At the end of August 2019, Farfetch bought New Guards Group, the brand platform behind Off-White and a handful of other labels. The acquisition was expensive ($675 million in cash and stock) and it positioned Farfetch, who at the time earned the vast majority of its revenue as a digital platform for boutique retailers, to further invest in its own brands where it could capture much more margin. Off-White, the group’s clear breakout brand with Virgil Abloh at the helm, likely accounted for around 50% of New Guards’ $345 million in revenue from April 2018-2019 and a good portion of its $95 million in EBITA. 

The biggest risk of the deal, besides the strenuous cash position that it put Farfetch in (it had to take out a loan to make the acquisition) was how many other Off-Whites are out there. At the time we wrote

The other challenge is that there are not many Virgil Abloh’s in the world—people with a potent mix of taste, relevance, social credibility and digital marketing power. Assuming Off-White generates many times more revenue than New Guards’ second biggest brand, finding the next hit on his level will be hard, if not impossible. New Guards could say it doesn’t need to find another Virgil and instead just needs a dozen brands led by creative directors that are half of what Virgil is, which could work. However, managing so many different entities and finding powerful creative leaders to helm each brand creates a lot more operational complexity and is a less proven path.

Since the acquisition, New Guards further revealed its plan in January 2020, buying Ambush, the cult jewelry brand with an estimated $22 million in annual revenue, and then Opening Ceremony, the OG designer boutique, which probably earns about the same amount as Ambush. With Ambush, New Guards bought a functioning brand with plans to expand its product categories, while with Opening Ceremony the company bought the trademarks and enlisted its designers to help power the new manifestation. 

Both acquisitions were likely good deals—it’s hard to imagine that they cost more than one or two times revenue. But were they—along with other similar deals New Guards might be considering—worth it? 

The limited results released so far are mixed: 

  • Farfetch reported that New Guards earned $190mm in revenue for the first half of 2019, which we’ll estimate was around $80mm in Q1 and $110mm in Q2, as Q1 is usually the slowest period of the year right after the holidays. 
  • At the time, 95% of this revenue was from wholesale and 5% was from direct sales. 
  • For Q3 we have to do some more math since Farfetch divided New Guards sales between what it calls “Brand Platform Revenue” for New Guards wholesale revenue and “Digital Platform Services Revenue” for Farfetch.com and the brand’s ecommerce sales, such as off–white.com. Thankfully, Farfetch said on its Q3 earnings call that New Guards revenue makes up just under 5% of its $1.4 billion in Q3 GMV, which puts New Guards GMV during the quarter at $70 million. 
  • Farfetch reported $63 million in Q3 revenue for New Guards wholesale, which would mean around $7 million in direct sales, bringing the 95:5 wholesale:direct split from the first half of 2019 to 90:10, a positive improvement. 
  • New Guards had a 55% gross margin in the first half of 2019, which dropped to 44% in Q3. A 9% drop in one quarter is quite significant, and even though the company blamed it on a shorter accounting period and increased freight costs, it’s not a good look.  

Even with the issues above, Farfetch said that the New Guards portfolio sold more in Q3 than any other brand combined, which it thinks will position the group for significant future growth. This is true, but Off-White likely makes up an overwhelming portion of that revenue, further proof of the structural risk Farfetch has in one brand that it does not fully control. 

As expected, there is no other Virgil Abloh floating in the ether, so the only choice New Guards has was finding smaller fish and hoping it could scale them. While there is definitely potential in long-tail brands—the Ambushes and Opening Ceremonies of the world—and the deals were likely quite cheap, early results continue to prove that Farfetch needs more breakout wins like Off-White to justify its acquisition of New Guards. Nothing but a maniacal focus on this goal will make the acquisition worthwhile. All of the other brands in the New Guards’ portfolio might keep growing, but it’s unclear if any will ever reach Off-White status. 

Simply acting as a bailout fund for faltering or slowly-growing labels will not get Farfetch to the place it desperately needs to be: profitable. Building breakout brands is the only option.