FIGS, Inc. (NYSE:FIGS) Q1 2024 Earnings Call Transcript

FIGS, Inc. (NYSE:FIGS) Q1 2024 Earnings Call Transcript May 9, 2024

FIGS, Inc. beats earnings expectations. Reported EPS is $0.00794, expectations were $-0.01. FIGS isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. Thank you for attending today’s FIGS First Quarter 2024 Earnings Conference Call. My name is Jaylin. I’ll be your moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. I’d now like to turn the conference over to our host, Jean Fontana. Please go ahead.

Jean Fontana : Good afternoon and thank you for joining today’s call to discuss FIGS First Quarter 2024 Results, which we released this afternoon and can be found in our earnings press release and in the stockholder presentation posted on our investor relations website at ir.wearfigs.com. Presenting on today’s call are Trina Spear, our Co-Founder and Chief Executive Officer, and Kevin Fosty, our Interim Chief Financial Officer. As a reminder, remarks on this call that do not concern past events are forward-looking statements, these may include 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 and 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. Definitions and reconciliations to these non-GAAP measures to their most comparable GAAP measures are included in the stockholder presentation we issued today. Now I would like to turn the call over to Trina Spear, Chief Executive Officer of FIGS.

Trina Spear : Thank you, Jean. We were pleased with our first quarter results. Net revenues came in at the upper end of our expected range at down less than 1% and the adjusted EBITDA margin of 10.9% exceeded our expectations. We were especially excited to see improved momentum in our business beginning in mid-March and into the second quarter. Over the last two quarters, we discussed factors that we believed were impacting our performance, and we made changes in response to these challenges. We got back to our roots in delivering incredible product innovation coupled with impactful storytelling centered around the healthcare community. And we are seeing these actions begin to pay off. As we have said in the past, healthcare professionals need their uniforms to perform at their jobs and need to regularly replenish these products.

The highly attractive fundamentals of our business are in large part due to the repeat frequency dynamics of healthcare apparel. We are seeing these frequency trends begin to stabilize and we plan to build on this momentum. Reflecting on the business, we are delivering strong performance across our growth strategies, starting with product. We raised the bar on innovation. Over the last two years, we’ve bolstered our product team, further building out our design and technical development talent. We’ve also bolstered our supply chain with best-in-class manufacturing partners. The results of these investments are beginning to bear fruit. In the first quarter, we saw strong engagement generated by new products, including our On-Shift Sherpa Bomber Jacket, Seville ScrubLegging, and Isabel Wide Leg Scrub Pants.

Notably, these launches also created demand for our core assortment. This is just the beginning. We plan to offer a steady stream of true Pinnacle products, including new fabrications and categories that will push the limits of anything health care professionals have ever seen before. We believe this innovation will bring unprecedented functionality, fit, comfort, design with greater velocity. The halo from these Pinnacle products is also driving demand for our core styles. As part of our amplified innovation strategy, we have made the decision to accelerate the timeline of our initiative to improve fit consistency across our assortment. We began to introduce our new [fit blocks] (ph) in April and now expect to complete the rollout by October, 2024.

Our new product innovation will be fused with marketing campaigns rooted in true storytelling, centered on the Awesome Humans that make up our community. In April, as part of our extreme series, we launched our CALL OF THE WILD campaign featuring Dr. Chloe, a veterinarian who operates on the front line of wildlife conservation. The product capsule featured our indestructible scrub overall and scrub jumpsuit, each of which quickly sold out. The collection was made in a new fabrication that’s tough on the outside and soft on the inside, providing extra durability, stretch, moisture wicking, and water resistance. The product launch was amplified by a meticulously executed campaign that celebrated this extraordinary work. The campaign which we filmed in South Africa, captured the hearts and the minds of our community, drawing 9 million impressions among a wide range of healthcare professionals who were in awe of Dr. Chloe’s mission.

