FIGS Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 13 speakers on the call.

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. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the call over to our host, Gene Fontanda, Head of Investor Relations at FIGS. You may proceed.

Speaker 1

Good afternoon, and thank you for joining today's call to discuss FIGS' Q1 2023 results, Which we released this afternoon will be found in our earnings press release and in the stockholder slide deck on our Investor Relations website at ir. Verisafe.com. Presenting on today's call are Trina Spear, our Co Founder and Chief Executive Officer and Danielle Turfenshine, our Chief Financial Officer. As a reminder, remarks on this call that do not concern past events or forward looking statements. We may include predictions, expectations or estimates, including about future financial performance, market opportunity or business plans.

Speaker 1

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 Qs 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 of these non GAAP measures to the most comparable GAAP measures are included in the supplemental slide deck we issued today.

Speaker 1

Now I would like to turn the call over to Gina Spearhead, Chief Executive Officer of FIGS.

Speaker 2

Thank you, and good afternoon, everyone. We are pleased to have exceeded our Q1 expectations across key financial metrics. We delivered profitable growth through disciplined execution of our strategy They are on track to achieve meaningfully improved inventory levels by year end. While the macro environment remains uncertain, FICC is an iconic brand, and I believe that we will advance our leadership position in the healthcare apparel industry, while expanding our TAMs. Touching on the financial highlights from our Q1.

Speaker 2

Net revenues grew 9% to $120,000,000 as compared to the Q1 last year. We delivered gross margin of 71.3 percent 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 $2.16 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.

Speaker 2

Once macro pressures have signed 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 engagement across our global markets. I want to thank our team for their unwavering commitment to serving healthcare professionals each and every day. I also want to thank our office units 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 scrub products engineered to work with our best Our recently launched Contrinet jacket exemplifies how we transform customer feedback into innovative products With distinct features that address the specific needs of healthcare professionals, our Contrinet jacket has been one of the best performing outerwear pieces in our history.

Speaker 2

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 The work we have done around Fitch showcases our commitment to serving all healthcare professionals. 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 FaceTime 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, Although new to PACE, we're able to experience them for the

Speaker 1

first time.

Speaker 2

This event is a great example of how we create excitement and move through inventory while maintaining Although our recent color launches have not generated the same level of demand that we saw during the height of the pandemic, We remain one of the most effective drivers of customer traffic and excitement. For International Women's Day, we celebrated Doctor. Sarah Kalpatric, Chair of Obstetrics and Gynecology at Cedars Sinai Hospital. She has done incredible work in women's medicine and co founded Prudes, the Center For Research in Women's Health and Sex Differences. As a female founded and led organization, we are proud to celebrate Doctor.

Speaker 2

Kilpatrick's achievements And especially proud to have donated $250,000 towards Crease Medical Research. Our commitment to this community has offering enduring brand strength and remains a key differentiator. Data continues to illustrate that FIGS garners industry leading customer loyalty. In a recent 3rd party brand survey, FIGS ranked highest on brand sentiment and across several attributes, including quality, comfort, Functionality is solid. We also experienced the highest purchasing intent from respondents.

Speaker 2

This aligns with private hard data indicating that the Customers who repurchase steaks within 1 quarter of their initial purchase is 2 to 3 times higher than for other scrap companies. Our goal is to continue to deliver the product and experience that rise the boat and furthers our lead versus everyone else. To that end, I'd like to provide an update on our growth strategies. As you know, we are laser focused on innovation. Over the last few years, we've built our layering system of scrub and non scrub 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.

Speaker 2

Our recently launched Unrelaxed jogger was designed based on feedback from our customers requesting a Rouge weight scan. We are seeing strong early results and awesome feedback across social media.

Speaker 1

Our 3X

Speaker 2

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 material. Our FIGS Pro 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 Big Pro line, which is yet another example of how we're expanding our TAM. Innovation like Free X and FixPRO represent completely new categories from which we're able to learn and iterate to build out the collection.

Speaker 2

While we continue to expect our core sponsor represent a high percentage of our overall sales, we are excited about the potential to drive significantly higher net revenue for active customer By addressing a greater proportion of healthcare professionals' needs with expanded offerings. Importantly, our ability to drive revenue in non stress illustrates healthcare professionals have entrusted us to address their life values beyond their scrubs. Next, I will speak to our marketing strategy. Across our communication channels, we are being more intentional in our story time to emphasize our product attributes. We create brand moments that showcase our leadership and product innovation And our relentless support of the health care community.

