FIGS, Inc. (FIGS) Earnings Call Transcript & Summary

Great. Thank you, and good afternoon, everyone. My name is Erinn Murphy, and I'm a senior research analyst here at Piper Sandler. And it is my privilege to introduce our next act this afternoon, we have the FIGS management team with us on the virtual stage. So by introduction, we have both co-CEOs, Trina Spear as well as Heather Hasson and most recently appointed CFO, Daniella Turenshine. So we've got the girl gang here. So we love it.

We've only got about 25 minutes today. So I really want to start the conversation, Trina, with you. You guys positively preannounced this morning, which was some nice positive news. It's been a really rough day in the market. So thank you for some positivity. And I thought maybe we could just start with some of the drivers of the fourth quarter. What really led to that upside that you saw in the fourth quarter and how you saw the holiday season progressed?

Sure. And thank you, Erinn, so much for having us. It's always great to see you, and thank you all for joining. It's incredible to be here. Yes, to your point, Erinn, we had an incredible quarter, generating $128 million, up 42% year-over-year. But we don't manage by quarter, we manage more for us by year and really are looking over the long run. So really proud of the year. $419 million in net revenue, up 60% year-over-year. That's off of the prior year of up 140% year-over-year. And in terms of 2021, we are reiterating 70% or over 70% gross margin, over 20% adjusted EBITDA margin. I think really proud of that, right, not only growth for growth's sake, but doing it in a sustainable and profitable way is really important to us here at FIGS. So really proud of the quarter, incredibly proud of the year. And to your question around drivers, right, we really saw strength across the business, across our core business and our scrubs as well as our limited-edition styles in addition to really seeing our layering system and our lifestyle products really accelerate. So $113 AOV. That's up 15% year-over-year. That's very much a function of all of the incredible products that we're bringing out inside of scrubs as well as outside of scrubs. So really proud of that. I think we really want to just highlight the -- how our health care professionals, our health care community has shown up, continues to show up through this pandemic. And remind everyone that we are the brand showing up for them, right? And showing up for this community at this time is really important. And we are more than honored to continue to serve them. So yes, I mean, with that, I'm going to pass it back to you, Erinn.

Great. No, that's super helpful. And one of the metrics you talked about is that $113 in AOV, I think it's the highest you've ever had. So maybe if you can share a bit more about how much some of the bundles or some of the new kits have kind of led to that growth of AOV versus lack of promotional activity? I think that was one of your strategies heading into the holiday season is to pull back on promotional activity. So we'd love to hear a little bit more about the AOV drivers? And then how sustainable? And maybe Daniella, this is also a good one for you. How sustainable is that triple-digit AOV?

Daniella, do you want to take it?

I can take this. So we're really excited about the growth that we saw in AOV, up 15%, as Trina mentioned, year-over-year in Q4. Not guiding to specifically what it's going to do in the future, but we're going to continue to execute on the same strategies that we've been doing to drive it higher over time. So what we saw in Q4 is real benefit from this increasing adoption of our layering system. So this drives AOV through higher price points, so some of our lifestyle items like the outerwear collections in Q4. You may have seen our amazing puffer. So higher-priced launches like that. Increasing units per transaction as well as customers are adding more items to cart so they can really build out their whole layering system. So beyond that, less promotional in Q4. As you mentioned, one of the things that we were planning to do and really proud of what we were able to do as part of that has helped drive AOV higher, adding more personalization and features to our e-commerce experience and then also driving more customers to purchase through smart bundling opportunities like kits that we launched in Q2. So all of those things really coming together to drive this AOV. And I would say while we're super excited about that, we're also more focused on net revenues per active customer. So how do we get customers to come back and not just increase their spend in a single transaction, but really how do we get them to come back and spend more over their entire year with FIGS. And we increased that metric $22 year-over-year to $224 in 2021. So really excited to see all of this and continue to execute on those strategies.

That's great to hear. And then maybe just last in terms of the fourth quarter performance. Some of the companies that we've heard present today and participated with this morning have talked about Omicron. And I think there's been fairly mixed views, like Summit said it hasn't impacted their traffic, depending on the demographic they cater to, or whether they're online versus in store. Others have said it's been a big issue in the warehouses. So just curious how you've seen over the last 3 to 4 weeks this variant. Has it impacted your business? Either positively, negatively. I would just love to hear your comments on Omicron.

