Farfetch Ltd (FTCH) Q4 2022 Earnings Call Transcript

Farfetch Ltd (NYSE:FTCH) Q4 2022 Earnings Conference Call February 23, 2023 4:30 PM ET

Company Participants

Alice Ryder - VP, IR

José Neves - Founder, Chairman & CEO

Stephanie Phair - Group President

Elliot Jordan - CFO

Conference Call Participants

Irwin Boruchow - Wells Fargo Securities

Douglas Anmuth - JPMorgan Chase & Co.

Lauren Schenk - Morgan Stanley

Abhinav Sinha - Societe Generale

Stephen Ju - Crédit Suisse

Kunal Madhukar - UBS

Blake Anderson - Jefferies

Edward Yruma - Piper Sandler & Co.

Operator

Good afternoon, and welcome to Farfetch Q4 2022 Results Conference Call. My name is Leila and I will be your conference operator today. [Operator Instructions].

Thank you. 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 fourth quarter and full year 2022 conference call. Joining me today to discuss our results are Jose Neves, our Founder, Chairman and Chief Executive Officer; Elliot Jordan, our Chief Financial Officer; and Stephanie Phair, our Group President. Please note that 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 4, 2022. 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 Jose.

José Neves

Hello, everyone. Thank you for joining us today. I'm pleased to report that in Q4, we delivered group GMV in line with our expectations to achieve $4.1 billion of GMV and $2.3 billion of revenue for full year 2022. I want to highlight that in spite of unprecedented macro headwinds throughout the year, this result means, Farfetch has continues to capture market share on a 3-year stack basis with an approximate doubling of our GMV since the onset of the COVID-19 pandemic.

Our Q4 results reflect higher than expected GMV from the marketplace, which was supported by strong supply growth from our luxury sellers. And while first-party remained a profitability headwind as we continue to clear through our inventory position, third-party gross margin improved year-over-year for the fifth consecutive quarter and demand generation as a percentage of Digital Platform Services revenue reached 16%, our lowest ever level reported. These results reflect the disciplined approach we have implemented as we focused on improving profitability in 2022.

2022 was a year of profound reorganization and further cost rationalization across our business. I want to take a moment to walk you through this significant efficiency gains. These initiatives have 2 strategic objectives. First, to redesign our entire organization to support our mission of building the global platform for luxury and enable the incredible growth we have ahead of us, given our plan to hit $10 billion in GMV with a 10% to 13% adjusted EBITDA margin by 2025. As such, the marketplaces business pillar was overhauled with a new role of Chief Marketplace Officer being created as a single point of accountability.

Our 1P businesses, which have reported to different branches of the organization, historically, were also brought together with our 3P business to form a unified deal of merchandising. And we now have a single Chief Fashion and Merchandising Officer overlooking both the breadth and depth of our supply across 3P concessions and 1P from Browns. All marketplace vendors for specific categories, such as Stadium Goods and Violet Grey were also consolidated under the single marketplace organization. We believe these changes will enable significant performance improvements for our 1P businesses, by providing a better offer for our customers as well as allow us to fully capitalize on our growth opportunities for the marketplace as outlined in our recent Capital Markets Day presentation.

Our two other business pillars, FPS and Brand Platform are also organized with single points of strategic accountability now reporting to the CEO. Finally, we've implemented a platform design in terms of our technology, operations and business services sanctions with an exact leading each of these platforms, reporting to me and with clear SLAs to serve the 3 business pillars of Marketplace, FPS and Brand Platform. As a second objective, in 2022, we also implemented cuts in our structural cost base for the marketplace core business as well as the technology operations and business services sanctions.

To date, we have taken actions to reduce our headcount proactively to the tune of 17% of our starting 2022 headcount in this core part of our business. We have also initiated actions to reduce or eliminate up to 15 locations worldwide, in addition to reducing our retail footprint at Browns and Stadium Goods. What is particularly remarkable is that this was all implemented whilst we've also been servicing an 11% growth in marketplace orders, excluding Russia and China, and increase in overall active customers. And while, of course, also ensuring we build the platform foundations needed to deliver on key strategic enterprise deals in 2023. Altogether, these structural cost reductions are expected to deliver our targeted 2023 SG&A savings of $85 million, which would represent more than a 10% fixed cost reduction in our core business.

