The image we received from reviewing FF’s financial statements and official declarations over the year is that of a rapidly-growing multinational fashion company led by double-digit growth in its key segment: Asia. Unfortunately, following an extensive investigative and due diligence work we find it impossible to reconcile that picture with our findings on the ground, which point to an unprofitable, struggling company with materially smaller, and rapidly decreasing revenue, network size and cash balances. The core of the issues seem to be concentrated in FF’s Asian and, particularly, Chinese subsidiaries. Our conclusions are well substantiated by the following points that will be reviewed in depth in this report:
A. The network of points of sale (POS) appears materially smaller than expected: We performed an extensive due diligence and checked each individual POS, often in multiples ways: contrary to the 630 POS mentioned in the 2016 annual report for the FF brand, we found evidence of only 289 operating POS. The majority of the remaining POS appear to have ceased operations.
B. Onsite checks: we personally visited several FF POS in key strategic locations (e.g. New York City and Tokyo, Japan) and can confirm that many critical assets that the company, still listed on its website (e.g. FF Soho or FF Madison Avenue shops), are indeed closed. We also noticed how a number of POS, including in key locations, appear to be of negligible size (often just a small window) and in the process of liquidation.
C. Digital presence: we ran an audit on FF presence online, checking website traffic and popularity on social media and benchmarking it against FF competitors. Our findings suggest that FF digital presence, especially in Asia, may be indicative of a far smaller company.
D. Financial analysis: FF official figures indicate growing revenue and profit, but constantly negative free cash flow, the bulk of which is explained by large and increasing working capital in its Asian subsidiaries. The amount of receivables and inventory of FF Asian subsidiaries seems clearly disproportionate if compared to its peers.
E. Chinese subsidiaries: FF claims $1bn of revenue originating in Asia, of which China has presumably the lion’s share (70% of the Asian network would be located there). Surprisingly, we found that the only two mainland Chinese subsidiaries of FF, Fu Li Fu Lei and Binlianyun, generate only some $40m of revenue and together count only some 50 POS.
F. Concerns about auditors: after auditing their accounts for several years through Baker Tilly, a 2nd or 3rd-tier accounting firm, FF recently switched to “Ecovis” a relatively unknown firm. Moreover, the auditors of the entity consolidating FF sales in Asia, totaling approximately $1bn, appear to be an obscure firm with a staff of only two people. According to senior Chinese auditors from Big Four firms, this firm may well be inadequate for an audit of this scope ($1bn of sales; hundreds of POS in multiple countries).
Due Diligence on Chinese Points of Sale:
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