Q1 2023 Farfetch Ltd Earnings Call

Participants

Alice Ryder; VP of IR; Farfetch Limited

Elliot Jordan; CFO; Farfetch Limited

José Ferreira Neves; Founder, Chairman & CEO; Farfetch Limited

Stephanie Phair; Group President; Farfetch Limited

Blake Anderson; Equity Associate; Jefferies LLC, Research Division

Douglas Till Anmuth; MD; JPMorgan Chase & Co, Research Division

Geoffroy Thibault Antoine Victor De Mendez; Associate; BofA Securities, Research Division

Irwin Bernard Boruchow; MD and Senior Specialty Retail Analyst; Wells Fargo Securities, LLC, Research Division

Lauren Elizabeth Cassel Schenk; Equity Analyst; Morgan Stanley, Research Division

Marvin Milton Fong; Director & E-commerce Analyst; BTIG, LLC, Research Division

Nicholas Jones

Presentation

Operator

Good afternoon, and welcome to Farfetch Q1 2023 Results Conference Call. My name is Leila, and I will be your conference operator today. (Operator Instructions) 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 2023 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 Group President.

Please note that unless otherwise stated, all comparisons on this call will be on a year-over-year basis. During today's call, we will also be displaying a slide presentation throughout our prepared remarks, which can be accessed as part of the live webcast at farfetchinvestors.com. Following the call, the slide presentation will also be uploaded to the site. 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 8, 2023. 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, which is available on our website at farfetchinvestors.com.

And now I'd like to turn the call over to José.

José Ferreira Neves

Hello, everyone. Thank you for joining us today. I'm pleased to report that Farfetch is back to growth. This is despite the continued headwinds from Russia, China and the stronger U.S. dollar, with Q1 2023 adjusted revenue, up 4% or 13% on a constant currency basis and adjusted EBITDA margin improving for the first time in 5 quarters. We have set 2023 to be our year of execution. And I'm delighted that we are absolutely delivering as reflected in our Q1 results as well as recent milestone launches. Our key 2023 launches, including Reebok and Ferragamo, have either been delivered or remain on schedule for our launch later this year as in the case of Neiman Marcus Group. Additionally, our announced transaction with Richemont continues to advance through the regulatory review process and our cost reduction and working capital initiatives towards achieving our 2023 profitability and free cash flow objectives are well on track.

Underlying our Q1 performance is strong execution across our business. I'd like to share with you some recent highlights across our 3 business pillars, marketplaces, platform solutions and brand platform. Within marketplaces, the Farfetch marketplace demonstrated notable progress with underlying growth as measured by other growth, ex Russia and China accelerating to 18% in Q1 as compared with 12% in Q4 2022. With respect to China, we saw a marked improvement in Q1 Mainland China GMV. While still in decline, it was to a lesser extent than in Q4 2022. And I'm pleased to share that performance has continued to ramp up as we expected with GMV back to growth quarter to date. I have just spent a week in Mainland China and Hong Kong, and I am very excited by what I witnessed. Not only does the countries seem to be back to normal with a lot of positive energy. It is also clear that the appetite for luxury is very strong. This makes me even more enthusiastic in light of what Farfetch has built in this market. I believe we are the only Western company succeeding at a multi-hundred million dollar scale in online luxury in China. In fact, very few Western Internet companies have been able to find a strong product-market feed in China. Yet Farfetch, thanks to the unique dynamics of the luxury industry, our continued investment in localized operations over the past 8 years and an amazing team on the ground has created a very differentiated platform for luxury brands to reach their Chinese customers digitally. China is expected to represent more than 25% of the luxury industry by 2030. And with Mainland China at less than 10% of our overall business. This means we have significant potential for further growth as our recovery in this market accretes positively to our overall 2023 plans. We are also delighted to see our internationalization efforts pay off in other key luxury markets, including in Latin America and the Middle East, where GMV grew strong double digits in Q1.

Turning to the U.S. In Q1, GMV declined as expected. As a result of our reduction of U.S. online marketing investment by more than 20% over the last 3 quarters in light of the heightened promotional environment and our increased focus on optimizing for profitability. But we're pleased to see that we have actually increased the active customer count and orders by high single digits and that U.S. GMV declined to a lesser extent in Q1 than in Q4 2022. We expect the promotional dynamic will moderate over the course of the year as retailers sell through their inventory positions. And as we start to comp 2022 declines in Q3 and Q4, we expect U.S. to be back to growth in the second half of 2023. And in the wider Americas region, thanks to the significant growth and scale of our Brazilian and Mexican businesses, we delivered positive growth, which shows the power of operating a truly global platform, something Stephanie will discuss further today. With our second business pillar, Platform Solutions, the teams have been laser-focused on supporting our existing clients while also delivering on our 2023 launches. To this end, I am delighted to report that in Q1, we expanded our relationship with key strategic partners, Harrods with FPS' launch of Harrods.cn, providing the iconic retailer with the localized e-commerce channel to cater to a pivotal audience of Chinese luxury consumers. The Platform Solutions and brand platform teams have also delivered on planned 2023 launches. We were thrilled to launch the initial e-commerce channel for a 360-degree partner, Ferragamo in Europe with U.S. and key international markets launching in the coming months.