Speaker 2

Our word on WFIRST campaign highlights our product attributes. This theme was introduced for Our launch of the Conferknit jacket is well aligned with future product launches throughout the year. Our stream of product innovation creates a flywheel effect In our business, we're working now. As our loyal healthcare professionals go to work each day during the latest take, they generate new customers. And as our base gets bigger, we expect this volume effect to multiply.

Speaker 2

This is how we have made aid efficiency in marketing spend that enables us to invest in new ways to reach our community. We're also delivering a more consistent cadence of market communication around our investigation. It keeps us top of mind amongst the healthcare community. This evergreen marketing approach is showing early success of driving stronger traffic On non launch days, which is enabling us to maintain a highly efficient marketing spend. Our ambassador program is an important driver of this organic growth.

Speaker 2

We've deployed a world localized strategy to better leverage our growing network of influential ambassadors by hosting frequent events across North America. For the Q2, these events will include our Nurses Week event in Seattle, Meet 6 in Toronto and Pride Day in San Francisco. Turning to personalization, we are encouraged by the times we're seeing. As our database has grown and we have expanded our product offerings, We're building on our personalization strategy and we're effectively tailoring our communication to every single healthcare Lastly, we're driving investment 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.

Speaker 2

We continue to build upon our early learnings as well as grow our local investor networks within each market. Importantly, We're maintaining our investment discipline as we build our presence across regions. With almost 120,000,000 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 We're making sure we maintain a methodical approach to grow this business over time.

Speaker 2

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.

Speaker 2

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 detail Shortly. We are also continuously working to diversify our supply chain with best in class manufacturers. We've always prided ourselves on the strength of our supply chain 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.

Speaker 2

While we continue to see that the healthcare industry As greater resilience than other industries, our healthcare professionals are not immune to fire inflation. We continue to focus on building strong loyalty and connections with our customers. So when these macro headwinds subside 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 can by helping healthcare professionals do their jobs better and look and feel great on shift, off shift, head to toe.

Speaker 2

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 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. Good afternoon, everyone.

Speaker 1

We are pleased to deliver better than expected results for the Q1 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 will begin with a review of our Q1 financial results followed by our outlook. Beginning with Q1 net revenues, we grew 9.2 percent to $120,200,000 compared to $110,100,000 in Q1 last year, reflecting an increase in orders, partially offset by modestly lower AOV. While frequency trends in AOV were down year over year, they were better than expected.

Speaker 1

Growth in active customers remains robust, increasing 22% as we welcome new healthcare professionals to the face brand globally. In addition, we continue to see more of our customers who have not purchased this in the last year come back to the brand after month 12. Turning to AOB, we saw a decline of 1.7 percent to $114 This compares to $116 in Q1 2022, which benefited from an elevated mix of non traveler associated with one of the largest shoe balance launches as well as supply chain disruptions causing out of stock on

Speaker 2

our core scrub In addition,

Speaker 1

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 air freight utilization, partially offset by the higher mix of promotions and higher duties. Moving to operating expenses. Selling expense for Q1 was $31,200,000 representing 25.9 percent of net revenues compared to 20% in Q1 2022.

Speaker 1

This 5 90 basis point increase was largely due to higher costs of infillment, including a 290 basis point impact from incremental warehouse storage and associated labor necessary to help inventory we pulled forward. To a lesser degree, the increase in selling expense reflects duty subsidies that we put in place in the Q3 of last year for international sales. Marketing expense for Q1 was $17,100,000 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 and A expense for Q1 was $34,200,000 representing 28.4 percent of net revenues compared to 24.7% in Q1 2022.

Speaker 1

The increase is due to the change in accrual methodology we discussed in our Q3 2022 call related to charitable donations, An increase in stock based compensation and an increase in professional fees, including public company costs, such as those associated with the implementation of Sarbanes Oxley 404. Our net income was $1,900,000 or $0.01 in diluted EPS for the Q1. Adjusted net income was $2,500,000 And adjusted diluted EPS was $0.01 in Q1. This compares to adjusted net income and adjusted diluted EPS of 10,500,000 and $0.05 per share in Q1 2022 respectively. Finally, our adjusted EBITDA for Q1 was $16,100,000 Adjusted EBITDA margin of 13.4% compared to 22.7% in 3Q1 2022.

Speaker 1

Turning to our balance sheet. We maintained a strong cash position finishing the quarter with $156,000,000 in cash and cash equivalents. Inventory totaled $180,000,000 at the end of the Q1. As we stated on our last call, we expected inventory to peak in Q1 I 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 risks.