Our restructured platform organization and recently signed projects are foundational to catapult Farfetch to the $10 billion GMV mark in 2025. In parallel, we have also been hiring specifically to support the growth plan for the FPS business and within NGG. These investments together represent over 100% of the expected SG&A growth in 2023, which will be partially offset by a minus 10% overall reduction in costs for the marketplace core business and supporting platforms. To deliver a notable efficiency gain in light of our expectations for double-digit order growth during the year. All of this means, Farfetch begins the year as an even stronger and more efficient organization, which is why I'm more confident than ever about our prospects to deliver growth, profitability and positive free cash flow in 2023 and beyond.

This year, we will have the benefit of lapping the macro headwinds we faced in 2022. And I'm pleased to see that on top of this, we are also starting the year on a solid note. Our partnerships with Neiman Marcus Group and Ferragamo are on track to launch as expected in 2023. And our announced transaction with Richemont is currently progressing through the regulatory review process. The Brand Platform continues to deliver exciting content, including Off-White's iconic Chicago Bulls lab and Palm Angels' innovative partnership with the Haas Group of Formula 1 frame as well as this week's unveiling of their spectacular collaboration with Moncler Genius during London Fashion week. And we're in the final stages of preparing to launch Reebok in Q2 as planned. These plans solidify our targets for 2023. The investments we have made over the years to build out our platform infrastructure mean we now have the building blocks we need, which when combined with our galvanized teams means we have all the key elements to execute on our plan.

As you would have seen from our 6-K filing today, Elliott will be stepping down from his role of CFO at the end of the current year after more than 8 years at Farfetch. We will now start the search for his successor, and I look forward to working closely with Elliott, who will remain as Chief Financial Officer during 2023 to ensure a smooth transition. We are some way off from saying a proper goodbye to Elliott, but I want to thank him for his commitment to Farfetch and say he has been a fantastic CFO over the years and an important building block of our success. He will leave us with his legacy of the formidable finance and business services teams, he's built to support a company that I believe is extremely well placed to continue to lead the industry and drive profitable growth. Thank you, Elliott.

With that, I'll hand off to Stephanie and Elliot to discuss further details of our progress in Q4 and 2023 outlook. Stephanie?

Stephanie Phair

Thank you, Jose. Today, I would like to provide an update on some of our key areas of focus, including first, our customer performance and engagement from our highly profitable private client cohort with plans for 2023 to capture even stronger growth in our private client business. Secondly, an update on our industry partnerships, including marketplace supply; and finally, our high-margin media solutions business with some exciting partnerships unveiled during Q4.

To begin, while 2022 was a challenging year, we were still able to grow active customers by 6%, whilst also driving a 7% reduction in demand generation spend, thanks to our ongoing focus on brand building and efficiency in acquiring customers through diversified channels, specifically the Farfetch app, which is our most profitable and fastest-growing channel and provides a direct means to reach consumers, which bodes well for long-term value, one of our key metrics for measuring customer value. And on that note, existing customer volumes on the marketplace grew double digits in almost every market, excluding Russia and China year-over-year and 3-month existing customer repurchase rates remained broadly in line with the previous year.

Our private clients continue to be our crown jewel, demonstrating the resilience of the industry, and we continue to expand this valuable consumer base in Q4 ahead of our overall consumer base. In line with Q3, private client retention remained over 90% and average order values were over $1,000 on continued strong demand for high price point items. As we look towards 2023, we're excited by opportunities we see to further strengthen and elevate our private client offering experiences in partnership with our top brands. To further drive this customer segment, we have recently appointed Thierry Pichon as SVP of Private Client, whose background includes Chalhoub Group, Gucci, Louis Vuitton and NET-A-PORTER. And we're pleased to see the year is already off to a promising start with the collection of high jewelry pieces totaling over $600,000 purchased by a client in the U.S.

We continue to maintain strong brand relationships as evidenced in part by the fact that overall stock value on the Farfetch Marketplace grew nearly 50% year-on-year to a record $5.9 billion, thanks in part to strategic initiatives with our largest partners to deepen our integrations to further expand our inventory and drive speed to market. Farfetch also helped brand partners clear through inventory in Q4 as we saw increased participation during our markdown window compared to the previous year.

Moving on to our Media Solutions business. Fourth quarter Media Solutions revenue set another quarterly high, bringing full year 2022 to our biggest year on record, with more than 60% year-on-year growth, driven by an increase in active media solutions' clients and higher average annual investment per client. We believe this demonstrates the advantages of our 1P data, especially in light of increased privacy restrictions that have reduced the ability to attribute marketing performance in the overall marketing landscape. At the same time, Farfetch is emerging as a truly viable alternative, and our Media Solutions growth supports the notion that brands want to work with us because they value our targeted luxury audience and data.