Additionally, our new brand platform license, Reebok, went live this month, thanks to FPS' launch of the European e-commerce channel and the brand platforms kickoff of wholesale operations. Later this year, we look forward to also launching Bergdorf Goodman as part of our broader partnership with Neiman Marcus Group, which remains on track for H2. And finally, our announced transaction with Richemont continues to progress through the regulatory review process with approvals now received in markets, including the U.K. and China. The transaction remains subject to approval from a number of other regulatory authorities around the world with whom we continue to work closely. Our Q1 results reflect our disciplined focus. Based on our performance, we remain on track to deliver on our 2023 plan, which is the first step towards achieving our medium-term targets and our longer-term mission to be the leading global platform for luxury. This represents a more than $360 billion opportunity today. With technology at the core of our business, we have consistently led innovation in the luxury space, having been chosen to be the long-term innovation partners like companies such as Chanel, Richemont, Kering, Harrods, Neiman Marcus and others.

One of the areas we are most excited about is the recent developments that large language models are bringing to the field of AI. We're already in a leading position with respect to AI intellectual industry with significant in-house data science, AI, and machine learning teams, and we have been active in this space for many years now. Our long-standing partnership with Microsoft has opened up the opportunity to access the most advanced version of ChatGPT, and our tech teams have been developing several concrete applications of ChatGPT for the luxury space. I believe this could be a significant development for Farfetch. Our unrivaled range is the reason why our customers choose Farfetch. But large language models open up areas like search and discoverability and storytelling of our brand catalog to provide a much easier-to-use hyper-personalized interface for our luxury customers. Large language models also offer other potential applications to augment the productivity and quality of providing customer service and creating product descriptions, for example. This is an exciting development in Farfetch's long history of successes in AI and machine learning. There's still a lot to be discovered in this field. And along the way, we will always have the customer in mind and the need to provide a truly exceptional luxury experience. I am very excited by the near-term prospects of rolling out consumer-facing applications of these new AI developments. And I look forward to opportunities for Farfetch platform solutions to collaborate with brands in developing AI applications to enhance their own digital channels.

With that, I will turn it over to Stephanie.

Stephanie Phair

Thank you, José, and hello, everyone. Farfetch has one of the largest, most valuable and broadest audiences in online luxury. In Q1 2023, we added 500,000 new customers, growing sequentially by 2% to nearly 4 million active consumers, even after the roll-off of our remaining Russia customers. We continue to focus on engaging and retaining existing customers, a fundamental lever in achieving our growth and profitability targets. As a result, we saw double-digit growth in existing customers shopping on the Farfetch marketplace versus Q1 2022 and increased new customer 3-month repurchase rates during the period, which is a strong indicator of long-term value. As a marketplace with an extensive range of products, we cater to a broad customer base that represents varying personas and aesthetics, which in turn allows brands to work with Farfetch to market a variety of looks from their connections. But also, this means we are uniquely positioned to lean into trends as they emerge across multiple customer profiles and respond to customer preferences in pricing and taste. We are truly global and geographically well diversified as demonstrated by our significant presence across the top 20 countries by luxury spend. Not only are we a key player in these large markets, but because of our scalable platform model, we are uniquely positioned to serve the global luxury industry. The global nature of our capabilities allows us to tap into a broad base of demand and lean into markets where demand is strong.

