FIGS, Inc. (NYSE:FIGS) Q1 2023 Earnings Call Transcript

FIGS, Inc. (NYSE:FIGS) Q1 2023 Earnings Call Transcript May 5, 2023

Operator: Good afternoon, and thank you for joining the FIGS’ First Quarter Fiscal 2023 Earnings Call. My name is Kate, and I will be the moderator for today’s call. [Operator Instructions] I would now like to pass the call over to our host, Jean Fontana, Head of Investor Relations at FIGS. You may proceed.

Jean Fontana: Good afternoon. Thank you for joining today’s call to discuss FIGS’ first quarter 2023 results, which we released this afternoon, can be found in our earnings press release and in the stockholder slide deck on our Investor Relations website at ir.wearfigs.com. Presenting on today’s call are Trina Spear, our Co-Founder and Chief Executive Officer; Daniella Turenshine, our Chief Financial Officer. As a reminder, remarks on this call that do not concern past events are forward-looking statements. We may see predictions, expectations or estimates, including about future financial performance, market opportunity or business plans. Forward-looking statements involve risks and uncertainties and actual results could differ materially.

These and other risks are discussed in our SEC filings, including in the 10-Q we filed today, which we encourage you to review. Do not place undue reliance on forward-looking statements, which speak only as of today which we undertake no obligation to update. Finally, we will discuss certain non-GAAP metrics and key performance indicators, which we believe are useful supplemental measures for understanding our business. That submission or reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in the cycle of slide deck issued today. Now, I would like to turn the call over to Trina Spear, Chief Executive Officer of FIGS.

Trina Spear: Thank you, and good afternoon, everyone. We are pleased that exceeded our first quarter expectations across key financial metrics. We delivered profitable growth through disciplined execution of our strategy that are on track to achieve meaningfully improved inventory levels by year-end. While the macro environment remains uncertain, FIGS is an iconic brand and I believe that we will advance our leadership position in the healthcare apparel industry while expanding our TAM. Touching on the financial highlights from our first quarter. Net revenues grew 9% to $120 million as compared to the first quarter last year. We delivered gross margin of 71.3% and adjusted EBITDA margin of 13.4%, all of which were above expectations.

Our growth was fueled by a 22% increase in active customers driven by strong customer loyalty as reflected in record reactivation rates during the quarter as well as new customers. LTM revenue per customer was down 4% to $216, due in part to a nearly 2% decline in AOV and lower frequency versus last year. While these metrics were down year-over-year, they were ahead of our expectations. Once macro pressures subside and as we continue to advance our initiatives, we believe these metrics will improve. International continued to deliver strong performance with revenue growth of 45%, driven by expanding brand awareness and engagement across our global market. I want to thank our team for their unwavering commitment to serving healthcare professionals each and every day.

I also want to thank our awesome humans for their loyalty as we continue to support them through our solutions-based product innovation, as well as through our efforts around advocacy and giving back. Since our call at the end of February, we’ve continued to build out the layering system with proprietary non-scrubs products engineered to work with our best-selling scrubs. Our recently launched ContourKnit Jacket exemplifies how we transform customer feedback into innovative products with distinct features that address the specific needs of healthcare professionals. Our ContourKnit Jacket has been one of the best-performing outerwear pieces in our history. As we continue to see notable strength in our extended size offering launched in December, we are encouraged by both new customer acquisition and the positive feedback we are receiving on our extended sizes offering.

The work we have done around fit showcases our commitment to serving all healthcare professionals, and we will continue to roll out extended sizes across our assortment throughout the year. Looking at our marketing initiatives. In celebration of our 10-year anniversary, we launched our FIGS10: The Iconic Series campaign, giving our healthcare professionals a chance over 10 weeks to grab their favorite injection colors by bringing back our most popular ones of all time. Loyal healthcare professionals jumped at the opportunity to purchase these iconic colors, while those new to FIGS were able to experience them for the first time. This event is a great example of how we create excitement and move through inventory while maintaining discipline around our discount rate.

Although our recent color launches have not generated the same level of demand that we saw during the height of the pandemic, they remain one of the most effective drivers of customer traffic and excitement. For International Women’s Day, we celebrated Dr. Sarah Kilpatrick, Chair of Obstetrics and Gynecology at Cedars-Sinai Hospital. She has done incredible work in women’s medicine and co-founded CREWHS, the Center for Research in Women’s Health and Sex Differences. As a female founder in that organization, we are proud to celebrate Dr. Kilpatrick’s achievement and especially proud to have donated $250,000 toward CREWHS’ medical research. Our commitment to this community has fostered an enduring brand strength and remains a key differentiator.