Sure. I think even prior to this pandemic, right, health care professionals have deserved better. And we were -- have been the brand over the past decade to show up and serve them with better products that help them look good, feel good and perform at their best. During this pandemic, whether Delta, Omicron, I don't know what letter we're on going next, but I think it is really -- it's shown a light, right, on this community and what they do every day and how much they dedicated their lives to helping us, to saving our lives, to being there for society, and it's been an incredibly challenging time for them in many ways. And it's our job as a company to show up and support them and continue to serve them as much as we can. And I think that's what you're going to continue to see long after this pandemic is that we're going to continue to find ways to innovate for them, innovate on the product side, continue to connect from a brand and community perspective, and that's what we're looking to do. I think in terms of the business, from a supply chain perspective, we saw in the fourth quarter we utilized airfreight to get our goods in, and we're happy that we did that. We met the demand, right? And we were able to get our products in to meet the demand and get them to our health care professionals. Going forward -- and we really do view that as the peak. And so we've moved a lot of the shipments to ocean freight. We have seen rates be a bit elevated or continue to be a little bit elevated on that front. But going forward, we're excited to utilize more ocean and really continue to navigate and be best-in-class as it relates to operational excellence and supply chain excellence.

That's helpful. So maybe just sticking to that point on supply chain. And I don't know, Daniella, this may be a more pertinent one for you. But I think last quarter, to Trina's point, you talked about the $8 million to $10 million of incremental headwinds in the fourth quarter. I guess first question is how did that come in relative to your budget?

Yes. Thanks for the question, Erinn. We're not going to get into kind of the detail on how that performed versus Q4. We will dive more into that in March on our year-end call. But what I can tell you is that we really do see Q4 as a peak in terms of air freight spend. And for the full year 2022, we do not anticipate needing to use the same level of airfreight that we did in the prior year.

Got it. So we'll start to see that come down. Is it fair to assume that that's going to start to come down in the second half of the year? Or is there any kind of seasonality that we should be expecting as you think about kind of the rebalance towards ocean?

Yes. And as Trina mentioned, so we are reducing the amount of air freight that we're using, and this is also because we put strategies in place in Q4 to be able to do that, right? We increased lead times to accommodate longer ocean transit times, and we began to hold more weeks of supply of our seasonless core product that we're really uniquely able to do as a uniform business. So that said, continuing to navigate macro supply chain issues, just like the rest of the companies in our industry. So for example, as Trina mentioned, we're expecting to see kind of continued elevated ocean freight rates, like we saw in the back half of 2021, continue to permeate into 2022. So expecting that to offset some of the benefits that we're seeing from reductions in air freight. But even with all this uncertainty, we're supremely confident in our ability to maintain that 70%-plus gross margin target.

That's super helpful. And I think just to kind of make a finer point, you reiterated that 70%-plus for this year and for your longer term for gross margin. Maybe if you can speak to kind of the confidence level as you expand the portfolio with new categories, what gives you that confidence that 70%-plus is achievable on a multiyear basis?

Yes, definitely. So I've been a part of building this business and really have a deep understanding of the drivers of our gross margin and really firmly believe that many of the structural advantages that we get from being a replenishment uniform business are what are going to be able for us to deliver on that 70%-plus gross margin. So we've been very consistent in this metric, even as we've continued to innovate and really build out the lifestyle portion of our business. And we've been able to maintain it despite a lot of the macro supply chain challenges that we've been facing recently. So it gives us a lot of confidence in our ability to be able to continue to do that. A lot of this comes from, as I mentioned, the structural advantages that we have in our business. So we're a uniform replenishment business. 90% of our fabrication -- 90% of our revenue is from the same fabrication. 80% is from the same 13 core scrubber styles. So we get a lot of scale and costing efficiencies as we grow, and we're able to take those benefits and really put them back into innovating in the lifestyle product and building out some of those categories while not seeing a change in kind of the overall gross margin. Secondly, B2C company, so able to really bypass the middlemen and go straight to the consumer and leverage that strong pricing power. So overall, super confident. As you mentioned, we reiterated it for 2022 to 2024, and are excited to go achieve it.

That's awesome. Great. Well, Heather, for you, I wanted to pivot the conversation to something that is near and dear to your heart and in your wheelhouse and that's innovation and product. And you have kind of created an incredible proprietary fabric platform, really unique designs that are catering to the health care worker and what she, or he, or they really need at their -- at the center of what they do every day. And so I guess my first question on innovation is as you think about the pipeline for 2022, how do you think about innovation within the core scrubs business? So not some of the new categories, but really the core scrub business. What's left to innovate on since you guys have been so forward thinking in terms of what you've done to date?

Erinn, I love that question because we get this a lot. It's like, well, you guys have finished innovating on the core scrubs, it's like, no, no, no. We only have 13 styles, right? And that's it for our core scrubs. And there is so much to do to innovate on our core scrub business with even our fabrication. I think Daniella just mentioned a minute ago, 90% is 1 fabrication or FIONx. We haven't even tapped into different weights, different consistencies in our core products. So we have a lot to do on fabrication, on weight, on fibers, on yarns, on sustainability, on silhouettes. I mean there's just a ton that we can do and that we are doing. And in terms of our core scrub business, so yes, core scrubs, but then there's also obviously, that you just mentioned, our layering pieces as well that we're going to go very deep in.