Speaker 1

An additional 20% of our inventory balance is I mean styles and colors. We are making good progress towards getting inventory to 25 basis points at 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 results in a higher mix of promotional sales.

Speaker 1

As we manage through these temporary headwinds, we remain profitable and will continue to make investments in our business to drive healthy long term growth. For the Q2, we expect net revenue growth to be between 8% 10%. We expect Q2 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 air freight 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 Q2.

Speaker 1

For G and A, we continue to expect deleverage year over year Due to increase in stock based compensation and personnel related costs. As a result of these factors, we expect 2nd quarter adjusted EBITDA margin to be between 9% 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. 1st, we are anticipating a difficult macro environment. And second, We will be lapping the very strong new customer as last year.

Speaker 1

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 costs associated with the implementation and execution of this project remain between $16,000,000 $18,000,000 However, we now expect to incur the bulk of these costs in 2024.

Speaker 1

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 2 50 basis points for the full year 2023 versus our previous expectation of 300 basis points. G and A is still expected to deleverage for the full year in part due to investments associated with growing our international and teens businesses, product innovation and an increase in stock based compensation, as well as our accrual for future inventory donations. As a reminder, our G and A for Q3 last year reflected a 190 basis point benefit due to a change in our accrual methodology for shareholder 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% 13%.

Speaker 1

We expect capital expenditures of between $24,000,000 $26,000,000 for the full year 2023. This reflects approximately $20,000,000 for the fulfillment project with the remainder being related to software investments and 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.

Speaker 1

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 right size our inventory. With that, I will turn it over to the operator to kick off our Q and A session. Operator?

Operator

Thank you. Our question and answer session will now begin. Our first question will be from the line of Ed Yruma with Piper Sandler. Your line is now open.

Speaker 3

Hey, good afternoon. Thanks for taking the question. I guess first, thanks for the update on inventory and when you kind of expect to get to alignment. I guess just maybe looking at some of the promos you ran in the Q1, how would you gauge your success in kind of closing out the inventory you wanted to close out? And as we think about the promotional cadence going forward, are there how should we think about the shape of that kind of promotional curve as you wind through that excess inventory?

Speaker 3

And then as a follow-up, I know you guys had some really interesting innovation in the quarter. You launched Reed's Scrub Jacket. Maybe just any more color on the performance of Some of the new SKUs you launched and kind of how you see that unfolding for the balance of the year? Thank you.

Speaker 1

Thanks, Ed. I'll start with your inventory question. So as it relates to the success of our promotions in the Q1 and what that curve looks like for the remainder of the year, Our inventory was as expected at the end of the Q1 and really getting our inventory into a more normalized position It's a really big priority for us and we do have initiatives in place to get to 25 weeks of supply by year end. I think just as a reminder, we're a uniform business. Our product is seasonless.

Speaker 1

It doesn't go out of style. 55% of our products is in core styles and class Colors which are always in stock, always available on our site. And so we're confident we'll move through the products at reasonable sell through rates and disciplined promotional levels. We're really focused on balancing protecting the brand for the long term with the pace with the right pace to move through our inventory balance. And so as we've done, we're going to continue to really keep a similar promotional cadence that we have to the prior year.

Speaker 1

We did that in the Q1. We're planning to do that in 2nd quarter as well, but we are being mindful of mix shift that we're seeing into some of these more promotional times. And looking at our inventory balance, we have initiatives that we're doing to really work through the balance outside of promotions. First, as we've seen shipping times normalize, we've been able to shorten our lead times, which has really enabled us to be more flexible with our inventory planning. We're updating our purchasing to buy more shallow in the future and we're bringing back Previous launches of limited edition inventory in ways that feel really new and exciting to the consumer like you saw in the fixed 10 iconic series.

Speaker 1

And with that, I'll turn it over to Trina.

Speaker 2

Thanks, Daniella, and thanks, Ted, for the question. So in terms of the Reed and Paige jacket, those were great additions. There are cargo scrub jackets, 8 pockets. I think it's actually one of our most technical scrub jackets that we've launched. And we had a number of other Product introductions throughout this year that super excited about and really resonated well with our community.

Speaker 2

To the point about Innovation, I really want to reinforce how we think about it at FIGS. Product innovation is first and foremost about solving real problems For healthcare professionals and we do that with premium products. Sometimes this is just as simple as updating pockets like what you saw with the scrub jackets, Adding zippers, changing our waistbands to classic silhouettes and that's on one end. On the other end, it's Building completely new businesses and you're seeing that right now with our FIGS Pro line, you're seeing that with our Free X fabrication and you're going to see more going forward on all of these fronts. And this all comes back to listening to our customers and creating products that enable them to perform at their best.