This past Sunday, the kickoff Nurses Week, we hosted a celebratory event in New York City with over 100 Awesome Humans. On Monday, we brought 13 nurses from across the country to ring the opening bell at the New York Stock Exchange in recognition of Nurses Week. We also kicked off our annual I am a Nurse campaign which celebrates our incredible nursing community. The momentum we have seen in our recent launches, illustrates the opportunity we have to truly lead with brand storytelling. At FIGS we obsess over customer journeys and look at the full marketing funnel to meet our community members where they are. We have an amazing community and we provide the platform for them to share their stories. Awesome Humans storytelling is not new for us, it’s in our DNA.

And as we look ahead, we have a huge opportunity to deliver more tentful, brand-defining campaigns and to put more investment behind top of the funnel initiatives. In parallel, we will continue to focus on the unique needs and interests of healthcare professionals, and effectively move customers through a full journey, driving not only awareness, but also consideration and conversion, ensuring that each marketing touch point builds on the [last] (ph). This approach will lead to greater brand engagement among new, lapsed and existing customers and fuel growth and profitability. Based on our recent strong momentum, we’re further leaning in and taking bigger and bolder steps to grow our community globally across channels. This means we’re strategically ramping investments primarily around brand marketing and responses encouraging trends we’re seeing in the US market, strong momentum in our international business, and a growing network of institutions joining our team’s platform.

International net revenues grew 29% in the first quarter compared to last year. We’re reflecting the reclassification of duty subsidies which negatively impacted net revenue growth by a 11 percentage points. We continue to gain traction across the countries we serve and plan to identify new markets where we believe FIGS can become the leader in healthcare apparel. Similar to the building blocks of our success in the US, our global marketing strategy focuses on all funnel storytelling with investments in our ambassador program, digital marketing, and localized e-commerce experiences. Turning to TEAMS. We made investments in building foundational ordering experiences for two of our largest teams customers with the development of the AYA gifting platform and the [veg-typing] (ph) experience.

Looking ahead, we’re eager to evolve and amplify these and other ordering platforms with the support of an outbound sales team and digital marketing effort in order to serve more TEAMS in more ways. Finally, with respect to retail, we’re incredibly excited by the prospect of being able to serve more healthcare professionals and look forward to the opening of our Philadelphia location. We acknowledge that we’re early in our retail journey and we’re learning more each day. We remain committed to our test, learn, apply, and win approach with locations and formats, and do not currently plan to meaningfully accelerate new hub openings until we can achieve key proof points. Operationally, we’re on track with our fulfillment center transition designed to support greater scale, increase flexibility and reliability, and deliver greater efficiency.

In addition, the foundational work behind this facility will help us to expand and scale our distribution network globally. This will not only support our growth, but enable us to deliver a superior customer experience across geographies. Importantly, we remain committed to delivering incredible brand cultural moments supporting the healthcare community by highlighting the work that they do and by giving back. In January, we opened the FIGS Operating Theater in Ukwala, Kenya, a state-of-the-art facility that is the first of its kind in the region. It’s now creating sustainable change for people in this community who previously had to drive hours to receive surgical care. As we look to the remainder of 2024, we believe we’re on the right path to reignite the excitement and word of mouth dynamics that propelled us to a leadership position in the industry.

We’re seeing the trends move in a positive direction, and we’re strategically investing in that momentum while remaining disciplined and controlling our expenses. The long-term growth outlook of the healthcare industry and favorable replenishment dynamics, coupled with our strong debt-free balance sheet and robust cash flow generation, provide a solid foundation to execute and invest in our growth plan. As the distant leader in healthcare apparel, we recognize the urgent need to serve healthcare professionals and we are at the forefront of this effort. Now I will pass it over to Kevin Fosty to discuss our financial results and provide an update on our outlook.