Calling out a few noteworthy pay brand campaigns launched during the quarter. Farfetch supported Valentino's Fall Winter 22 Pink PP Collection, featuring originally saw its shoppable content and gave private clients early access to the collection and exclusive products. This drove incremental performance for Valentino with more than an 80% uplift in private client engagement and an average order value of approximately $2,500. Following our announcement last year of a global strategic partnership with Ferragamo, the brand revealed their new creative direction by Maximilian Davis with an exclusive spring/summer 2023 capsule on Private.

The launch gave the Farfetch audience virtual backstage access during the runway show, incorporating responsive AI imagery, thanks to our open innovation startup ecosystem. This was followed by a preorder live stream and a series of private client-owned events in Hong Kong, Brazil, London and Dubai. The campaign generated 35 million impressions for the brand. Ferragamo came to us with a clear objective to capture a new and younger luxury customer, which Farfetch delivered.

Over 80% of campaign traffic generated on the Farfetch marketplace came from new visitors to the brand and approximately half of campaign clickers fell into the Gen Z and millennial cohorts. The work we've done throughout 2022 and the years prior, investing in our customer and in our partnerships with brands and boutiques puts us in a strong position to deliver on our 2023 goals.

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 want to focus on the key points from a financial perspective and then leave plenty of time for Q&A. There are 3 takeaways to highlight. First, our Q4 results for GMV and adjusted EBITDA margin are in line with our expectations, including digital platform GMV slightly better than expected, which means we have closed 2022, in line with the plan we outlined at our Capital Markets Day in December with strong underlying momentum going into Q1.

Secondly, our expectations for 2023 are unchanged with a return to GMV growth, operating cost leverage and adjusted EBITDA profitability, plus we have several working capital initiatives in place. This will ensure we end the year with cash and cash equivalents in line with where we exited 2022. Finally, the 4 quarters of 2023, all have unique characteristics, making the financial results for each quarter different from our usual shape to the year. In particular, we will still see the impacts of external headwinds across Q1 and Q2. We'll comp headwinds and anticipate building momentum across our larger markets within the marketplace in Q3 and then in Q4, and we will see positive impact on GMV as we start going live with our new client operations in Q2 and throughout the second half across the brand platform and FPS. This means growth, profitability and cash generation is expected to be significantly higher in the second half than in H1.

Let's look at the full year 2022 results, which, despite the significant macro challenges we faced, we maintained group GMV of $4 billion, a slight 4% decrease year-on-year on a reported basis, but up 2% year-on-year on a constant currency basis. We also achieved 4% growth in adjusted revenue, which was up 13% year-on-year on a constant currency basis. Digital Platform order contribution margin increased by 40 basis points to 32% despite an increasingly promotional environment across the latter part of the year and our need to take clearance action on stock ordered well before the global demand challenges we faced. In addition, our third-party take rate for 2022 was 32.1%, up 190 basis points year-on-year, reflecting the strong value we deliver to our partners on the digital platform.

We focused our efforts on moderating growth in our operating cost base, consisting of G&A and technology expenses, despite continuing to build our platform to support new clients and new categories and added costs from acquired businesses, overall technology and G&A costs came in at $850 million as guided. And we delivered adjusted EBITDA margin of minus 4.9%, in line with our most recent guidance. Turning to Q4. Group GMV decreased 12% year-on-year to $1.1 billion, which is a decrease of 5% on a constant currency basis. Revenue decreased 6% year-on-year to $629 million, which is an increase of 2% on a constant currency basis. And adjusted EBITDA margin was minus 6.3%.

Let's walk through the key drivers of this performance, starting with the digital platform. You can see on Slide 14 that the performance of the digital platform in the fourth quarter was driven by strong underlying growth within the marketplace characterized by positive year-on-year order growth, excluding Russia and China of 12%. This was slightly offset by our strategic decision to reduce demand generation spend in the U.S. This was also the third consecutive quarter of lost GMV due to the closure of our Russian market. We saw suppressed growth due to ongoing COVID restrictions in China, and we saw currency impacts to our average order value, which was down 14% year-on-year, which is where you see the impact of the stronger U.S. dollar on our financial results.

By region, the Americas was flat year-on-year with a softer performance in the U.S. following our decision to reduce our U.S. marketing spend by circa 30%, knowing that higher discounting from large bricks-and-mortar players would reduce payback on such spend. We lost GMV as a result but maintained higher order contribution margins. We compensated for that lost GMV in the Americas by driving strong growth in Mexico and Brazil. EMEA, excluding Russia, was also flat year-on-year, with solid levels of growth coming from the Middle East and core European markets such as France, Italy and Spain. This was offset by weaker performance in the U.K. and in Eastern Europe.