Speaker 2

Everything we do at FIGS is designed with intention and every product we make becomes part of our layering system, Which coordinates across our product lines, across our colorways and our accessories. And it's one of the reasons that almost 70% of our revenue It's from repeat customers. And to Daniella's point, when we think about our inventory levels, they're not impacted by the amount of newness and innovation that we're able to deliver Our new launches keep our customers engaged with our brand, whether they're purchasing the product that we just launched Like you saw with the Read and the Page Jackets or whether they're coming back to buy their favorites, our core or other products that have existed on our site. And so as we think about innovation, it's happening at FIGS every single day 20 fourseven, 3 65 days a year, And it's driven by solving real problems in the most creative, comfortable and functional way possible. And that's Why, where we are and that's this is a huge differentiator for us.

Speaker 3

Thanks so much.

Operator

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

Speaker 4

Hi, thanks for taking my question. Can you please elaborate on the quarter to date trends that you've seen and Also how AOV conversion and customer purchasing frequency have trended since the end of the quarter?

Speaker 1

So our Q2 guidance is not necessarily reflective of our growth rate quarter to date, but really it's an expectation of the quarter's performance in aggregate. Given our main event of the quarter, nurses' week is actually kicking off today. We still have a lot of volume in front of us and we're cognizant of that in the guide. So we're not speaking specifically to trends intra quarter today.

Operator

Got it.

Speaker 4

Thank you. And then just really quickly, can you talk a little bit more about the Teams business percent of mix and Any progress in signing up more customers? Like what percent of the assortment is currently available versus what you want to make available through that Program, just any quantifications around that would be really helpful.

Speaker 2

Sure. Our Teams business is smaller today, but there's a massive opportunity in front of us. 15% of healthcare professionals receive scrubs, receive their uniforms from their institution. And so we're really excited about this opportunity. We're on track in terms of upgrading our platform to incorporate more availability across our assortments.

Speaker 2

It's going to enable more types of institutions to participate and be a part of the FIGS brand from hospitals to Schools to med spas to concierge clinics, private practice. So we couldn't be more excited about our Teams platform, everything that we're doing to help Standardized and professionalized medical teams across the U. S. And across the world.

Speaker 4

Thank you.

Operator

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

Speaker 5

Excellent. Thanks for taking my question and congrats on a nice first quarter.

Speaker 6

Danielle, can you talk to

Speaker 5

the path back to that high teens adjusted EBITDA margin? Yes. Previously, it was in the 20s. Obviously, there's been a lot of changes in inflation since that original target came out, but you are giving us pretty Specific detail on some of the selling expenses related to inventory and fulfillment costs. Just wondering how we think about think about the sequencing of that path back to high teens adjusted EBITDA margin.

Speaker 1

Definitely. So based on what we see today, we believe we have significant opportunity to drive EBITDA margin expansion over the longer term. And so in 2023, as we spoke about, we're seeing pressure from

Speaker 2

a few

Speaker 1

factors. First, We're seeing transitory gross margin pressure, a couple of 100 basis points due to the combination of promo mix and also freight related to sell through of inventory that we purchased last Secondly, we're seeing approximately 250 basis points of selling pressure, mostly from excess storage fees. Moving to 2024, we do have the bulk of the $16,000,000 to $18,000,000 in incremental costs related to the fulfillment enhancement project, but Excess storage fees are going to largely go away. So net net, we will see some more pressure in fulfillment in 2024 versus 2023. All that being said, our core business is high margin, replenishment driven, highly profitable and cash generative in a normalized state.

Speaker 1

There's a lot of short term impacts that are creating pressure, but the fundamentals of our business remain strong. And over the longer term, we continue to expect gross margin to approximate 70%. We're going to aim to keep marketing expense At around 15% of net sales, selling is going to normalize in 2025 and beyond. And looking further into the future, we do expect as we accelerate growth That G and A is also going to be able to leverage from where we are today. So ultimately, our goal is really to ensure that we're making The right decisions for the long term, while sustaining a strong profitability profile today, and we feel really confident in our ability to do so.

Speaker 5

Excellent. That's helpful. And maybe Trina, you could talk to customer acquisition and retention costs. And Daniela just said you plan on keeping marketing expenses relatively Flat as a percent of sales. I'm just curious in terms of near term marketing trends.