In Q1, we saw double-digit order growth in more than half of the 190 countries and territories we serve. We have also invested in regions that have not historically been a focus for luxury players, including markets like Mexico and Brazil, which continue to deliver outsized growth relative to other regions on the Farfetch marketplace. I had the pleasure of witnessing this firsthand during my recent travels to Brazil and Mexico, where our customers' enthusiasm and engagement for our brand were clearly evident. And I heard how much they appreciate the fact that we not only have the global luxury brands, but also allow them to shop some of their favorite local brands in a single destination. The fact that they see local brands being showcased to a global audience on the Farfetch marketplace also appeals to their national pride and instills an even stronger affinity to the Farfetch brand. I believe our global success is as a result of the high quality and personalized services provided through our localized approach, which starts with our supply and is carried through all aspects of the customer experience. This is an approach we have invested behind for several years and have developed a strong presence and strategic relationships with key local players, China being a great example. Our global footprint enables us to remain nimble and shift investments from one region to another in adapting to changes in consumer demand. But where we have a broad customer base, we also and importantly, have a very valuable private client customer base, which we service in a very personalized way. Within our global and diverse customer base, we continue to hone in on our private client. We have private client stylists on the ground in many of our key regions, whose understanding of our customers' cultural values and nuances enables them to deliver highly curated experiences. This approach has helped grow this attractive Farfetch customer segment, which represents a larger base of demand than many of our competitors' entire businesses. As the top 1% of our customers generated more than 27% of Farfetch Marketplace GMV in 2022. We also continued to expand this valuable consumer tier ahead of our overall consumer base. PC retention remains above 90% and a higher proportion of customers in the gold and platinum tiers of our Access Loyalty program are upgrading to the next tier. Additionally, private client average order values remained above $1,100, which is particularly encouraging given overall AOV trends. And it is for all of these reasons, our broad and valuable customer base, our regional diversity and our highly engaged and high-spending private clients that our brands and boutiques continue to see Farfetch as a key partner to reach luxury consumers. The strength and depth of our customer base is extremely compelling to the industry. And as a result, our brands and boutiques are continuing to allocate stock to their Farfetch channel, further improving the offering we have for existing and new consumers. Our top 20 brands, excluding MGG brands, grew available supply by 60%.

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. I'd like to start with the key financial highlights for the quarter. First, Farfetch is back to growth, and our underlying growth accelerated in Q1 '23, reflected in marketplace order growth, excluding Russia and China, which was 18%, up from 12% in Q4. Additionally, brand platform GMV grew 15%, and adjusted revenue increased 13%, both at constant currency. Our reported GMV continued to be impacted by unprecedented macro forces that started in 2022, namely the closure of Russia, COVID restrictions in China and the strong U.S. dollar. Despite these factors, reported GMV was slightly higher than last year, and digital platform order contribution margin remained robust at 32.4%. SG&A was in line with expectations with a decrease in spend versus Q4 '22, a year-on-year reduction in the underlying cost base through our cost rationalization initiatives and incremental investment to support the new FPS and brand platform deals signed in 2022 as previously guided. Finally, as is typical for a Q1 period, there was a use of cash in the quarter, but this year, it was favorable compared to both Q1 '22 and Q1 '21, reflecting our focus on improving our working capital and overall cash position.

Slide 10 shows our P&L results, which reflects a solid quarter. Group GMV was $932 million, a 0.1% increase on a reported basis and up 3.6% on a constant currency basis. This was driven by growth across all 3 segments on a constant currency basis. Adjusted revenue was $476 million, up 13% on a constant currency basis, driven by strong brand platform performance and first-party growth across the digital platform. Gross profit grew 4.4% to $241 million. G&A and technology costs were $218 million, very much in line with the expected position and reflecting underlying cost savings and incremental investment on new 2023 revenue lines and adjusted EBITDA improved slightly year-on-year to minus $35 million.

I'd now like to discuss the performance of our segments. The digital platform started the year well. Slide 11 shows that digital platform GMV growth, excluding Russia, China and the impact of FX was circa 10%. Adding back Russia and China, growth was plus 2% at a constant currency. The impact of a strong U.S. dollar resulted in reported GMV of $800 million, a reduction of 1% year-on-year. This makes Q1 '23 the strongest overall quarter for digital platform growth in 4 quarters. The strong underlying performance was underpinned by continued robust growth across our marketplace with the higher sequential active consumer growth across 4 quarters, reflecting our successful customer acquisition and retention initiatives. And an acceleration in order growth excluding Russia and China to 18%. In terms of average order value, we have seen 18% reduction to $566 driven in part by the currency headwinds incurred as we report in U.S. dollars, plus lower underlying average order value due to higher levels of markdown and a shift in consumer demand for items with lower price points. On a regional level, for the Farfetch Marketplace, the Americas improved quarter-on-quarter, delivering low single-digit growth year-on-year with growth in Mexico and Brazil, the highlights, partially offset by continued softness in the U.S. as a result of the promotional environment. We specifically tailored our demand generation expense in this market to drive efficiencies. EMEA improved quarter-on-quarter with low double-digit year-on-year growth, excluding Russia, supported by continued strength in core European markets such as France, Italy and Spain and double-digit growth in the Middle East and Asia Pacific improved quarter-on-quarter, with an improvement in China, albeit still lower year-on-year. As José mentioned, this important market is back to growth in Q2 to date, in line with the ramp-up that we expected for the full year.

