Dive Brief:
- Moody’s Investors Services downgraded its rating for Farfetch Limited Tuesday and placed the luxury e-commerce company on review for a further downgrade.
- Moody’s changed Farfetch’s Corporate Family Rating, based on whether the company has the ability to honor its financial obligations, from B3 to Caa2, a designation for companies that are “judged to be of poor standing and are subject to very high credit risk.” It similarly downgraded Farfetch’s probability of default rating. The firm’s outlook for Farfetch was previously stable, per the report.
- The move comes after Farfetch canceled its scheduled Q3 earnings announcement last month. At the time, the company said it expected to provide an update “in due course,” but said it wouldn’t provide any new forecasts or guidance and further stated its previous forecasts and guidance couldn’t be relied upon.
Dive Insight:
Moody’s, an international financial research firm, cited the earnings cancellation as the key reason for the downgrade.
“Moody's considers this has resulted in increased uncertainty about the sustainability of the company's capital structure,” it stated in the report.
The rating also took into account the “deterioration in Farfetch’s share price over the past year or more,” which the firm said would negatively impact Farfetch’s ability to access capital markets to support liquidity.
Farfetch’s share price is also the subject of a class-action lawsuit filed by shareholders in October. That complaint alleges that the company violated federal securities laws and made “materially false and misleading statements regarding the Company’s business, operations, and prospects,” and that the shareholders suffered loss and damages due to the alleged omissions.
Beyond these issues, Moody’s said the luxury clothing market is experiencing soft demand, with consumers cutting back on their discretionary spending. Luxury firms LVMH and Kering have recently experienced a slowdown in earnings.
A rating upgrade for Farfetch is unlikely, Moody’s said. An upgrade would require Moody’s to be convinced that Farfetch had “sufficient liquidity for at least 12-18 months to give it time to grow its earnings to an extent that its capital structure can become sustainable.”
However, Moody’s said a downgrade of an additional “several notches” is likely. A spokesperson for Farfetch declined to comment on the rating.
Farfetch’s Q3 earnings cancelation followed rumors that the company’s founder and CEO José Neves was planning to delist the luxury e-commerce platform from the New York Stock Exchange. The initial report, from U.K.-based newspaper the Telegraph, said Farfetch was considering a deal with the “tentative backing” partners such as Alibaba and Richemont.
While Farfetch and Richemont were granted antitrust clearance to proceed with the previously announced deal that gave Farfetch a 47.5% stake in Richemont’s digital Yoox Net-a-Porter platform in October. Richemont said after the Telegraph report that it was under no financial obligation to Farfetch and it “does not envisage lending or investing into FARFETCH.”