Data continues to illustrate that this garners industry-leading customer loyalty. In a recent third-party brand survey, FIGS ranked highest on brand sentiment and across several attributes, including quality, comfort, functionality, and style. We also experienced the highest purchasing intent from respondents. This aligns with prior [indiscernible] data indicating that the percentage of customers who repurchased FIGS within one quarter of their initial purchase is two to three times higher than for other scrubs companies. Our goal is to continue to deliver the product and experience that widens the moat and furthers our lead versus everyone else. To that end, I’d like to provide an update on our growth strategy. As you know, we are laser-focused on innovation.

Over the last few years, we built our layering system of scrubs and non-scrubs with purposeful functionality and comfort in every product while combining this with our unique, cool, and playful DNA. We keep our healthcare professionals engaged with our brand with constant innovation, which is informed by our data and customer feedback. Our recently launched Uman Relaxed Jogger was designed based on feedback from our customers requesting a raised waistband. We are seeing strong early results and awesome feedback across social media. Our FREEx fabric featuring anti-static lightweight water-repellent attributes is another example of innovation resulting from customer requests for lighter-weight alternatives. We will continue to build our solutions-based offerings utilizing this fabrication, which is made almost entirely from recycled and upcycled materials.

Our FIGSPRO office-ready collection addresses the demand gap left by traditional apparel companies that don’t meet the specific needs of healthcare professionals. We plan to add several new silhouettes and fabrics to our FIGSPRO line, which is yet another example of how we’re expanding our TAM. Innovation like FREEx and FIGSPRO represent completely new categories from which we’re able to learn and iterate to build out these collections. While we continue to expect our core scrubs to represent a high percentage of our overall sales, we are excited about the potential to drive significantly higher net revenue for active customers by addressing a greater portion of healthcare professional needs with expanded offerings. Importantly, our ability to drive revenue in non-scrubs illustrates that healthcare professionals have entrusted us to address their lifestyle needs beyond their scrubs.

Next, I will speak to our marketing strategy. Across our communication channels, we are being more intentional in our storytelling to emphasize our product attributes. We create brand moments that showcase our leadership and product innovation and our relentless support of the healthcare community. Without a doubt [ph], the first campaign highlights our product attributes. This theme was introduced for our launch of the ContourKnit Jacket and will align with future product launches throughout the year. Our stream of product innovation creates a flywheel effect in our business work now. As our loyal healthcare professionals go to work each day wearing the latest FIGS, they generate new customers, and as our base gets bigger, we expect this flywheel effect to multiply.

This is how we have maintained efficiency in marketing spend that enables us to invest in new ways to reach our communities. We’re also delivering a more consistent cadence of marketing communication around product education. It keeps us top of mind among the healthcare community. This evergreen marketing approach is showing early success in driving stronger traffic on non-launch days, which is enabling us to maintain a highly efficient marketing spend. Our ambassador program remains an important driver of this organic growth. We’ve employed a more localized strategy to better leverage our growing network of influential ambassadors by hosting frequent events across North America. For the second quarter, these events will include our Nurses Week event in Seattle, Meet FIGS in Toronto, and Pride Day in San Francisco.

Turning to personalization, we are encouraged by the signs we are seeing as our database has grown and we have expanded our product offerings. We’re building on our personalization strategies, and we’re effectively tailoring our communication to every single healthcare professional based on their individual needs and wants. Lastly, we’re driving the revenue in our early stage business. Internationally, we’re already seeing the benefits of localization strategies, and we’re rolling out translations for certain non-English speaking countries starting this month. We continue to build upon our early learnings, as well as grow our local ambassador networks within each market. Importantly, we’re maintaining our investment discipline as we build our presence across regions.

With almost 120 million healthcare professionals outside of the United States, we are extremely energized by the opportunity in front of us. Within Teams, we remain on track to launch an updated version of our technology platform as we look to elevate our customer experience and expand our available assortment. Today, this is a small portion of our revenue, and we’re making sure we maintain a methodical approach to grow this business over time. We believe this is a significant opportunity that we barely have in queue. Turning to retail. We are on track to open our first store this fall. We believe that our retail stores will provide a great opportunity for healthcare professionals to connect and experience our products and to engage with each other through our community hubs.