Turning to revenue where digital platform services revenue grew 8% to $341 million. This increase was driven by 28% growth in the first-party GMV and revenue. First-party GMV represented 22% of digital platform GMV as we continue to trade through our first-party inventory holding. In addition, we increased third-party take rate by 90 basis points to 32.9% during the quarter with higher marketplace take rates and FPS build fees. These 2 factors were partially offset by a reduction in third-party GMV of 7%, reducing third-party digital platform services revenue by 5%. In terms of margins, digital platform order contribution margin was broadly flat at 32.4%. This robust position was achieved as we saw a 16% reduction in our demand generation spend, generating 470 basis points of incremental order contribution margin versus Q1 '22. First-party gross margin of 27.9% as we traded through our inventory holdings and third-party gross margin of 67%, with an impact from additional duties and shipping costs as well as higher cost per order of logistics through the lower average order values in Q1. Moving to the brand platform, where we delivered GMV of $110 million. an increase of 10% on a reported basis and 15% on a constant currency basis, reflecting stronger deliveries for our spring/summer 23 collections within the quarter. Brand platform gross profit was $60 million at a 52% gross margin, an increase of 330 basis points versus Q1 '22. As last year, we increased our inventory provisioning due to warehousing delays. Our operating cost base consisting of G&A and tech expenses was $218 million. This was an overall reduction in spend versus Q4 '22 and accounting for a one-time ruble hedging credit last Q1 and the incremental spend associated with the launch of new clients for 2023, we have seen an underlying reduction in spend versus Q1 '22. We remain on track to spend $950 million for 2023 as a whole, which includes underlying savings of 10% versus 2022, driven by headcount reductions and cost-cutting initiatives across the entire cost base.

On cash, we closed Q1 with cash and cash equivalents of $486 million, a net decrease of $248 million during the quarter in line with expectations given the usual Q1 seasonality of group operations. As I said earlier, the Q1 movement was favorable compared to the equivalent movement in Q1 2021 and Q1 2022, which saw an outflow of cash of $326 million and $425 million, respectively. Compared to Q1 2022, this improvement was a result of a reduction in investment spend and actions taken to improve our working capital position, including tightening our inventory balances. We expect each quarter of 2023 to be stronger in terms of use of cash than the equivalent of 2022 due to stronger adjusted EBITDA, reducing our first-party inventory balances reversing the post-Brexit buildup of our VAT receivables due in from European governments, which currently stands at over $200 million and expanding our marketplace creditor position as we return to growth. This means we expect to close Q4 '23, in line with the closing Q4 2022 position. That leads nicely to full-year guidance, and I wanted to remind everyone of the guidance we set for 2023, which remains unchanged. We are on track for GMV of circa $4.9 billion, which includes digital platform GMV of circa $4.2 billion and brand platform GMV of circa $0.6 billion. We expect revenue of $2.9 billion, up circa 25%. Stable year-on-year margins, including brand platform gross profit margin of 48% to 50% and digital platform order contribution margin of 33% to 35%. Our focus on cost means we continue to expect SG&A of circa $950 million, and we continue to target adjusted EBITDA margin of 1% to 3%. We also see no change to how that result will be delivered across the remaining quarters of 2023, with Q1 delivered slightly better than expectations, we look towards Q2, which we expect will deliver stronger reported growth at the GMV level. We will be annualizing the Russia and China impact, so these macro factors fall away. We will also start to see contributions from the recent launches of Ferragamo and Reebok, both driving GMV and revenue growth.

Moving into Q3, the currency-related headwinds from 2022 are expected to largely neutralize allowing the strong double-digit underlying growth position to start shining through once again and further improve our reported GMV and revenue growth. We also expect to launch our new partnership with Neiman Marcus Group during the second half of the year, with most of the incremental impact expected in Q4. Finally, we expect positive adjusted EBITDA to track this stronger top-line performance as we navigate through the year. In terms of cash, we expect that the working capital outflow in Q1 will reverse with strong working capital dynamics, particularly in Q4.

I'll now pass back over to José for his closing remarks.

José Ferreira Neves

Thank you, Elliott. Farfetch is back to growth despite a continued uncertain macro backdrop by remaining focused on the clear objectives we've articulated. Our Q1 results are the first step towards delivering on our plan for 2023, our year of execution. We continue to be focused on driving our 3 business pillars and delivering on the deals we signed in 2022 with the recent launches of Ferragamo and Reebok. As we look further out, we are also focused on achieving our medium-term targets, including the successful completion of our announced transaction with Richemont and our longer-term mission to be the leading global platform for luxury. Farfetch is uniquely positioned to go after this more than $360 billion opportunity. We have a track record of strong growth over the years. As Farfetch grew at a 24% CAGR or 3x as fast as the industry between 2019 and 2022. I'm extremely confident in our ability to continue expanding our reach across its resilient luxury industry and also on our prospects for delivering sustained profitability and free cash flow over the coming years.

And with that, I'd like to open up for your questions. Thank you.

Question and Answer Session

Operator

We will now move into our Q&A session. (Operator Instructions) To start, we would like to take our first question. Doug Anmuth from JPM.

Douglas Till Anmuth

(technical difficulty)

And then just more broadly as we are roughly

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and some of the new partnerships. And if you could just also comment on the sustainability of demand generation leverage that you're seeing.