Speaker 5

It looked like marketing expense per active customer ticked down a little bit from where it was and year over year. So just curious what you're seeing from a marketing spend and an acquisition and retention perspective? Thanks.

Speaker 2

Yes. I mean, I think it's been really encouraging. You've seen our customer acquisition trends over the last number of quarters and it's incredibly strong. I think the similar same dynamics that we've always talked about remain to be true. It's mainly word-of-mouth, right?

Speaker 2

Every fixed customer is a walking billboard acquiring that next customer for us. That's a trend that drives our efficiency to the levels that you've seen over the last number of years. And that's what over 60% of our traffic is organic. And the second thing that we have that many don't is the replenishment nature of our business. And so almost 70% of our customers are repeat that we're not acquiring for the first time.

Speaker 2

And so Those two dynamics really drive what we would call a paradigm shift, right, flipping that paradigm on its head where As we grow, as we scale, we can become more and more efficient. Now if we wanted to drive that way down, we could, but our goal is to keep to Daniella's point, Our marketing is at around 15% as a percent of sales, which as a direct to consumer, almost 100% digital company, Many haven't been able to pull that off. So we are proud of our ability to keep acquiring customers at such an efficient level And do it while bringing more and more healthcare professionals into the FIGS family.

Speaker 5

Got it. Thank you.

Operator

Thank you. Our next question will be from the line of Brooke Roach with Goldman Sachs. Your line is now open. Good afternoon and thank you for taking our question. Trina, I was wondering if you could start By talking about the drivers of the record reactivation rates that you saw in the quarter, what was it that brought those customers back to the brand now?

Operator

And are they engaging in any specific types of new innovation or promotional activity that they didn't in the past?

Speaker 2

I think it's a function of our repeat frequency has been extended a bit and so you're seeing that Show up where customers are spending a little bit more time between purchase and it's not that they're leaving FIGS, right? They're just spending a little bit more time before they come back and shop again. And I do think it's a function of a few things. It's definitely a function of our innovation. We launch products every single week And our customers are coming back.

Speaker 2

It's driving traffic, it's driving hype, it's driving excitement and bringing our healthcare professionals back to engage with us. A bit on the promotion side, we're seeing more customers engage on that level just given the environment and given what's happening from an inflation perspective. But we feel really good as macro pressures subside over the long run that given how much bigger our base is, given how much We're acquiring the position that we're going to be in as we as the macro normalizes over time, we've never been in a stronger position And it's really exciting to see and you see it in the customer acquisition, you see it in the reactivation and you see it As we've seen, the frequency is normalizing as well.

Operator

Great. And then maybe a question for Daniella. Daniel, I think you mentioned airfreight recapture as a driver of some of the outperformance in gross margin in the quarter. Can you Quantify the benefit that airfreight was in 1Q and then perhaps help us understand what airfreight quantification is embedded within this updated

Speaker 1

As expected, we are anticipating to see better airfreight utilization year over year. It was one of The benefits year over year from the Q1, it was also came in better than we expected. And so continuing to drive Lower air freight utilization. As a reminder, we're not bringing in really much product at all inbound via air freight today, But what we are doing is selling through product that was air freighted in 2022 that's already in our balance. So inclusive in Our gross margin guide of just below kind of 69% for the full year, we've incorporated that continued Benefit that we expect to see, from lower air freight utilization over time.

Operator

Great. Thanks. I'll pass it on. Thank you. Our next question will be from the line of Matt Koranda with Roth MKM.

Operator

Your line is now open.

Speaker 7

Hey guys, good afternoon. Thanks for taking the questions. Just maybe wanted to see if I could get at the reengagement from a different angle. Curious maybe could you quantify or maybe just call it safely discuss how big is the pool The lapsed active users that you have to pull from, and what does that mean for marketing efficiency on a go forward basis?

Speaker 1

So, it's definitely been what we've been saying as Trina So to before is a record number of reactivations. And so we have people in our customer base who, as kind of those Frequency trends expand and as we see a little bit of an increase in days between purchase, they're waiting longer and we see them coming back in month 13, 14, 15. Definitely on the marketing side, we're targeting those customers through our personalization strategies and focused on providing them with Messaging and content to drive them back to the site. And so it's definitely an opportunity for us in the future to continue to drive more of those reactivations over time.

Speaker 7

Okay, great. And then just one more on inventory if I could. You mentioned 25 weeks is still the goal Toward the end of the year, just curious if you could maybe kind of level set us on what to expect in terms of cadence to get there. Is it just a steady drop through the rest of the year? Are there going to be chunkier periods around some of the promotions for like nurses week or whatnot, just kind of level set us there?