Asia Pacific GMV was lower year-on-year, driven by an over 30% year-on-year decline in GMV from Mainland China. Our fourth quarter third-party take rate was 32.4%, which was 200 basis points higher year-on-year. This reflects our efforts to negotiate higher commissions, particularly from direct brand partners and continued growth in revenue of our high-margin Media Solutions product.

On the bottom right of Slide 16, you can see there were 3 contributing factors to the digital platform order contribution margin movement year-on-year. First, continued strong third-party gross margin of 67.4%, up 5 basis points year-on-year, a significant improvement in demand generation expenditure down 25% year-on-year in absolute terms and down 500 basis points year-on-year to 16% of digital platform services revenue. This is our lowest reported level and is driven from further refining the customer engagement model towards more profitable orders. These 2 positive factors were more than offset by Autumn/Winter 2022 clearance activity and provisioning across our first-party business, which impacted on first-party gross margins.

As a result, digital platform order contribution margin decreased 95 basis points year-on-year to 31.5% in Q4 '22. Overall, I'm pleased with this result as we delivered 5 consecutive quarters of order contribution above 31%, whilst navigating the unprecedented macro challenges and rapidly shifting patterns on global demand. On top of this, our LTV over CAC has improved with our more recent Q2 '22 and Q3 '22 customer cohorts having already paid back within 6 and 3 months, respectively.

Finally, a point on our first-party business, we have completely revisited our first-party ordering plans given the ongoing challenges around first-party sell-through and therefore, first-party gross margins and adjusted EBITDA margin. We expect this will have a significant positive impact on first-party gross margins as we trade through 2023 and into 2024.

Moving to the Brand Platform, where we saw softer performance year-on-year, down 3% on a constant currency basis, with reported GMV of $100 million, which is down 15% year-on-year and brand platform revenue of $98 million, down 16% year-on-year. As stated earlier, we have seen a shift in the scheduling of some deliveries to our brand platform, wholesale partners from Q4 2022 into Q1 2023. I'll note the Brand Platform gross margin of 44% was lower than the full year average of 49.1% due to actions we have taken in Q4 to clear excess inventory levels through lower margin channels. In 2023, we expect Brand Platform gross margin to be in the range of 48% to 50% over the full year.

Our Q4 operating cost base, consisting of G&A and technology expenses, was $226 million, which means we achieved our latest guidance of $850 million total spend for the full year, which is 42.6% of adjusted revenue. Whilst this overall result reverses our trend of achieving historical operating cost leverage each year, we have seen full year operating cost leverage in our technology, platform and brand expenditure. The actions we have taken to reduce SG&A spend across 2022 and into 2023, means we will cut our operating cost base on an underlying basis by 10% year-on-year in 2023 versus the 2022 total delivering $85 million in savings and achieving a return to operating cost leverage across 2023 as a whole. We have already seen benefits from these actions with a quarter-on-quarter reduction in people costs, platform costs and technology costs in Q4.

Overall, our adjusted EBITDA was minus $35 million in Q4 2022, and we had a loss after tax of $177 million. We had $734 million in cash and cash equivalents at year end. We achieved a broadly neutral free cash flow position in Q4 as we largely offset our negative EBITDA position and capital expenditure with a $71 million favorable working capital movement within the quarter. The working capital benefit was not as high as we forecast due to higher than expected inventory and receivable balances at year end and was lower versus Q4 '21 due to the decline year-on-year in marketplace GMV, which means our trade and other payables balance reduced year-on-year.

Our working capital initiatives for 2023 are well underway, and we expect to achieve strong free cash flow across the full year, helped by reducing inventory levels on an absolute basis, shortening terms on trade receivables and a return to growth in the marketplace, which delivers favorable working capital dynamics. We ended 2022 with 394.8 million basic outstanding shares, a 4% increase from the prior year and up from 300 million shares at the end of 2018, an increase of 95 million shares over the 4-year period, driven by the acquisition of New Guards Group for 27.5 million shares, 22.8 million shares issued to receive investment from strategic growth partners and an average annual dilution from exercise employee awards of just under 3% per annum, below our targeted annual cap of 5% per annum.

