Farfetch's overall GMV.

So as I said earlier on, north of 80% of the move, and the guidance is down to those markets. Then the rest of it broadly is the shift from markdown to full price. As you know, we need to really pick up the full price growth with the reduction in markdown that's coming through. And so net-net, that's an impact on this year's growth because we'll be sort of overall going backwards until we annualize through all of that shift from markdown. But as we move into 2023, with a better full price mix, we'll be annualizing again and seeing very, very strong growth.

On top of that, we obviously need to be a bit cautious about everything else that's going on in the world. So we've taken a tiny bit out for other factors. But by and large, it's an extend in terms of what we've seen from Q1 and extension across the rest of the year, no Russia, reduced plans for China this year, and the shift towards full price. That's the big change in the numbers.

Louise Singlehurst

Do you think online lose the share in the luxury market this year with the 5% to 10%, or do you think it holds steady?

Elliot Jordan

I think -- I mean it's difficult to say when you just sort of compare it to that number. I mean, if you compare it to what we're doing in the markets where we are able to grow, because there isn't a geopolitical concerns in the macro concerns, so let's look at the US where we were growing 20% plus, the Middle East and other key markets, that indicates that we are still seeing this long-term shift towards online consumption. And this is a market that is moving towards more penetration of online.

We were growing. The market was growing before the pandemic much faster than the overall growth in luxury during the pandemic. Obviously, that continued at pace. And then since the pandemic, we're still seeing in those markets where we can trade freely very, very strong growth and to be delivering 20% in those markets on top of 60% last year indicates that the customer -- online customer is here to stay.

Alice Ryder

Terrific. Thank you all for joining us today. We look forward to giving you further updates on our next quarter call. Thank you, and have a great evening.

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