FIGS, Inc. (FIGS) Q3 2023 Earnings Call Nov. 03, 2023

Here is a summary of the earnings call.

Trina Spear - Co-Founder and Chief Executive Officer

Q3 Financial Highlights:

• Net revenues in the third quarter grew by 11% YoY.

• Significant growth in active customers, with a record number of new customers added in the quarter.

• International growth was remarkable, with an 81% increase, indicating demand beyond the U.S.

• Inventory levels decreased by 15% compared to the same quarter last year.

• Achieved an adjusted EBITDA margin of 17.2%, surpassing expectations.

• Generated free cash flow of $46 million during the third quarter.

Strategic Priorities:

• FIGS remains dedicated to serving the healthcare community and has a customer-first approach.

• Focus on product innovation that addresses real-world issues for healthcare professionals, offering functionality, comfort, and style.

• The success of these limited-edition style drops matched back with the core scrub styles and reflects ability to deliver a consistent stream of newness that our customers want.

• Merchandizing strategy includes building a product assortment that complements core scrubs, with limited edition styles to drive excitement and repeat purchases.

• Collaboration with brands that share similar values and capabilities, such as New Balance and Eko.

• Marketing strategy involves creative storytelling, segmentation, and personalized messaging to drive new customer acquisition.

• Engaging students as they begin their healthcare careers, creating on-campus experiences and partnerships with universities and associations.

• Advocacy for healthcare workers' rights and well-being, generating intense brand loyalty.

International Expansion:

• Record net revenue growth of 81% in international markets.

• Expansion into seven new countries during the quarter, including Poland, Kuwait, and Singapore, to grassroots demand.

B2B Business:

• Strong performance in FIGS' B2B business (Teams) with year-over-year net revenue growth.

• Partnership with healthcare organizations like the American Student Dental Association, Aya Healthcare, and Veterinary Emergency Group (VEG).

• Growing inbound demand from institutions looking to professionalize their staff with premium uniforms.

Retail Store:

• Announcement of FIGS' first permanent retail store, referred to as a "community hub," in Century City Mall.

• The store is dedicated to healthcare professionals, offering product experience, education, and purposeful programming.

Daniella Turenshine - Chief Financial Officer

Q3 Financial Performance:

• Q3 net revenues increased by 10.7% to $142.4 million compared to the same period last year.

• Growth attributed to increased orders from existing and new customers, as well as a higher average order value (AOV).

• AOV rose nearly 2%, driven by higher units per transaction (UPT) and increased average unit retail (AUR).

Gross Margin and Operating Expenses:

• Gross margin for Q3 was 68.4%, down from 70.6% in Q3 2022 due to a product mix shift.

• Strong growth in non-scrub wear categories, such as footwear, contributed to margin changes.

• Operating expenses:

  • Selling expense was $32.2 million, representing 22.6% of net revenues, with lower fulfillment expenses and higher AOV.

  • Marketing expense was $19 million, representing 13.4% of net revenues, reflecting digital marketing efficiencies.

  • G&A expense was $36.2 million, representing 25.5% of net revenues, driven by investments in personnel.

Net Income and Adjusted EBITDA:

• Q3 net income was $6.1 million, or $0.03 in diluted EPS, compared to $4 million and $0.02 per share in Q3 2022.

• Adjusted net income was $6.3 million, and diluted EPS as adjusted was $0.03 in Q3 2023, compared to $4.1 million and $0.02 in Q3 2022.

• Q3 adjusted EBITDA was $24.4 million, with an adjusted EBITDA margin of 17.2%, up from 16.4% in Q3 2022.

Balance Sheet and Free Cash Flow:

• Ended the quarter with $232 million in cash, cash equivalents, and short-term investments.

• Inventory decreased by 15% to $143 million compared to the third quarter of the previous year.

• Generated free cash flow of $46 million during the quarter.

2023 Outlook:

• Fourth-quarter net revenue growth is expected to be in the low single digits, considering macro uncertainty and potential demand pull forward.

• Gross margin in Q4 to be influenced by better freight costing offset by changes in product and promotional mix.

• Anticipated start-up costs of approximately $2 million for a fulfillment enhancement project in Q4, extending into the first three quarters of 2024.

• Selling expense expected to be impacted by higher international business growth, including duties and shipping expenses.

• Q4 adjusted EBITDA margin projected to range between 11% and 12%.

• Revised 2023 guidance: Net revenue growth of approximately 8.5% and adjusted EBITDA of approximately 14%.

• Improved performance in the uncertain macro environment, maintaining a strong balance sheet and cash flow, and making strategic investments for future growth.

• FIGS maintains a robust financial position and cash flow, positioning it well for future growth initiatives.

Q&A followed.