Kevin Fosty : Thank you, Trina. For the first quarter, net revenues came in at the upper end of our guidance range while adjusted EBITDA margin exceeded our expectations, yielding strong free cash flow generation. We were also encouraged to see improving trends particularly around repeat frequency indicating that our product and marketing strategies are gaining traction. With a steadfast commitment to serving the healthcare community, we are highly optimistic about our ability to drive accelerated growth into the future. While margins are expected to be impacted in the short-term, we are confident that these investments will not only drive higher net revenues growth in the future, but also stronger and more sustainable profitability.

I will begin my discussion with a detailed review of our first quarter results, followed by an update on our financial outlook. Starting with our first quarter results. Net revenues decreased 0.8% to $119.3 million as compared to Q1 last year. Net revenues reflect $1.4 million in contra revenue associated with duty subsidies paid for international customers. As a reminder, duty subsidies were recorded as selling expense in last year’s first quarter. Active customers for the trailing 12-month period increased 8.6% compared to the same period last year. Average order value increased 1.8% to $116 in the first quarter reflecting higher AUR due to product mix and higher UPTs. Net revenues per active customer on a trailing 12-month basis decreased 2.8% to $210 versus the same period last year.

These metrics reflect the aforementioned international duty subsidies which negatively impacted both AOV and net revenues per active customer growth by approximately 1 percentage point each. Looking at product categories, non-scrubs grew 9% reaching 20.5% of net revenues. Gross margin for Q1 was 68.9% compared to 71.3% in Q1 of 2023. The decline in gross margin rate was primarily due to product mix shift. Selling expense for Q1 was $28.5 million representing 23.9% of net revenues compared to 25.9% in Q1 2023. The decrease in selling expense as a percentage of net revenues primarily reflects duty subsidies that were recorded in selling expense last year and are now reflected in net revenues as contra revenue. These costs were partially offset by startup costs associated with the transition of our fulfillment center to a new facility.

As Trina mentioned, the new facility will enable greater efficiencies and set the foundation to expand our distribution network. Please note, transitory costs related to the fulfillment enhancement project came in below our expectations, in part due to a timing shift into the second quarter and in part due to lower than expected startup costs. Marketing expense for Q1 was $17.2 million, representing 14.5% of net revenues compared to 14.2% in Q1 2023. The increase in marketing expense as a percentage of sales was largely due to an increased mix in international marketing spend. G&A for Q1 was $36 million, representing 30.2% of net revenues compared to 28.4% in Q1 2023. The increase in G&A as a percentage of sales was largely due to the continued investments in people.

This was partially offset by a decrease in legal fees, lower accrual for charitable donations, and reduced professional fees versus last year. Taking this to the bottom line, first quarter net income was $1.4 million or diluted EPS of $0.01. First quarter 2023 net income was $1.9 million or $0.01 in diluted EPS. Adjusted EBITDA for Q1 was $13 million with an adjusted EBITDA margin of 10.9% compared to 13.4% in Q1 2023. Touching on our balance sheet, we finished the first quarter with cash and cash equivalents and short-term investments $259.2 million. Inventory declined 28% to $130.5 million versus Q1 last year as we continue to make progress in bringing our inventory back to normalized levels. Overall, we are very comfortable with the composition of our inventory.

Capital expenditures for the first quarter totaled $4.5 million. This is largely associated with the fulfillment transition project. And finally, we delivered strong free cash flow of $11.1 million in the first quarter. Turning to our outlook. Based on recent performance and the positive impact from our brand initiatives we have in place, we are raising our full-year net revenues outlook to negative 2% to positive 2% as compared to 2023 and versus prior guidance of down 5% to flat. As a reminder, we expect Q3 to be the toughest year-over-year comparison in terms of net revenues growth, primarily due to the anniversary of last year’s highly successful sample sale in September. Our gross margin outlook for the year is unchanged and expected to be in-line with our 2023 gross margin rate.

We are committed to enhancing product innovation through new fabrications, advanced features, and designs tailored to meet the needs of healthcare professionals with premium products at exceptional value, which may impact gross margin rate in the short-term, but we are confident that we will drive higher margin long term. First, as we expand and diversify our fabrications and product categories, we anticipate realizing economies of scale over time, subsequently mirroring the margin trajectory delivered by our core scrub ware and FIONx lines over the years. And second, we expect new innovation to also drive our higher margin core business. Also note that we expect the duty drawback benefit anticipated for later this year to offset some of the headwind from new product innovation.