Operationally, we are committed to making investments that will support long-term profitable growth. We are making progress on our fulfillment enhancement project, which we expect to drive greater flexibility, reliability, and speed to market across our distribution channel. Daniella will provide an update on the project details shortly. We are also continuously working to diversify our supply chain with the best-in-class manufacturers. We’ve always prided ourselves on the strength of our supply chain, and we’re excited to build next-level capability as we work with amazing partners that help us bring our vision to life. In closing, we continue to expect growth in 2023 to be moderated by a challenging and uncertain macro environment. While we continue to see that the healthcare industry has greater resilience than other industries, our healthcare professionals are not immune to inflation.

We continue to focus on building strong loyalty and connections with our customers. So, when these macro headwinds subside in the future, we’re well-positioned to deliver accelerated growth. In the meantime, we’re managing our business prudently, enabling us to deliver continued profitability. Overall, we plan to continue to disrupt the landscape of the healthcare apparel industry and expand our TAM by helping healthcare professionals do their jobs better and look and feel great on-shift, off-shift, head to toe. We see tremendous opportunity globally and believe that our product innovation, combined with the power of our brand, will fuel further market share gains. We have scale, profitability, and a strong balance sheet with no debt. We expect to generate free cash flow to support our sustainable long-term profitable growth for years to come.

With that, I’ll turn the call over to Daniella.

Daniella Turenshine: Good afternoon, everyone. We are pleased to deliver better-than-expected results for the first quarter with strong flow-through of top-line outperformance. We are making progress against our initiatives while exercising discipline around expense management, and we expect to deliver positive free cash flow for the remainder of the year. I’ll begin with a review of our first-quarter financial results, followed by our outlook. Beginning with first quarter net revenues, we grew 9.2% to $120.2 million compared to $110.1 million in Q1 last year, reflecting an increase in orders, partially offset by modestly lower AOV. While frequency trends and AOV were down year-over-year, they were better than expected. Growth in active customers remains robust, increasing 22% as we welcome new healthcare professionals to the FIGS brand globally.

In addition, we continue to see more of our customers who have not purchased within the last year come back to the brand after month 12. Turning to AOV, we saw a decline of 1.7% to $114. This compares to $116 in Q1 2022, which benefited from an elevated mix of non-scrubber associated with one of the largest shoe product [ph] launches, as well as supply chain disruptions causing out-of-stocks in our core scrubs products. In addition, a higher mix of sales were derived from promotions, again, in line with our expectations given the macro environment. Gross margin for Q1 was above our expectations at 71.3% compared to 71.2% in Q1 2022. The 10 basis point increase compared to Q1 last year was primarily due to lower airfreight utilization, partially offset by the higher mix of promotions and higher duties.

Moving to operating expenses. Selling expense for Q1 was $31.2 million, representing 25.9% of net revenues compared to 20% in Q1 2022. This 590 basis point increase was largely due to higher costs within fulfillment, including a 290 basis point impact from incremental warehouse storage and associated labor necessary to help inventory be pulled forward. To a lesser degree, the increase in selling expense reflects duty subsidies that we put in place in the third quarter of last year for international sales. Marketing expense for Q1 was $17.1 million, representing 14.2% of net revenues compared to 14% in Q1 2022. Our marketing initiatives enabled us to maintain a healthy return on ad spend while driving strong new customer acquisition. G&A expense for Q1 was $34.2 million, representing 28.4% of net revenues compared to 24.7% in Q1 2022.

The increase was due to the change in accrual methodology we discussed in our Q3 2022 call related to charitable donations, an increase in stock-based compensation, an increase in professional fees including public company costs such as those associated with the implementation of Sarbanes-Oxley 404. Our net income was $1.9 million or $0.01 in diluted EPS for the first quarter. Adjusted net income was $2.5 million, and adjusted diluted EPS was $0.01 in Q1. This compares to adjusted net income and adjusted diluted EPS of $10.5 million and $0.05 per share in Q1 2022, respectively. Finally, our adjusted EBITDA for Q1 was $16.1 million for an adjusted EBITDA margin of 13.4% and compared to 22.7% in Q1 2022. Turning to our balance sheet. We maintained a strong cash position, finishing the quarter with $156 million in cash and cash equivalents.

Inventory totaled $180 million at the end of the first quarter. As we stated on our last call, we expected inventory to peak in Q1 and declined sequentially through the remainder of 2023. Looking at inventory on hand, approximately 55% is comprised of always in stock, seasonless core styles and classic colors and therefore, doesn’t have significant obsolescence risk. An additional 20% of our inventory balance is an upcoming styles and colors. We are making good progress toward getting inventory to 25 weeks of supply by year-end while maintaining discipline around promotional activity to protect the long-term health of our brand. Moving to our outlook. Consistent with the factors we discussed last quarter, our guidance assumptions incorporate a challenging macro environment through the remainder of 2023.