José Ferreira Neves

(inaudible) are here. I'll cover your other questions first and then touch on the U.S. and then I'll let Stephanie cover on the customer and in [margin generation] part of the question, if that's all right. Look, we said that 2023 is our law of execution. I'm really happy would believe against that. Q1 was a quarter where we were back to growth and a quarter of acceleration in our top methods, both U.S. and China, but also other methods. And it was a quarter of launches in key launches, landmark launches, Reebok is live on budget and on schedule. And same with Ferragamo, we're on track with Neiman Marcus Group for the second half of this year, and we continue to make progress with Richemont well. So this makes us very, very confident about the rest of 2023, and we're on track to achieve our guidance back to growth, EBITDA profit and positive cash flow. We've also implemented a number of initiatives, and we're very disciplined in terms of the cost side of the business than the fixed cost. As Elliot outlined, the underlying business, excluding new deals and new partnerships, actually, we saw a reduction in about 10% of the fixed cost base and very disciplined on cash with a Q1 that was a significant improvement over Q1 last year and with a number of actions well on track to end the year with as much cash, if not more, than what we started. So all in all, very, very positive dynamics. And just to elaborate a little bit more in terms of the U.S., look, in Q3, we shared with you, and we noticed that the market was becoming very promotional in the U.S. retailers, luxury retailers had built inventory levels, and we were starting to see a high promotional activity. And therefore, we took the decision to prioritize profitability and reduce our demand generation spend to the tune of circa 20% since then, quarter every quarter. And as expected, we saw a decline in Q1, although we saw a sequential acceleration from Q4.

And in fact, in terms of customers and others, we are growing in the U.S. So active customers grew high single digits. Others grew high single digits, and the decrease in GMV is the result of lower AUVs as the customers are slightly trading down and taking advantage of the promotional environment elsewhere and therefore, have become slightly more price sensitive. By the way, we don't see that with our private clients. Our private client, the AUVs remain at $1,100. It's a very large part of our business is almost 1/3 of our business. And we see 90% private client retention. So that business hasn't really been effective that much by these dynamics. And now for second half, we do think there's a probability of inventories being more managed by retailers and lower inventories across the industry, less promotional environment. And one thing we know for sure is that the comps will get much easier for us in Q3 and Q4. And that gives us confidence that we're going to go back to growth in the U.S. and that will also be supported by our broad exposure to other geographies. China is as expected, recovering we're actually positive year-on-year, quarter-to-date in Q2. And also, I think we are demonstrating that our very global business and the investment we've done in internationalization is paying off. So the Americas in Q1, for example, actually grew year-on-year in spite of the U.S. decline. That's a result of businesses that are now at scale and growing at strong double digits in Brazil and Mexico and Middle East continues to be very strong. Southern Europe continues to be very strong with double-digit growth year-on-year. So as we start comping, we've now comped Russia, we will continue to comp China, FX. This underlying strength of the business makes us confident for our 2023 numbers. But of course, there's still 3 quarters to go, and we will continue to be very, very focused on execution and very focused on continuing the disciplined approach to cost and actually leveraging all the strengths we have in terms of the customer base and an incredible platform we've built.

And Stephanie, if you want to cover the margin generation [pricing] please.

Stephanie Phair

Doug, Stephanie here. I'm glad you asked about the demand generation leverage because we are pleased with that, and it's very much an intentional decision, as José mentioned, we made the choice to drop our demand generation spend to really lean in on efficiencies and be nimble as to where we invest to drive those efficiencies. So the U.S. is a case in point, we dropped by 20%, but we didn't see that commensurate drop in sales. And I think to give you a little bit background around this, this is really the result of a long-term strategy. It's been 15 years of investment in marketing tech to really be able to hone in on efficiencies. We continue to find new ways of driving profitability through profit multipliers, looking at audience targeting, looking at drilling down to profitability at the product level. It's also a result of an investment over the years. I've talked a lot about investment in brand building, which shows up over time. Diversification of channels as well. I've talked in the past about app being a channel that whilst it's a more expensive channel to acquire customers. It has very strong long-term value. So this is a long-term effort. I'm pleased to say that both CAC and CPRO are down. But I think the story here is one that we've mentioned before is really about retention and engagement. I mentioned this at the Capital Markets Day, we've acquired a very large broad-based and very valuable luxury customer. We continue to grow that base, 500,000 customers this quarter, but we're really continuing to engage on retaining that broad and large customer base. And we have a very strong strategy around retention, personalization, some of the developments that, as José talked about in AI will only accelerate that. But for example, this quarter, we launched Farfetch for you, which is already showing some really, really promising results in terms of curating the marketplace one-on-one. Personalized communications have a 90% higher conversion rate, and we keep driving those up year-on-year. And so we're really becoming more and more surgical about all of the factors that drive retention. And as we invest on that side of the business, we're actually expanding it to really the end-to-end customer experience. So I think retention is a big part of the strategy. And to your question about what should we expect in terms of that leverage through the end of the year. We've always said that we manage our demand generation to a framework around payback, and we are back to the under 6 months payback. We will continue to manage it that way, lean into markets where we're seeing really good payback and pull out of markets where we're not. But I think you should expect to see around 7% to 7.5% of GMV in terms of demand generation spend.

