Farfetch (NYSE: FTCH) shares jumped 25% on Thursday, including postmarket, on the back of their results announcement. Some are noting that Farfetch has returned to growth with an 8% sales rise. This is not wholly and exactly true. Nominal sales have risen by that much. But we are in an inflationary environment, and so we need to consider the effects of that inflation. At which point it's not obvious that Farfetch is growing at all. This is one of the damages that inflation does to an economy, it makes it terribly difficult to work out what is really happening, - that then leading to a loss of efficiency in capital allocation and so on.
The Farfetch results did indeed include this: “Farfetch said revenues were up 8% year-on-year to $556.4 million in the first quarter of 2023, surpassing analyst expectations.” It's also true that this was beyond analyst expectations. It's actually a revenue beat of some $41 million over the average of all expectations. The earnings per share - despite being negative - were also a considerable beat at -$0.16 which beat those expectations of 13 cents worse than that.
So, things are improving, right? We can look forward to regaining some of that 90% of value destruction since the FTCH stock price highs of a couple of years back? Well, no, perhaps not, or at least not so fast.
Farfetch stock price from NASDAQ
Think about this another way for a moment. Sales are up that 8% but that's in nominal terms, in the number of $. But inflation this past year has been of the order of 10%. Sure, different countries, different currencies, different inflation rates. 10% is a useful enough average to use here. So real sales, the actual real solid value of the cash collected, has fallen - despite all lauding this increase. We can even go a step further and point out that the clothing inflation rate might be very different from the general one - which it actually is. The competition from Shein and the like is having an impact. But then that just shows how much harder Farfetch must run to simply stand still. Those costs - people, computing power, logistics and so on - are going to run at the general inflation rate. The revenue is going to run at that - for equal volume sales - the clothing inflation rate.
It's therefore not obvious that Farfetch has returned to growth. We as investors - or traders - need to continually think about that difference between nominal and real values. Significant inflation is something we've not had to deal with for decades but here's a good example of the problems with it when it does roar back, as it has done. Farfetch revenue numbers aren't keeping up with inflation, in real terms they're falling. Yet this is being described as growth?