Turning to our outlook. Our expectations for the full year on a reported basis remain the same as those provided at our recent Capital Markets Day. For full year 2023, we expect group GMV of circa $4.9 billion, inclusive of Digital Platform GMV of circa $4.2 billion, Brand Platform GMV of circa $0.6 billion and in-store GMV of circa $0.1 billion. I'd like to note that under the current reporting structure, results from our new Reebok partnership will be split between the Digital Platform and the Brand Platform. For 2023, we expect digital platform order contribution margin to be in the range of 33% to 35%. Operating costs are estimated to be circa $950 million. Adjusted EBITDA margin is expected to expand from minus 4.9% in 2022 to be in the range of plus 1% to 3% in 2023. And cash and cash equivalents are expected to remain in line with where we exited 2022.

As mentioned earlier, one key financial takeaway to note is the shape of 2023. The first point to note is that we expect to maintain strong underlying growth reflected by the positive order growth we've seen across 2022. In 2022, this growth was impacted by 3 macro factored driving GMV down year-on-year. These were the closing of Russia at the time, our third largest marketplace market, COVID-related restrictions in China and a stronger U.S. dollar impacting on reported growth. In Q1 '23, we expect to continue navigating these 3 exceptional challenges, resulting in negative GMV growth on a reported basis. We will also continue our first-party markdown initiatives, which will result in another quarter of pressure on our first-party gross margin with some offset by continued strength in third-party performance. The negative GMV and overall margin pressure will result in a negative EBITDA position in Q1.

As we move into Q2, we will be annualizing the Russia and China impact. We also expect contribution from the imminent launch of Ferragamo and then Reebok. This should see our GMV growth turn positive. Moving into Q3, the currency-related headwinds from 2022 are expected to neutralize, allowing the underlying position to start shining through once again and further improving our reported GMV results. We also expect to launch our new partnerships 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 the stronger topline performance as we navigate through the year. These expectations outline what will be a great year for all of us here at Farfetch, and we believe that the actions we have taken in 2022 to restructure the operations and build on our key partnerships will result in strong growth, margin expansion and positive free cash flow in 2023 and beyond.

And with that, I'll turn it back over to Jose for some closing remarks.

José Neves

Thank you, Elliot. Our long-term vision of building the global platform for luxury is more relevant, and we're closer to it than ever. Our luxury platform flywheel consisting of the 3 business pillars of marketplaces, FPS and Brand Platform continues to deliver on this vision with strong underlying performance in spite of unprecedented macro headwinds in 2022. We have taken the opportunity to overhaul our car business in a very strategic way. With a full reorganization as well as significant headcount reductions within the core business of 17% and cost savings, which are expected to deliver our targeted savings of $85 million in SG&A expenditure for the core business in 2023.

Along the way, we've also continued to make progress towards launching announced deals with Ferragamo, Reebok and Neiman Marcus Group. All of these give us reason when 2023 with healthy optimism. These favorable dynamics position us to return to growth, particularly as we will begin to comp the macro headwinds we navigated in 2022 by Q2 2023. I believe our continued focus on driving profitable growth, while delivering operating cost efficiencies will also make 2023 a year of profitability and positive free cash flow. The luxury industry has proven to be resilient, and it is becoming increasingly digitized. As it navigates its current and future challenges, the industry will benefit from a global tech platform. And Farfetch is the leading global platform for luxury, a unique positioning, which I believe will see this business grow to $10 billion in GMV and 10% to 13% adjusted EBITDA profitability in the next 3 years.

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

Question-and-Answer Session

Operator

[Operator Instructions]. Thank you. To start, we'd like to take our first question. First question comes from Ike Boruchow from Wells Fargo.

Irwin Boruchow

Elliot, best of luck. Jose, I guess I'm not sure how this is for, but just to take a step back, I mean, obviously, the last 12 months have been choppy for you guys in the macro in general. How should we think about this year maybe being different? The guidance you're giving is very compelling if you guys can hit it, I guess, what gives you the confidence in the assumptions you're making for the next 12 months?

José Neves

It's Jose here. Look, absolutely, 2022 was a year of unprecedented macro challenges with Russia, China, FX, I'm actually very proud of how the team navigated these challenges. We ended the year in spite of all of this with positive growth in GMV, 2% on constant FX, 13% on revenue with a strong underlying business. In terms of the underlying business, 12% order growth, excluding Russia and China, very solid take rates, order contribution. I think we've also taken the opportunity to restructure and further rationalize the business with a full re-org with a significant reduction in the headcount in the core business, strategically targeting the areas of the business where we saw duplications and where we could see efficiencies whilst preparing for the big launches that we have this year. So all in all, we exit 2022 in a very solid position.