Speaker 1

So as we discussed, the Q1 was a peak in terms of inventory and we do expect it to decline from here. It is A pretty kind of just sequential decline. There isn't a ton of lumpiness and we've planned kind of our future purchases to Get to the 25 weeks of supply by year end, but there isn't a lot of choppiness to speak to before then.

Speaker 7

Okay, great. I'll leave it there. Thank you.

Operator

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

Speaker 8

Hi. Just two questions for me. The

Speaker 9

first one is, are you seeing Any change in competitive pressures? And then the second question that I have is,

Speaker 6

Can you elaborate a little

Speaker 9

bit more on international takeaways, what you've learned so far

Speaker 10

with the growth that you're seeing?

Speaker 8

Thanks.

Speaker 2

Sure. Thanks, Bob. So as we think about competition, if competition didn't exist, we wouldn't be doing our jobs. It's one of my favorite lines, but competition is healthy, right? It's a sign that you're doing something worth copying and I really believe that.

Speaker 2

But I also believe there's only one spot for 1st place and FIGS plans to remain in that seat for decades to come. How are we evolving to stay ahead? How do we plan on remaining as the number one brand in the healthcare apparel space? 1st and foremost, product integrity and innovation. We're light years ahead of our competition in terms of product development, Research, Innovation and Production.

Speaker 2

We've been working with our healthcare professionals for 10 years on fit, style, functionality And we have the manufacturing partners so that we can stay agile, increase the extraordinary. Secondly, and this point is something that I'm passionate about. We have the scale. We are 10 times larger than our closest B2C competitor and our marketing budget alone is bigger than the revenue. 3rd, we're profitable.

Speaker 2

And what this means is that we have resources to continuously get better, faster, smarter across all areas of our business. And finally, we have brand love, intangible brand love. We've mentioned this on calls, but this is what we've built for 10 years. It can't be replicated in a day by any competitor. Our relationship with our community is deep and our brand trust is unmatched.

Speaker 2

We're the only brand in the healthcare apparel space that has tapped into what it means to be a human in healthcare. As it relates to international, I think you saw the growth in the quarter. We feel really great about our progress in the markets that we're in And we're going to continue to localize across markets. And you're seeing that as we talked about translations actually coming this month for non English speaking countries and that's something that we're super excited about. But localization isn't just about translation.

Speaker 2

It's also about how we communicate With our healthcare professionals and around the world in the way in which they want to communicate and engage. And so this is a big priority for us and we're just getting started. We talk about penetration. We have 10% market share in the U. S.

Speaker 2

We have, I mean, a fraction of that internationally. And so We have a huge runway ahead of us and we're excited to keep connecting with the 118,000,000 healthcare professionals outside of the U. S.

Speaker 10

Thank you.

Operator

Thank you. Our next question

Speaker 11

Good afternoon and nice to see the progress. As you think about the supply chain, I think either Danielle or Trina where you mentioned it in diversifying the supply chain, How far along are you? What will it mean go forward whether in terms of how you manage inventory or the cost? And then with the Fulfillment Enhancement Program. What should we be looking for as guideposts along the way that will lead to improved margins?

Speaker 11

Thank you.

Speaker 2

Thanks, Dana. As it relates to the supply chain, we're really taking advantage of this opportunity To lay the foundation with new supply partners and where are we focused, we're really focused 1st and foremost on innovation, right? That's our lifeblood. We're also really focused on flexibility, on scale, consistency and reliability. And We are in the process of diversifying further, not just around country, but also around How we can make the best product across our layering system and deepening our partnerships with The suppliers we already have in building new partnerships around the world.

Speaker 2

As it relates to the fulfillment project, We are on our way to in terms of this initiative. And I think, Danielle, I don't know if you have any other points on that.

Speaker 1

Yes. I think for the fulfillment enhancement initiative, it's really going to enable us to drive flexibility and reliability and ultimately improve the customer experience. It's also going to set the foundation for us for future distribution expansion as we think about potential distribution centers in the East Coast or internationally in the future. And so over the long run, it's going to enable to drive efficiency and But there's also a lot of benefits as it relates to the experience that we're providing to our customers and we'll be sure to update you along the way as we get deeper into that project.

Speaker 11

Just one last thing on the non scrubswear, the rate of growth there versus the past. Anything to note on non scrubs and the lifestyle product and looking at that this quarter

Speaker 1

or go forward? Thank you.