Operator

Our next question comes from Lauren Schenk from Morgan Stanley.

Lauren Elizabeth Cassel Schenk

I just wanted to dig in a little bit more into the second quarter outlook, just given all the moving pieces, anniversary in Russia, Reebok, Ferragamo. It sounds like you're expecting all geographies will deliver sequential improvement. But just given some of the new partnerships, any way to think about the magnitude of GMV improvement in the second quarter? And then just wanted to reconfirm that on the full-year guide, you're still expecting about $500 million on the year from all the new deals together.

Elliot Jordan

Lauren, good to speak to you. It's Elliot here. Look, I think we -- you saw in the shape of the year slide, absolutely see the year continuing to pan out as we predicted back when we provide full-year guidance. Obviously, the key goal here is for us to deliver the $4.9 billion of GMV. That's the expectation for this year. And with Q1 slightly ahead of where we thought we would land because of the very focused execution on delivering what the customer needs in this current environment. We remain very confident that the $4.9 billion is the right place to be. And yes, in terms of incremental value from clients, we absolutely are seeing that $500 million number is the GMV that will come through from the new clients that we will launch on FPS and obviously, Reebok, which has now gone live. So obviously, a key part of the growth of $4.9 billion is with the new clients. But underlying, we're obviously going to be achieving high single-digit, perhaps 10% underlying like-for-like growth across the business to achieve the numbers for the full year and remain very confident that, that is the profile. In terms of Q2, I don't want to be drawn too much on exactly where we'll land. But obviously, back to growth in Q1, we will see that expand as we trade into Q2. I think the GMV number will still be a single-digit year-on-year growth so I don't want people to get too excited at just the stage. Obviously, we will focus on as much as we can with the new clients that have gone live, but I think single-digit year-on-year growth is probably the right thing to be focusing on for Q2.

Operator

Our next question comes from Geoffroy De Mendez from Bank of America Merrill Lynch.

Geoffroy Thibault Antoine Victor De Mendez

I just wanted to come back on the guidance for this year on an underlying basis. I think Elliot, you just mentioned that the guidance for this year was between 8% and 10%. But I think initially, when you guided for these numbers, you had in mind that China would only come back to growth in the second half of the year, and you didn't really have a clear view on where the U.S. would be in 2023. And then today, you're now saying that China is already back to positive in Q2 to date. And if I understood correctly, you're also saying that the U.S. should be up in the second half of the year. So does that mean that you're thinking that the underlying growth could be faster than the initial guidance? Or is it not and if not, then what's the offsetting factor here?

Elliot Jordan

Geoff, great speaking with you. Look, I think, again, I'll say we obviously achieved in Q1, exactly what we set out to achieve, get the business back on track, focused very much on costs, delivering an improvement on our cash position year-on-year and maintain the healthy margins that we've been delivering as well as this, I suppose, slightly better-than-expected performance in terms of GMV growth. We've got a really good plan for the rest of the year. We've got a fantastic position on inventory from third-party clients. You'll have noticed from the report that inventory levels the year up significantly year-on-year. And the comp headwinds will start to reduce, which is also very positive in terms of reported numbers as we start to move through Q2 and beyond. But I think there's plenty to navigate. So we don't want to get ahead of ourselves in terms of where numbers may or may not be versus that original plan. I think the plan of underlying 8% to 10% is still the right plan. In terms of by geography, we are seeing China back to growth, absolutely Q2. That will pick up across the rest of the year. We obviously are still expecting a moderate ramp-back-up. Sorry, the numbers for this year for China will be lower than 2021. So we aren't seeing a full recovery back to 2021 levels and our expectations for China. But we are obviously seeing growth from the rest of the year now as we move forward. On the U.S., obviously, we are seeing a better position from where we were in Q4. And I think that will improve as we trade through Q2. Whether that will get to positive territory in the U.S. is yet to be seen. So I think second-half growth for the U.S. is probably what you should have in your numbers. And that obviously will allow us to deliver this 8% to 10% underlying. I think broadly, that's the focus for us. We'll trade all markets as best we can, but we don't want to get too ahead of ourselves in terms of numbers right at this stage.

Operator

Our next question comes from Ike Boruchow from Wells Fargo.