As you could see, the marketplace actually performed slightly better than expected. And look, this team and this company has a very strong track record of execution. In terms of the big projects we have ahead of us, other enterprise deals that we've signed in the past, I'm thinking JV -- the JV star, which we launched 3 months in advance, the Tmall star, which we also launched ahead of schedule. Harrods, which we delivered according to the testimony from Michael Ward, the CEO on absolutely on time, on the day, it was supposed to be delivered and on budget. And that gives us extraordinary confidence in this fantastic team and in the efficiencies that we've gained, and this gives me strong confidence of 2023 being a year of return to growth a year of profitability and a year of positive free cash flow.

Operator

Our next question comes from Doug Anmuth from J.P. Morgan.

Douglas Anmuth

You reiterated your '23 outlook for group GMV of $4.9 billion. Does this still embed around $500 million from new deals and partnerships and therefore, imply high single-digit growth in the core business? And what are your assumptions as you're thinking about kind of China and the U.S. and perhaps any early metrics or details you can share on China reopening thus far?

Elliot Jordan

Doug, good to speak to you. So yes, I mean, the outlook absolutely unchanged since Capital Markets Day, $4.9 billion of GMV for the year ahead. And as Jose was just outlining, we have a track record of delivering on our underlying business and on the new initiatives. Obviously, as you see, $500 million of GMV for new initiatives, that is still the number that we're expecting. That is obviously Reebok, split between the brand platform and digital platform, the direct-to-consumer aspect of it going through the digital platform and Ferragamo and of course, the Neiman Marcus partnerships towards the back end of the year, so lots to look forward to in terms of new business that are joining the platform over the next 12 months.

On the underlying side of things, absolutely high-single digits, very confident about that, as Jose said, the start of the year has gone well in terms of our expectations. We also saw the marketplace better than expected in Q4. In particular, navigating what was a highly competitive U.S. market. So we saw good results coming out of the year, which means we're very confident on continuing to deliver the underlying order growth position. It's up 11%, 12%, if you exclude Russia and China. And there's no reason for us to believe that won't change. What I would point out is active consumer numbers were up quarter-on-quarter, up about 6% year-on-year, and that's despite losing around 100,000 or so customers from closing the Russian market. So customer base in a really good place.

I'd also point out the stock number, highest level of stock available from third-party customers at about $5.9 billion. Again, that's really showing the strength of partners and how they see Farfetch in terms of being able to drive GMV over the future. So sort of -- all the factors are in the right place and as I sort of talked through just earlier around the shape of the year, Q1, clearly, still going to be impacted by the fact that we have to fully annualize Russia and China and the U.S. dollar strength pushing down our reported numbers. So we'll still be negative in terms of GMV. But then we will be positive in Q2 and then growing across Q3 and Q4. To come back specifically to the U.S. and the China market, we do expect our China numbers to be in growth again this year. The numbers that we've got in terms of delivering the high single-digit overall doesn't mean historical levels of China performance. We just need to be back ahead of last year to deliver solid numbers, and we're very confident about achieving that.

And then in terms of the U.S., as I said, we actually were very pleased with our navigation of that market. We reduced our demand generation spend in that market significantly retreated from heavy promotions and competition. You saw the third-party gross margin of Q4 stay up year-on-year, 67%. And that meet the order contribution for the full year was 32% and above 31% for the quarter. So that's 5 quarters in a row now above 31%. So we're navigating everything well. And as we look into the year ahead, we expect that U.S. to drive strength across the marketplace and see that strong underlying growth that I think most people have sort of missed in the last 4 quarters because of the sort of headline macro factors impacted on it. I'm really looking forward to seeing that strong underlying growth start to shine through as we move through 2023 back to very, very strong growth, which, of course, added to the focus on costs. We've got a significant cost reduction plans in place that will drive a 10% underlying saving on the cost base, and that will move us from loss-making EBITDA to positive EBITDA, 1% to 3%.

On top of that, the teams are very focused on our working capital plans to be able to turn assets on the balance sheet today, inventory, receivables, et cetera, into cash for the year ahead. So we're expecting strong free cash flow and will end 2023 in terms of cash and cash equivalents. At the same place, we started it with over $700 million. So very excited plans for 2023 and very confident we can deliver the numbers.

Operator

Our next question comes from Lauren Schenk from Morgan Stanley.

Lauren Schenk

I was just wondering if you could help us think through the breakdown of Reebok between Brand and Digital Platforms. Just thinking about the $450 million base going to $600 million, how much of that is core growth versus Reebok?