Great. And then, I guess, on that kind of new category or layering, I mean, where are some of the biggest opportunities you see for 2022 within the noncore business?

Sure. So speaking -- so just a product, I'd say, our noncore business, there's a lot that we're doing. Let's say it's the under-under, then it's the outerwear. And then I think those 2 are really areas that we're going to home in on.

Great. That's good to hear. And then Trina, maybe zooming back out to probably the biggest question we get since you guys have been a publicly traded company is around TAM. And I think there is a lot of differences of opinion right now on the buy side and the industry on is the U.S. drug business $2 billion? Is it a $12 billion TAM? I know you've cited, I think, historically with the upper end of that band, but we definitely heard estimates all throughout that range. And so my first question is -- on TAM is how do you think about the core building blocks of what gets you to kind of the U.S.-centric scrub TAM today?

Sure. Thanks, Erinn. Yes, so we commissioned a third-party independent study as part of our IPO, Frost & Sullivan, and they did the work, right, to get to this $12 billion health care apparel market in the U.S., $79 billion globally. And we actually think those numbers are really underrepresenting what we do here at FIGS. Because prior to FIGS, scrubs were a V-neck top and a drawstring pair pants. And as Heather was describing, we completely changed the game on the scrubs industry, right, bringing different silhouettes, different styles and colors and really increasing the frequency of ordering, increasing the level of just engagement with a product, right? And so -- and then outside of that, what are health care professionals wearing to work? What are they wearing at work? What are they wearing from work? What are they wearing on shift? Off-shift? Head to toe? All of these other products from our underlayers, our sports bra and our leggings, to our under scrubs, to our scrubs, to our outer layers, our scrub jackets, our fleeces, our vests, our compression socks, our shoes, our scrub caps, the list goes on, right? And it's all of these other categories that were not even in these $12 billion TAM number or $79 billion number. And so as we think about this industry, there's just so much that we're excited to keep building. And we have a 3% market share in the U.S. We have a 0% market share internationally. This is the fastest-growing job segment in the world right now. And actually, although it's been challenging for health care professionals right now, more people are wanting to enter their profession because of the purpose they want to have in this world, especially younger generations. They want -- they have a calling to help people, to show up, to be those people that are getting us through, right? And so this is the fastest-growing job segment. It is an industry that is mandated. It's recession-resistant. It's pandemic-proof, as we've seen. And so it's really exciting, right? It's an exciting industry that we're excited to be the leader in. We are the leader. We are the brand for health care professionals, and we are excited to continue to show up and be there for them.

That's great. Well said. So maybe just thinking through the leadership position that you have and the disruption you've had so far, I mean, oftentimes, that does lead to competition. And so would love to kind of hear a little bit more how the competitive set has evolved since you guys have -- I mean, you've firmly been on the map for over 7, 8 years now, but accelerating over the last 2 to 3. So how is competition evolving? And what are things that kind of keep you up at night as it relates specifically to competition?

Sure. So we think about the competition in 2 ways. There's really kind of 2 parts of the industry. So there are the companies that came before FIGS. They were really 2 types of companies. They were the suppliers that made scrubs and then there were the distributors that sold them. Those companies are kind of stuck. We call them the anti-moat, they're stuck in the strip mall, right? They sell to these retailers and strip malls, where there's racks and racks and racks of scrubs, next in knee braces and bed pans. You walk in, it's a horrible experience. And the companies that are supplying those scrubs are structurally disadvantaged, right? They're giving 60% margin away to the retailer. They're giving a 10% royalty fee to the license holder. They're essentially all licenses of other companies, right? And so that's a huge problem. And we haven't seen them really evolve their businesses at all, and we've been around for about a decade now. Companies that have come after us, right? The next closest competitor is about 1/10 our size, and these companies are small. And as you've seen, right, it's been hard to build an authentic brand. It's been hard over the past 10 years to do that well. And we're proud of being able to really connect with this community and build a community around a profession. It's going to be even harder over the next 10 years to build an authentic brand because customers are smart and health care professionals are even smarter. And so that's a part of our secret sauce, and part of our mode is brand and community and how we've been able to connect these dots in a way where our health care professionals are waiting up until midnight to see what we're launching next and then it's selling out in a matter of hours. I mean, that's almost impossible to replicate. And so we're really proud of the position that we have. We are the leader. And so the way we think about competition is how do we outdo what we did yesterday, last week, last month and last year? How do we get into the hearts -- more hearts and minds of our community? How do we continue to execute? What keeps us up at night is this isn't an execution game at this point, and we're going to continue to deliver. And we've got to stay humble. We got to stay true to our mission, true to who we are. And that's what we are going to do. We're going to continue to hire the best, to bring on the best people in the world from all different industries, all different companies that brings just so much experience and make this company so interesting, diverse and unique. But yes, I mean it's exciting and it's an exciting time. We feeling we're reinventing this industry again right now as we speak. And so I think it's going to be that much harder for those other companies to compete with us.