Irwin Bernard Boruchow

Elliot, maybe for you. When we look at the inventory and the balance sheet and the 1P business, can you talk about the quality of inventory you're sitting on now? Maybe what your expectations are on the inventory line as we get through the year? And then to that point, the 1P penetration and 1P gross margin, I assume that directionally, those should be improving as we move through the year. But can you give more context behind that, maybe some more specific numbers about what we should be expecting there?

Elliot Jordan

Yes, great questions. Look, Ike, we've done a superb job actually in Q1, churning through excess inventory balances that we've been carrying. Between the end of the year and now on an underlying basis, actually, the inventory levels have come down. It's been offset somewhat by Reebok inventory that's now come onto the balance sheet, about $20 million to $25 million of Reebok was added in the quarter. So underlying, we've seen a reduction in our inventory levels. That is clearing through old dated stock. We've been able to use the current environment of promotions across the industry to manage that stock through and very much focus on moving through the inventory balance. That has caused this shift up in terms of share. So as I said earlier, on the GMV is up to 22%. And the margins on the first-party business, therefore, continue to be suppressed below 30%. Obviously, we'd much rather have our gross margins on 1P in the 30s, which is back to better historical numbers. Because of the fact that we were clearing older dated stock, we've been able to utilize some of the provisions that we have on -- against the stock position to be able to offset some of the margin pressure, which is why we've seen good 1P margins year-on-year. Obviously, as the team has been more aggressive on some of the older stock has released those provisions. And also we're seeing in Q2 to date, the ability to continue to move through inventory at slightly better margins than we were expecting. So everything is holding up quite nicely, but plenty of work to get through.

My target for the end of the year is to have overall inventory back below $300 million. So we've got something like $50 million, $60 million of inventory at a net level. That includes net of any additions for Reebok through this year, so much higher than that number in terms of underlying inventory to clear. And we're taking that focus through the next few quarters to get that number below $300 million by the end of the year. That will result in continued gross margins below 30% for the rest of the year. And it will mean that 1P as a mix of GMV will probably stay above 20% for the next few quarters. But our intention, as we exit this year, is to have inventory levels back under control as we go into 2024. And then the GMV mix will come back below 20% as we see 3P grow again and 1P will moderate. So hopefully, that paints a good picture of where we are. Very pleased to be working through it. And I think the other key aspect of this is as we bring that inventory down from today's balance of $346 million to below $300 million, obviously, that turns back to cash. And this is where we are seeing the opportunity to really improve our working capital position across the year by turning inventory balances back into cash, which obviously helps us get back to the $700 million-plus number by the end of the year.

Operator

Our next question comes from Nick Jones from JMP Securities.

Nicholas Jones

Great. In the press release, there was comments about personalized communications, improving conversion rates. How should we think about these efforts to generate more personalized communications, whether maybe it's through some of the generative AI stuff you're working on versus the pullback in demand generation that you've made? And can these efforts offset the pullback?

José Ferreira Neves

We have been laser-focused for a few years now in terms of deploying artificial intelligence and machine learning algorithms to personalization. This is one of the vectors of growth and the opportunities we see in the marketplace. We have an absolutely unrivaled range, many more brands and products from all around the world. And this is really a key USP for Farfetch, but personalizing that offer that vast offer to each single customer is a major opportunity for us. So we're very, very happy with the results of that effort. Our in-house algorithms have beaten every single algorithm we've tested in the industry on AB testing. And therefore, we now have full in-house recommendations engine, rankings engine. And obviously, these things get better and better as we go along. The conversion rate of personalized communications is almost double. It's 90% higher than other communications. And so you can see the benefit that comes from it. And to that extent, we're very excited about the recent quantum leaps in terms of large language models and AI that we've seen since the launch of ChatGPT. So we're very excited about that. We think there are really powerful applications in the luxury industry. We think we're better positioned than anyone else to capture those opportunities because, of course, it's about these models.

And in that, we have a long-term partnership with Microsoft. And we've been able to agree with them in the spirit of that partnership and deepening of that partnership to have access to the latest versions of ChatGPT. But of course, it's even more important, how rich your data set is and your knowledge base in terms of applying these models with a fantastic user experience for the luxury customer and for this industry. And in those 2 elements, I think we win in space. We have a very, very rich data set with global transactions, visibility of both online and offline transactions across most 3,500 brands in 190 countries, over 1 billion visits per year, 4 million active customers. This is at the scale in terms of data set and the richness of the data set, which is quite unrivaled in this industry. And when we also apply our knowledge of the luxury industry, I think we're in a very good position to have the best applications of ChatGPT for this industry. We're actively now working on 3 proofs of concept. And we believe that could drive the personalization effort even further, which has been very successful in the past. And I think with this quantum leap in these advancements in AI could really accelerate that even further. And not just that, I think there's opportunity also on the increasing of the efficiency in terms of our operations, I think product descriptions, in customer service and augmenting the quality and the speed of customer service, the impact that has on retention and customer satisfaction. In terms of image generation, we have acquired Allure, which is already proving to boost our efficiency in terms of our digital generation of images without using real models, but with the quality that a human I cannot really differentiate between what Allure is producing in terms of quality. And that's leveraging advanced technologies and AI. And I think with these new advancements that we're seeing in this space, we will be able to also apply those to what has already been very successful. So yes, we're very, very excited about personalization and continuing to elevate the luxury customer experience.