Speaker 2

Yes. I mean, I think our view around our non scrubs business is that they're all tied together. We have a really holistic and intentional view around the entire layering system. It's meant actually to be layered. So Our categories aren't really competing with one another.

Speaker 2

They're really complementing each other. So they add value by being part So really as you think about the uniform, it's not I know we break it out scrubs and non scrubs, but it's all supporting each other. If you're wearing FIGS, you're most likely not just wearing a set of FIGS scrubs, you're also wearing our under scrub or you're wearing our vest or our jacket. And our hope over time is that you're wearing the full layering system on shift, off shift, head to toe. And so you might Some of these categories fluctuate in growth, but our goal is that the remaining a healthy percentage of the total and that's the intention and that's what you're seeing.

Speaker 2

The only other thing I would add is that as much as we're known for our scrubs, right? And I think we're getting known over Especially with our repeat customers, they're coming back in their second, their third, their 4th purchase for these other pieces. Our first time customers, 85% of them are buying just the scrub. So that's kind of why you're seeing that growth rate in the quarter.

Speaker 1

I would also just add a reminder, Dana, last year in Q1 2022, we saw At a normally high kind of non scrubware percentage as we were out of stock on some of our core scrubware products and we also Had a really strong New Balance launch. So there's a little bit of year over year comps going on as well.

Speaker 11

Thank you.

Operator

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

Speaker 10

Thank you. Good afternoon and congrats on the strong execution. Can you talk about replenishment trends? I believe at the time around the IPO, it was around 98 days, but it's about a month longer now. Does guidance assume that this trend has stabilized or does it reflect frequency continues to stretch longer?

Speaker 1

So as we discussed, frequency continues to be a bit pressured by the macro environment, but That days between purchases has stabilized from the last quarter. I think it's important to note that a portion of kind of The increase that we've been seeing here is that we are reactivating more customers and as customers extend their purchase life cycle and That metric, that higher reactivation, that has customers coming back after 12 months and that's just inherently going to drive this metric up. I think from here, there's a lot of opportunity for us to drive frequency higher over the longer term. As we've discussed, we're really focusing on Product innovation and expanding our layering system. We're taking steps through our marketing strategies to drive higher engagement through Personalized messaging through tailored communication, as well as really amplifying product education and value.

Speaker 1

And so We're still early in these initiatives, so we're not factoring in a lot of upside into our guide from here, but a lot of opportunity for us to improve this over the long term.

Speaker 10

Can you also talk about the outlook for AOV? What's the right way to think about The puts and takes as we consider the mix of business versus your expectations for consumer behavior during promotional times.

Speaker 1

So for AOV, as we, I think, spoke about, we expect it to be kind of flat over the remainder of the next three quarters. And I think what's really great is we're continuing to see higher UPT and we're continuing to drive that metric higher as customers Expand and purchase more into our layering system. However, that is going to be pressured in the near term by a lower AUR as we are seeing that higher But over the long term, it gives us confidence in our ability to continue to drive UPT and ultimately AOV up from here in the future.

Speaker 10

Thanks very much.

Operator

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

Speaker 6

Hi, good afternoon. Congrats on the nice progress. So my first question Hi, Brian. My first question and just a bit of a follow-up, but with regard to shipping costs, so we saw the gross margin of Track above plan in Q1 and then the update to the gross margin guidance for the year. But as we're getting now further past the shipping disruption And how should we think about the ultimate, so to say, benefits of FIGS?

Speaker 6

If either you mentioned before, Daniella, the less reliance On air freight, but then also just lower shipping costs, through 2023, then maybe some commentary beyond 2023?

Speaker 1

So as we discussed, we are seeing lower inbound rates for both ocean and air and we're also driving Better Air Utilization. In 2023, we're continuing to sell through inventory that was largely brought in, in 2022 at higher Ocean and air freight rates. And so net net, we're seeing a benefit in air freight utilization year over year. That's still being offset a bit by Higher ocean freight rates, but as we look further into the future, looking into 2024, we do think there's a couple of 100 basis points of Gross margin pressure both from freight but also PromoMx that we'll be able to recapture over the long term.

Speaker 6

That's very helpful. Sorry about the background noise, if you could hear it. But the second question I have is also a follow-up. So with regard to the better Customer engagement you've seen recently. Is that more as you're looking at this happening?

Speaker 6

I guess maybe if one of you could help size it. I mean, how big of a shift has this been? But then also, is it do you

Speaker 10

think it's

Speaker 6

more Tied to timing or are you seeing this correspond well with some of these new products you're launching on the innovation side?