And you brought up, Trina, a really important point. I was hoping to get Heather's opinion on just the authenticity that you bring to not just the category but to the brand, and you've worked with so many influencers. You continue to work with these influencers. How do you see, like are other brands starting to try to emulate this influencer strategy? Or have you kind of locked up all of the key medical influencers that are out there? Just curious on just the marketing strategy that has been unique to the team there at FIGS.

Sure. So in terms of the marketing strategy, I'd like to think of it as less of marketing strategy, but as our job at FIGS is to elevate health care. That is it. That's why we wake up in the morning to elevate it, whether it's through product, whether it's through tech, whether it's through our ambassadors. Whatever it is that we need to do, we need to step 1 is obviously make a great product, but step 2 is have that emotional connection with our health care professionals. So if other brands are doing this, great, that's okay, do whatever you need to do. But why we are so special is because we have that connection with them. And we are able to elevate health care with our health care professionals. We are able to put them on a pedestal. We're able to empower them. We listen to them. I think every brand will win if you just make that real connection. And that's it, and you enrich their lives. If you can do that, then you win. And I think we're doing a great job, and I think we're going to continue to do an amazing job enriching their lives because at the end of the day, that's what we have to do.

Great. That's excellent. So we're getting a couple of questions through the chat, and I do think they're relevant because they are longer-term focused. So a couple I'd love, maybe Trina, or the 3 of you can tag team. But if you think about -- I guess 1 question for me is how are you prioritizing some of the levers of longer-term growth? So you've got international. I think it -- is there the brick-and-mortar? Is that ever something you'd consider thinking through a brick-and-mortar strategy, whether it's near hospital centers? And then also, what other industries are -- do you feel like are worthwhile disrupting that -- maybe in that replenishment uniform industry or kind of business model? So just curious on international, how these are prioritized between international, brick-and-mortar and then disruptive replenishment of uniforms?

Sure. So I think the more near-term growth levers are definitely our lifestyle business, building out these categories within outerwear, within our compression socks line, within -- and you see it, right? You see it in the AOV in the fourth quarter. You see it as our lifestyle business continues to grow and scale, and as our customers -- the tax rate increases, right? They're adding more of these other elements outside of scrubs. International, to your point, is also a more near-term growth lever. Our international business grew 150% year-over-year in the third quarter. It's going to continue to scale and grow, not only within the markets we're in, in Canada, the U.K., Australia, but also in new markets that we're planning on launching this year that we're really excited about. In terms of loyalty, loyalty is also a big one, right? We have replenishment dynamics that are truly unique. I mean it's why we're a uniform -- it's a function of us being a uniform company or a replenishment-driven business, and that's really exciting because there is a compounding cohort effect that we see over time. Brick-and-mortar, we've had pop-up shops in L.A. We've had them in New York. I think now, based on some of the stuff that we've seen today is not the best time to have retail, and we're actually really -- we're fortunate that we are a 100% digital business today. But that being said, having an in-store experience is really awesome, right? You're able to touch and feel the product, you're able to have that experience. And so that will be something that we do over time, but it's not something that we really need to hit our $1 billion target in 2025 or even beyond that. And then in terms of other uniform categories, that's a bit more longer term, but we've talked about this, right? Uniform industry is broken, and we're excited to kind of tackle that in more of the medium to long term.

That's great. And I guess we only have a minute left. So maybe my last question is just around as we think about the setup here into 2022, what gets you most excited about the road ahead?

Oh my God, there's so many exciting things in front of us. We really think about even within women's, within repeat, within the U.S., right, like I think 3% market share in the U.S., 0% market share internationally. We're innovating on incredible products, entirely new categories that don't exist for this profession today, right? When we talk about creating TAM, right, if you look back at like Lululemon, they have $500 million TAM, right? And now it's $50-plus -- I don't know about today, but $50 billion business, right? I think as we look to the future, it's limitless. It's endless. We are an iconic brand over the next 100 years, and we're going to continue to innovate on every level, from a product standpoint, from an experience perspective, and we're just super excited about the future.

Great. Well, thank you, Trina, Heather, Daniella and Carrie as well for being with us. We'll have to end it there, but continued success as we kick off the new year. Thanks for being with us.

Thanks, Erinn. Super excited to be here.

Thanks so much.