Some trends take a while to get going. After more than a year of speculation, Farfetch U.K. Ltd said on Monday that it planned an initial public offering in New York. Its timing is noteworthy. The company, which acts as a digital hub for fashion boutiques, is targeting a $5 billion valuation, Bloomberg News reported.

A glance at its 2017 accounts included in its filing show that while gross merchandise value — the total amount of orders it processed — rose 55 percent in 2017 to $909.8 million, the pre-tax loss increased from $81.3 million to $112.1 million on the back of heavy investment to stay at the cutting edge of online retail.

 

BIG SPENDER

While Farfetch’s sales are expanding, so are its losses as it invests to stay ahead.

Assuming a $5 billion enterprise value, Farfetch would be trading on 5.5 times 2017 sales. That compares with about 2.5 times for Yoox Net-a-Porter at its last valuation before its purchase in June by Cie Financiere Richemont SA.

That looks ambitious, and not only because losses are growing. Farfetch may well continue to expand its sales — after all, they were up 60 percent in the first half of 2018, compared with the year earlier.

For a start, the shift to purchasing online is a structural one, even for high-end goods. The company is well-placed to capitalize on this trend, which shows no signs of abating.

 

STRUCTURAL SHIFT

Consumers are turning on to buying luxury online, giving Farfetch some protection against wobbles in the broader market

But it also helps that sales of everything from Gucci handbags to Balenciaga trainers have been on fire recently. Much of the surge has come from China. Farfetch is building its business there through a partnership with JD.com, which is also an investor.

While other regions may be more important to the company right now, it can’t escape how changes in Chinese shopping habits can affect industry sentiment. Investors are rightly concerned that trade tensions between the U.S. and China will stifle demand for upmarket names, and they’ve already voted: A Bloomberg Intelligence index of luxury companies is down 9 percent since mid-June.

 

WAR WORRIES

Concerns about trade tensions between the U.S. and China have weighed on luxury valuations.

So far, Kering, Hermes International and LVMH have been reporting stellar sales. But if the Chinese shopper stumbles, or a stronger dollar continues to weigh on emerging markets, that could change. Some strain is surely due anyway, since over the remainder of this year companies may struggle to publish earnings that can top 2017’s strong sales growth.

And Farfetch would feel this sting much more keenly. Although the company looks like a capital-light weight to tap into the online fashion market, because the majority of its business does not buy any stock, it still requires significant investment to stay at the cutting edge. That pressure to spend will continue even if the broader luxury market cools down, and Farfetch could easily start to look stretched.

With Farfetch’s mooted valuation already looking farfetched, the online retailer is wise to try to come to market before the cracks in luxury retail start to show.