Speaker 2

Yes, I think as you think about what's happening with the environment More broadly for consumers and then I'll talk a bit about what's happening within our community that are both impacting healthcare professionals. So As you know and economists are telling us the macro environment continues to be challenged. Consumers have spent their stimulus checks and they're moved through their savings. Layoffs are happening across industries. They're in consumers are in save mode and inflation is creating additional pressure.

Speaker 2

Those factors are impacting our healthcare professionals. But on the other end, there are dynamics within the healthcare environment that give us a lot of confidence And about our community's buying behavior and what we're seeing is that the healthcare community is reenergized and they're getting back to work. Since 2020, our customer has been fighting a global pandemic that's taken a meaningful toll on them. And the COVID fog is lifting and we're entering a new era of medicine. Yes, we're talking to healthcare administration, hospital CEOs every day and there has been an uptick In hiring, in wages, in staffing levels and zooming out over the long run, there's going to be a continue to be an incredible need for healthcare professionals as they are the fastest growing job segment and they're an incredibly attractive customer base Due to a number of factors including stable incomes, the wages as we've discussed, their jobs are incredibly purposeful And as discussed, it's a stable and growing industry.

Speaker 2

So that's kind of the zooming out the bigger picture. And then to your point, everything that we do from a product standpoint, from a marketing standpoint, that's kind of layering on top of how The environment is evolving over time.

Speaker 6

Thank you. I appreciate it.

Operator

Thank you. Our next question will be from the line of Noah Zatzkin with KeyBanc Capital Markets. Your line is now open. Hi. This is Chandra Nodaca on for Noah.

Operator

Just a quick one for me.

Speaker 1

Could you expand more on the upcoming retail presence? Any early updates around that first store that's opening 3Q? And I guess how are you thinking about an omnichannel approach to business longer term and maybe evaluating any other

Speaker 2

Thanks for the question. We are on track It's opening our 1st permanent store this fall. As we've seen with our pop ups and activations that we've had in the past, our healthcare professionals Are obsessed with FIGS and love experiencing us in person. They want to feel and touch and experience our products. They want to learn more about our brand.

Speaker 2

It's why we have 5 hour lines around the block with any physical Activation or pop up that we've done. And so we're really excited. We're really excited that we're opening our store and we have A plan to open more in the future. We'll give you more details on all of that going forward, but this is the future, right? The fact that we only have one channel today, with over $500,000,000 in net revenue, layer on top of our D2C channel, International layer on top teams, layer on top retail, there is so much opportunity in front of us.

Speaker 1

Thank you.

Operator

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

Speaker 12

Thank you very much. Just two quick questions. I guess the first one is on extended I think I'm wondering if you can share with us kind of visibility on how much it has aided in new customer acquisition. And then Daniella, my Question is really on modeling the $16,000,000 to $18,000,000 fulfillment in 2024. It was going to be spread pretty equally over 4Q and 1Q.

Speaker 12

Should we expect now that that is 1Q and 2Q of 2024? And then I guess the 2.50 of excess storage fees, Should we just assume that that is negated kind of the wash between moving, the total expense into 2024, offset by the 250 excess storage this year. Thanks so much.

Speaker 2

Sure. The release to extended sizing, this is with a long time coming. We're super excited to bring 3XL to 6XL to our healthcare professionals. We're seeing 5% of new customers engaging in our extended sizing and we've only really incorporated a few styles. So we're really excited to bring it across our assortment and continue to give our healthcare community not just A few of our core styles, but all of them in addition to the full layering system, that's really the goal and we're going to do that over time.

Speaker 2

But You know, saves this for everybody and everybody. And that was our campaign and it's, we are the most inclusive brand in the world or we aim to be, Because that's what this brand is all about. It's for all healthcare professionals and all awesome humans wear FIGS.

Speaker 1

And as it relates to your questions on the fulfillment enhancement initiatives, so we are now expecting to incur the bulk of the costs Of the $16,000,000 to $18,000,000 in incremental expenses in 2024, and that will be spread mostly in the first half with some trickling into the Q3 as well. And the 2 50 basis points basically from The move of the Fulfillment Enhancement project into 2024, we are seeing a 50 basis points Benefit in 2023, the differential between the 300 basis points of incremental expense we spoke about in Our past call and the 2 50 basis points we're now seeing in excess storage and fulfillment expenses.

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.

Speaker 2

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 Q1 fiscal 2023 earnings call. Thank you for your participation. You may now disconnect your lines.

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Earnings Conference Call
FIGS Q1 2023
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