We expect these headwinds to continue to impact frequency trends and result in a higher mix of promotional sales. As we manage through these temporary headwinds, we remain profitable, and we’ll continue to make investments in our business to drive healthy long-term growth. For the second quarter, we expect net revenue growth to be between 8% and 10%. We expect future gross margin to be slightly below 68% due to a higher mix of promotional sales associated with our Annual Nurses Week Event and product mix related to new launches. We expect these headwinds to be partially offset by lower airfreight utilization year-over-year. Looking at operating expenses. Due to higher labor utilization than we previously anticipated, we now expect the warehouse storage fees and associated costs to impact selling expense by approximately 220 basis points in the second quarter.

For G&A, we continue to expect to leverage year-over-year due to an increase in stock-based compensation and personnel-related costs. As a result of these factors, we expect second quarter adjusted EBITDA margin to be between 9% and 10%. For the full year, we expect net revenues to increase between 5.5% and 7.5%. As we look at the second half of the year, we expect tougher compares for two reasons. First, we are anticipating a difficult macro environment; and second, we will be lapping the very strong new customer adds last year. We expect Q3 to be the most challenged in terms of year-over-year net revenue growth due to the shift in timing of our product launch and marketing calendars. We now expect gross margin for the year to be closer to 69% as we pass through the better-than-expected Q1 results.

We expect gross margin to improve sequentially in the back half due to timing of promotional calendars and product launches. Turning to selling expense. As it relates to our fulfillment project, we are providing an update on the timing of this initiative. The estimated cost associated succeeded with the implementation and execution of this project remain between $16 million and $18 million. However, we now expect to incur the bulk of these costs in 2024. Associated with this timing shift, we plan to extend the use of storage facilities through the end of 2023. As a result, we now expect selling expense pressure from excess storage and associated costs in addition to initial fulfillment costs combined to be approximately 250 basis points for the full year 2023 versus our previous expectation of 300 basis points.

G&A is still expected to deleverage for the full year, in part due to investments associated with growing our international and Teams businesses, product innovation, and an increase in stock-based compensation, as well as our accrual for future inventory donations. As a reminder, our G&A for Q3 last year reflected a 190-basis-point benefit due to a change in our accrual methodologies for charitable donations. As a result of these factors and based on our Q1 outperformance, we now expect adjusted EBITDA margin for the full year of 2023 to be between 12% and 13%. We expect capital expenditures of between $24 million and $26 million for the full year of 2023. This reflects approximately $20 million for the fulfillment project with the remainder being related to software investments at our retail store build-out.

We remain a clear leader in healthcare apparel with significant growth opportunities in front of us. Our strong balance sheet and ability to generate healthy free cash flow positions us well to invest in our future growth. Near term, we remain focused on managing our business prudently through macro and cost headwinds. We believe we have a line of sight to return to high-teens-plus EBITDA margin as we move past some transitory costs, fulfillment investments, and as we rightsize our inventory. With that, I will turn it over to the operator to kick off our Q&A session. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question will be from the line of Ed Yruma with Piper Sandler. Your line is now open.

Operator: Thank you. Our next question will be from the line of Alice Xiao with Bank of America. Your line is now open.

Operator: Thank you. Our next question will be from the line of John Kernan with TD Cowen. Your line is now open.

Operator: Thank you. Our next question will be from the line of Brooke Roach with Goldman Sachs. Your line is now open.

Operator: Thank you. Our next question will be from the line of Matt Koranda with ROTH/MKM. Your line is now open.

Operator: Thank you. Our next question will be from the line of Bob Drbul with Guggenheim. Your line is now open.

Operator: Thank you. Our next question will be from the line of Dana Telsey with Telsey Advisory Group. Your line is now open.

Operator: Thank you. Our next question will be from the line of Rick Patel with Raymond James. Your line is now open.

Operator: Thank you. Our next question will be from the line of Brian Nagel with Oppenheimer. Your line is now open.

Operator: Thank you. Our next question will be from the line of Noah Zatzkin with KeyBanc Capital Markets. Your line is now open.

Operator: Thank you. Our next question will be from the line of Adrienne Yih with Barclays. Your line is now open.

Operator: Thank you. There are currently no additional questions registered in the queue at this time. So, I will now pass the call to Trina for closing remarks.

Trina Spear: Thank you so much. Thank you all for joining us. We look forward to updating you on our next call and hope you have a great night.

Operator: That concludes the FIGS First Quarter Fiscal 2023 earnings call. Thank you for your participation. You may now disconnect your lines.