Elliot Jordan

Lauren, we're not breaking that out at this stage. As I said earlier on, it is split between Digital and Brand. I think the Brand Platform is going to grow quite strongly in Q1. As we sort of said in the opening remarks, there have been some delays from Q4 into Q1. So we'll see the brand platform in growth. And on an underlying basis, we're very confident with the plans. We're not aggressive in that space, though. So I think we're being cautious about the retail position for the year ahead. So we're actually reducing our distribution to some retailers, shifting more of that the brand sales from NGG across other direct channels. Obviously, that drives improved order contribution improved gross margins across the group and also means we'll be improving our stock turn by focusing on those inventory levels. So the Brand Platform is in a very good place, but some strategic initiatives means that it will not be growing at the same sort of levels as maybe the marketplace on an underlying basis, but certainly with the addition of Reebok delivering strong growth.

Operator

Our next question comes from Stephen Ju from Credit Suisse.

Stephen Ju

All right. Great. So I wanted to revisit the question of pulling back on customer acquisition activity in the U.S. So I guess the implication here is that somebody is wanting to spend with their spending on paid media auctions. So either their unit economics are better or they're on the path to burn through their cash potentially. So how does the current environment feel versus what you were seeing in the first half of 2019, which I recall was a very promotional period, and I think you might have seen a lot of, shall we say, economically rational activity among some of the competitors?

Elliot Jordan

Stephen, great speaking to you. Yes, look, the U.S. market, we did see it as very, very competitive, driven a lot by sort of markdown promotional clearance activity from, I would say, sort of larger bricks-and-mortar retailers. And I think online, people did spend into the demand generation spend and try and drive sales. I think that was because of inventory positions. They maybe not necessarily saw the economics at a customer level as strong, but when you also factor in the fact that retailers online and offline needed to shift excess stock holdings. They probably factored in that more on demand generation was better than terminal stock issues later on. So there's a lot going on in the market that means people will spend into it. We didn't want to take that approach in terms of demand generation. So you saw that significant reduction, 25% down on an absolute basis year-on-year in terms of spend. And yet, we still were able to do better in the U.S. than we thought. And actually, our active customer numbers in the U.S. was higher in the quarter just gone than it was in Q4 last Q4 '21. So we were able to sort of navigate the environment quite carefully and still deliver a much stronger order contribution economics as a result. I think that will continue -- in Q1, inventory levels across the industry is still high, we are now -- and there's no exception there. You only have to look at our balance sheet to see that our first-party business is carrying too much inventory. We will continue to mark down that inventory to clear it. As I said earlier on, Q1 will include a markdown there to move inventory and keep pressure on the first-party margins. But I think overall, there is still stock and inventory to navigate.

Operator

Our next question comes from Kunal Madhukar from UBS.

Kunal Madhukar

Just a quick one on '23 outlook, when we look at the increase in SG&A costs from $850 million to $950 million that kind of implies higher cost of about $185 million. And that was something that you kind of attributed to the FPS business as well as the new partnerships and the brand partnerships that you're going to spend. Can you talk about the nature of the investments? And can you also talk about how much of debt expense you expect to capitalize in '23?

Elliot Jordan

Kunal, so the bulk of that spend, yes, those numbers are absolutely right. It's exactly the same as we outlined in December Capital Markets Day. And -- but the numbers are more related to our Reebok operations than FPS. FPS is an extremely scalable business. It's utilizing the exact same technology as the rest of the platform that powers the marketplace and our existing FPS clients like Harrods. The team that runs FPS absolutely focused on very, very strong profitability. It's incremental to our order contribution profitability on the digital platform and incremental to our EBITDA margin position as well when we add new clients. And yet we are still delivering phenomenal value to those clients. The clients that are existing on the platform are extremely happy with what we're achieving for them in terms of their digital solutions and the new clients can't wait to start with FPS. So a great shout out to the FPS team there.

In terms of the SG&A position, -- we -- it is mostly Reebok. We have additional cost of warehousing associated with bringing that product in. We will be building out our teams within NGG to deal with new vendors, with new distribution clients. We obviously want to ensure that we get merchandising and buying and design and styling right. The exciting thing about Reebok is as we expand into luxury -- the luxury end of the space. And we're really looking forward to launching new initiatives. I wouldn't put too much in terms of financial numbers in for that, this year, but certainly 2024 and we want to make sure, we've got a great team in place there under very, very strong leadership within New Guards Group. So those -- what those costs are.

Operator

Our next question comes from Blake Anderson from Jefferies.

Blake Anderson

I think at your Investor Day, you talked about the medium-term guide being fairly conservative for new FPS deals, and kind of a high-level question. Just wanted to see if you could talk about the pipeline there? And any commentary on how you guys are thinking about maybe what types of FPS deals you might see in this current environment over the next 1 or 2 years, how you're thinking about structuring them? Just any commentary on the forward look there?