Turning to selling expense. Total transitory costs associated with our fulfillment enhancement project are now estimated to be approximately $13 million, slightly below our previous expectation of $14 million. We expect to realize the bulk of these transitory expenses in the second quarter. Note that a portion of fulfillment costs that we assume would fall in the first quarter shifted to the second quarter. We anticipate the transition to be largely complete by the end of the third quarter. With respect to marketing spend, we plan to increase our investment as a percentage of net revenues as we build on our momentum. The majority of the higher investment will be incurred in the third quarter coinciding with a large-scale brand campaign. With respect to G&A, we plan to maintain investments in key areas of our business, particularly in talent, while carefully managing expenses to identify savings opportunities.

As a result of these factors adjusted EBITDA margin for full year 2024 is now expected to be between 9.5% and 10.5%. This reflects approximately 220 basis points of cost headwind from the transitory portion of our fulfillment project. Turning to our second quarter 2024 outlook, we expect net revenues growth of between 3% and 4%. We expect gross margin to be down versus Q2 last year, largely due to a product mix shift. Importantly, while there may be fluctuations in the short term, we aim to maintain a healthy margin rate while also making the right investments in our long-term growth. Looking at operating expenses. For selling expense, we expect deleverage of approximately 330 basis points, which takes into account higher transitory and ongoing fulfillment costs.

As a result, we expect second quarter adjusted EBITDA margin to be approximately 8.5%. Our capital expenditure’s expectation for 2024 continues to be between $18 million and $19 million, including $13 million to $14 million in fulfillment enhancement related costs. In closing, we’re delighted to see the positive trends in our business. Moving forward, we’ll continue to capitalize on our robust balance sheet and cashflow dynamics to strategically invest in our future growth. With that, I will turn it over to the operator to kick off our Q&A session. Operator.

See also 15 Best States to Retire in The US Financially and 20 Things People Waste the Most Money On.

Q&A Session

Operator: We will now begin our question-and-answer session. [Operator Instructions] Our first question comes from Brian Nagel with the company Oppenheimer. Brian, your line is now open.

Brian Nagel: Hi. Good afternoon. First off, congratulations on the pick-up in your business lately. The first question I want to ask — the first question I want to ask, just with regard to the, I guess the adjustments to the guidance and then the discussion around the investments there. So the question is, the way I want to ask it is, as we think about — you’re taking revenue guidance up, EBITDA margin guidance down. So are these incremental investments, are you looking at them more as a kind of a shorter-term dynamic to capitalize upon this improving trend, or is this something that’s going to basically change the cost of doing business for FIGS over a longer period of time?

Trina Spear: Sure. Thanks, Brian. So I think as you know, the fundamentals of our business have always been highly attractive. At the center of that is the metric of repeat frequency. By the nature of what we sell, uniforms and who we sell to healthcare professionals, we naturally benefit from frequent replenishment. And so we saw in the second half of March going into Q2, we saw these trends improve. And we really are attributing that to strong engagement around our product launches combined with the marketing campaigns that we’ve put out that have all been centered around the healthcare community. And so, that is where we’re seeing the dynamic shift and why we’re increasing our revenue guidance for the year. We are being prudent, given it’s still early days.

And we’re seeing this dynamic working between product and marketing coming together. We are investing behind that and that is where you see the EBITDA guidance. We are bringing that down and that can be almost fully attributed to this increase in brand marketing spend that very much is a short-term dynamic as we continue to invest in what’s working, as we continue to scale and build the business to a billion dollars and beyond.

Brian Nagel: Got it. That was helpful, Trina. The second question I have just on the gross margin, So I guess gross margin [in fact] (ph) a little bit weaker than the forecast out there. You would guide it to be down, but you talked about the product mix shift. Is that a — was that a shorter-term dynamic too, or is that something we should expect to persist?