Operator

Our next question comes from Blake Anderson from Jeffrey.

Blake Anderson

I wanted to ask on the customer growth in the U.S. You said that was up high single digits. I was wondering the mix of that in terms of maybe a higher-end customer versus more of an aspirational one in terms of income level. And then in a more normalized environment, what do you feel like that customer growth could be if you weren't discounting lower than peers?

Stephanie Phair

Blake, Stephanie here. So yes, we've talked about the U.S. specifically. And yes, well, it is an uncertain economic environment, and we've seen those reports, certainly in other calls. We are pleased to see that we've seen order growth, active customer growth, and we've seen an acceleration quarter-on-quarter. And I think a large part of that is coming from our customer growth and where that is not translating into sales has more to do with AOV. So it really is around our strategy to continue to grow customers and retain the large customer base we have. I talked about it earlier, the long-term efforts we've had in brand building in the U.S. We've invested quite a lot there, our efforts around efficiency to really acquire the right kinds of customers. I think in terms of the difference between aspirational and private client, I think we need to take a step back and actually think about how we are positioned as a business as a marketplace to really cater to both of those. And I think this is very unique to Farfetch and also positions us extremely well to navigate these very questions that you have around markets and what kind of customer. Farfetch has the broadest range of supply in the industry, which means that we can cater to a very broad range of customers. So we can cater to the aspirational customer who wants to come in at a bronze level is what we call them in our access program. And through our efforts over time, we start to build share of wallet and move them up, but we are also catered to a very high-end customer, the private client customer. And we've actually seen acceleration of that private client customer moving up tiers from gold to platinum and into private clients. So I think what Farfetch does in a way is very actively reflect the way the industry operates. If you look at the way some of the largest brands in the world run their businesses, they talk about the high end, they talk about the private client, but their sales come from a very broad base of product. So they cater to the aspirational customer with small accessories, shoes, smaller bags and then, of course, they cater to the very high-end. And that's where we are very, very well positioned at this time to navigate both geographically but within markets. So we can cater to both different price points and different trends and customer preferences.

Operator

We have time for one more question. Our final question will come from Marvin Fong from BTIG.

Marvin Milton Fong

Great. I guess I'd like to just focus on Europe. We haven't talked much about it, but it seems to be -- I think you said it was up low double digits. Just curious, is that more of a function of easy compares? Or is the geography performing better than you expected? And maybe just as a quick housekeeping question, Elliot. Could you speak to the gross ads in the quarter? Was it $40,000 or better in the quarter as it has been in past quarters? Or did we see some pullback there in line with your lower demand generation expense?

José Ferreira Neves

Yes. I think over the last 15 years, we really invested a lot in terms of having a truly global footprint and capabilities. It's one of our company values is in global. We believe this is a global industry. We believe that brands have the absolute imperative needs to appeal to the key luxury markets around the world, and this is a global luxury customer base. So over these 15 years, we've invested in a very robust operations and logistics platform. So we're able to collect products from 50 different countries and deliver to over 190. That logistics capability, combined with the technology we've developed, we're in 15 languages providing customer service, providing payments in different jurisdictions, different countries. So it's a truly localized experience, and that's what's driving the growth. And the growth in Europe is coming predominantly from Southern Europe. So we're seeing very good results in Italy, in France, in Spain, and this is because we have these languages. We've had these languages for a few years. This is an investment we've made in our payment systems, logistics and also marketing tech, the ability to really operate at global scale and move the demand generation dollars to where they are -- where they are more efficient. In fact, on a 3-year stack, we've grown this market over 100% including the Middle East. So yes, so very happy that our investment in building a global platform is really materializing into strong growth in all the geographies. And we think this is a competitive advantage and a strong mode. It's an investment we've already made. So now we're ready to leverage these strong investments. And this is something that our brands tell us that is when added reason why they very much want to be on our platform. You saw the growth in our top 20 brands in terms of supply made available to the Farfetch platform is staggering at 60% year-on-year. And this is because we bring them an incremental, very high-value luxury customer in all these geographies.

Elliot Jordan

And Marvin, I'll just finish up on the gross ads. I think we've said before that it's around $500,000 in the quarter in terms of new customers acquired.

Marvin Milton Fong

Great. I must have missed that. But thank you, Elliot and José. Appreciate it.

Alice Ryder

Great. Thank you all for joining. With that, we'll conclude our call today. Thank you all for joining us. We look forward to updating you on our progress next quarter.