José Neves

Yes, look, like during Capital Markets Day, we really wanted to focus the audience on the considerable power of the deals that we have signed and that we have confirmed and that actually we're already in building phase. Of course, the Richemont deal is pending regulatory approval, but we will be ready providing we get that regulatory approval. We will be ready to roll those and launch those websites starting with cartier.com and then the NET-A-PORTER Group very, very quickly. So we're very focused on executing on all these transformational multi-billion dollar enterprise clients. And that's why we wanted to focus the audience not on an hypothetical pipeline, but on an actual pipeline of signed deals because we wanted to be conservative in the guidance.

Having said that, we're very excited, we think that FPS is coming of age. These enterprise businesses, SaaS businesses, they grow with great clients and with the credibility that these leaders in the luxury industry like Tmall and Neiman Marcus Group bring to our platform. So we're seeing more and more interest from very large clients, which is where we're specialized, but also medium-sized companies and also the modularity that we are going to be rolling out. Obviously, FPS has not just the end-to-end solution, but we will be looking at rolling it out in a modular way in terms of global payments and logistics, which were Farfetch, I believe, has an absolutely unrivaled proposition with our capabilities in China, in the Middle East, Latin America and other emerging markets as well as our connected retail capabilities, e-concessions-as-a-service. So there's plenty of opportunities for growth in these several modules and a very, very large TAM to address, and we will be focused, obviously, on execution, but also on extending that yield flow.

Operator

Our next question comes from Edward Yruma from Piper Sandler.

Edward Yruma

I guess just a follow-up on the pullback in the new customer generation spend in the U.S. Just to be clear, is this more a transitory phenomenon given the promotional environment that you identified? Or is this kind of a signal that you have kind of a more mature market in the U.S.? And then as a follow-up, on the NGG business, thank you for all the color, how quickly can you get kind of the production side rationalize, I guess, ex Reebok so that you kind of control some of the ex inventory condition given the softer demand?

Stephanie Phair

Ed, I'll take your question about the U.S. and demand generation. I think, look, we've always said that demand generation is a tool that we use, a lever that we use and we reserve the right to sort of lean in when it makes sense and pullback when it doesn't. And this was the case in Q4 and sort of throughout the tail end of the year, where we really felt that it was important for us to lean into markets where we saw better efficiency, more profitable customers and a better return on our spend.

That said, what it goes to show, and I think this is to your question about the U.S. is that we have really built a solid business there where through diversifying our channels, and this is something I've been talking about for quarters and quarters now over the last few years, where we've been investing in brand. If you remember, we -- we worked on a number of ranked campaigns targeted in the U.S. We've been investing in mid-funnel so that we really have the complete funnel of our marketing activities. It shows that, that diversification means that when we pull back in that channel, it doesn't actually look like a commensurate drop in sales. And in fact, to Elliott's point, we over-delivered including to our own expectations in the U.S.

So I think this shouldn't be something that you -- this percentage of demand generation isn't something that necessarily should be modeled out, but it is, I think, proof that we really are working to diversify our channels and that we will have a laser focus on profitability, efficiency and really play to our strengths at Farfetch, which is that we have a diversified market and we're able to lean into markets that are doing very well where the unit economics are extremely good.

Elliot Jordan

And just I'll jump in on the NGG piece. Look, I think I'd probably just draw your attention back to what we talked about at the Capital Markets Day, where we gave you targets for 2025, where NGG overall will be continuing to deliver 20% plus EBITDA margins. And I think that shows you that the build out of Reebok and the continued growth of the underlying business, plus new brands as the team develop them, we'll continue to deliver very, very strong EBITDA margins and be accretive to the overall position within the next couple of years. So I'm very excited about what's happening there. Obviously, this is a year of investment, as Kunal noted in terms of SG&A for Reebok, but quite quickly next year and then to 2025, very strong EBITDA margins across the Brand Platform and the rest of the NGG business.

Operator

And our next and final question will come from Abhinav Sinha from Societe Generale.

Abhinav Sinha

I have just one. Given that we are already two months down in the year. So what has been your observation in terms of the trading pattern in the various geographies or the regions where you operate?

José Neves

Yes. I'll probably be very short on this one. We're not giving in quarter updates other than to say we've seen the year start well overall, which gives us confidence about the guidance that we've reiterated today, but we're not going to paint any picture of different regions at this stage. We'll obviously update in -- once Q1 is over.

Alice Ryder

Great. Well, I think with that, we'll just conclude the call. Thank you all for dialing in today. We look forward to updating you on our progress next quarter.