Trina Spear: So as we shift into building out our categories, building out fabrication in addition to raising the [bar-in] (ph) quality as it relates to our features and trends, there may be some higher product costing associated with that. But it’s really a short-term dynamic because as you’ve seen with FIONx with our core scrub ware over the years, we get economies of scale over time. And so we look to see that in our new innovation. We look to see a similar margin curve over time that we saw with core scrub ware. And so it’s all about balancing and gaining leverage from that core to invest in the future of the business, invest in innovation. And so you know the gross margin this year and beyond that’s kind of how we think about it.

Brian Nagel: Got it. Appreciate it. Thank you.

Operator: Thank you. Our next question comes from Rick Patel with the company Raymond James. Rick, your line is now open.

Rick Patel: Thanks. Good afternoon, and well done on the new innovation here. I’m hoping you can provide some additional color on the shape of revenue growth that you gave. So can you help us with the building blocks for how that growth is achieved as we think about growth in active customers versus frequency and AOV?

Trina Spear: Sure. So as you’ve seen we’ve had a number of gains from — let’s start with AOV. AOV was $94 in 2019. We finished this last quarter at $116. That’s a function of both AUR and UPT. So AUR is driven by really building out our layering system. You’re seeing footwear, outerwear, FIGSPRO all have higher retail MSRP, and so that’s driving AOV growth as well as UPT. And just to add to this, I think it’s really important to note that the innovation is a key piece to this. Our limited edition scrub ware has doubled in the past year. And our non-scrub ware was 18.6% of the business last year, it’s 20.5% as of this past quarter. And so really seeing innovation, really seeing this diversification across category to move beyond an e-com scrubs business.

We’re diversifying by category, by fabrication, diversifying by channel and geography. And all of that is really important as we aim to be an iconic brand over the next hundred years. As it relates to the guide, there’ll be a modest increase from an active customer perspective and it actually assumes repeat is down. And so we are being prudent as we’re seeing some gains there.

Rick Patel: Great. And can you also talk about the potential to chase demand for the innovation that is working? I know, inventory is down 28%, and it’s where you want it to be overall. But do you have the right inventory to meet the demand for the newer products that you’ve launched?

Trina Spear: Yeah, we feel really good about our inventory balance. As you know, we have made incredible strides over the last year down 28% year-over-year, and it will continue to decline on a year-over-year basis every quarter through the end of the year. And we do feel like we have the right inventory across our core, across our limited edition styles, across our pinnacle pieces that have come in. And it’s been, I don’t know if you saw our indestructible capsule launch. It’s [killer] (ph). So really exciting things to come. And I think that — but we’re nimble, Right? And so we’ve seen a number of key launches in the first quarter, our Sherpa Bomber, our Scrub Legging, our Wide Leg Pants. And there’s a number of pieces I can’t say right now, because if our health care professionals are listening, we’ll get too excited. But we’re chasing, we’re nimble, we’re adjusting as we see that demand, we’re adjusting as we see that excitement.

Rick Patel: Appreciate the details, thank you.

Trina Spear: Thank you.

Operator: Thank you. Our next question comes from Lorraine Hutchinson with the Company Bank of America. Lorraine, your line is now open.

Lorraine Hutchinson: Thank you. Good afternoon. I just wanted to follow up on the brand marketing increase that you’re doing in the third quarter. Trina, you spoke earlier about it being a shorter term dynamic. So when we think about ‘25 and ‘26, should we expect marketing to come back down or would you expect to be growing revenue sufficiently to just have that cost percentage decline naturally? So what I’ll say is that we’re really making this brand investment intentionally. We’re focusing on the spend on what’s working. We’re seeing the new customers, we’re seeing these improved frequency trends, so we’re leaning in. And we believe that this is going to drive higher growth, paving the way for long-term profitability. We are a growth company.