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Farfetch acquires New Guards Group

Farfetch acquires New Guards

Luxury marketplace Farfetch has bought New Guards Group, the company said, bringing in-house the ability to co-create and scale buzzy brands and products.

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In doing so, Farfetch is effectively building out its own private label platform through which it can launch, test, and scale brands on its existing online and offline sales channels.

It is not unlike the way Amazon has in recent years used its vast trove of customer data to identify gaps in the market and manufacture those products in house.

New Guards Group is the Milanese holding company founded in 2015 that has launched many of luxury streetwear’s most-hyped and successful brands, including Off-White, Palm Angels and Heron Preston.

Farfetch acquired New Guards for $675 million in a cash-and-stock deal, twice the group’s annual revenue and seven times its earnings before taxes. The deal is expected to close in the third quarter of 2019. Co-founder Davide De Giglio will stay on as chief executive, and Andrea Grilli will remain chief commercial officer.

New Guards was founded in 2015 by De Giglio and Claudio Antonioli. As of April they owned 46 percent of the business, and the business owns an average of 75 percent of its portfolio of brands.

The group is in a healthy state financially: it generated revenues of $345 million in the year ending April 30 with profits before tax of $95 million. In the first half of 2019, revenues increased 59 percent year-over-year, with gross profit margin up 55 percent.

Farfetch reported second-quarter revenue of $209.3 million, up 43 percent from the same period in 2018. Its gross merchandise value increased 44 percent to $484 million, but platform fulfilment revenue increased at a slower rate due to “significant increase in customer promotions year-over-year.” Losses after tax widened to $89.6 million, from $17.7 million.

The financial results and New Guards acquisition were reported after markets closed in New York. In after-hours trading, Farfetch shares plunged by over 40 percent, which would mark an all-time low for the stock.

Investors have expressed concerns in the past about the company’s widening losses which reflected rising customer acquisition costs and spending on technology and infrastructure.

Farfetch sees the value in New Guards not necessarily for its portfolio but for its ability to spot talent and launch highly sought after brands like Off-White — the Virgil Abloh label that is the pre-eminent example of the new luxury streetwear boom.

The deal also adds to its own slate of operated businesses, which includes Browns department store and sneaker reseller Stadium Goods.

“[New Guards is] a platform — they are not a brand, they are not a Maison, they are not a conglomerate,” said Farfetch founder and Chief Executive José Neves. “They are absolutely best in class in terms of spotting the new stars of tomorrow.”

New Guards has developed a production platform that taps into high-quality Italian manufacturing and has the ability to move goods from conception to delivery in three weeks.

“It is like luxury fast fashion,” De Giglio told BoF in April, when he said the company was seeking a partner with infrastructure expertise. De Giglio did not respond to a request for comment on Thursday.

Farfetch is betting that the addition of New Guards will create a flywheel effect that will grow brands at a fast rate. Farfetch hopes to capture more of the profits of transactions on its marketplace and give its owned labels a boost online and through its network of more than 650 boutiques stores.

“We then take [New Guards brand-building platform] and give these talents the online exposure that they so much need to build the brands of the future. We think this is an incredible acceleration of our existing strategy,” said Neves.

For New Guards, which had been looking for a partner for months, Farfetch will not only give it more resources to launch new brands but also scale its existing brands. These brands currently generate on average of about 95 percent of their revenue through wholesale and franchise mono-brand stores, i.e. channels with lower margins.

Farfetch plans to grow the New Guards brands’ distribution through directly operated retail stores and directly operated e-commerce. Its first priority, however, will be to re-launch e-commerce sites for all the brands starting with Off-White, as well as setting up “e-concessions,” or direct online sales, through Farfetch’s marketplace.

The brands will also expand sales through Farfetch’s network of boutiques, where it will track supply and demand closely to “enhance the full-price sales and protect the brand image,” said Neves. (Discounting has eaten into Farfetch’s bottom line.)

But Neves emphasised that New Guards’ ability to spot and incubate talent is its greatest asset.

“New Guards Group is about a new way of doing things: a new way of making, a new way of communicating, a new way of distributing,” said De Giglio in April.

“In the same way that none of our creative directors are really designers, we designed 200 collections in 2018. For this, you need a different machine. We move fast and think big,” he continued.

Before New Guards was formally founded in 2015, De Giglio and Antonioli teamed up with Marcelo Burlon to launch his namesake line in 2012. They later partnered with Virgil Abloh to launch Off-White in December 2014, with Francesco Ragazzi to launch Palm Angels in January 2015 and with Heron Preston to launch his namesake label in January 2017.

Off-White is its biggest hit, though it does not technically own the brand. Abloh owns the brand’s trademark, and New Guards is the majority owner of an operating company that has an exclusive multi-year licensing deal with the brand.

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“The New Guards Group transaction with Farfetch will not affect Off-White day-to-day operations as the New Guards Group team will become part of Farfetch. We look forward to our ongoing work together,” said Abloh in a statement.