FIGS, Inc. (NYSE:FIGS) Q4 2023 Earnings Call Transcript
FIGS, Inc. (NYSE:FIGS) Q4 2023 Earnings Call Transcript February 28, 2024
FIGS, Inc. beats earnings expectations. Reported EPS is $0.05494, expectations were $0.02. FIGS, Inc. 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 Fourth Quarter and Fiscal 2023 Year Earnings Conference Call. My name is Cole, and I'll 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. [Operator Instructions] I'd now like to turn the conference over to our host, Jean Fontana. Please go ahead.
Jean Fontana: Thank you. Good afternoon, and thank you for joining today's call to discuss FIGS fourth quarter and full year 2020 results, which we released this afternoon and can be found in our earnings press release and in the stockholder presentation posted to our Investor Relations website at ir.wearfigs.com. Presenting on today's call are Trina Spear, our Co-Founder and Chief Executive Officer; and Daniella Turenshine, our 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 the 10-K 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 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.
Trina Spear: Thank you, Jean. Looking back at 2023, we outperformed our expectations with net revenue growth of 8% and adjusted EBITDA margin of 15.8%. We reduced inventory by 33% and generated strong free cash flow of $85 million. Looking across the business, we grew our active customer base 13% versus last year. Additionally, we achieved 18% net revenue growth in non-scrubs, 42% growth in our international business and nearly 50% growth in our teams business. We also opened our first permanent retail location, our community hub in Los Angeles with strong early reads in traffic and conversion. Importantly, we continue to lay the groundwork to scale our business with investments in infrastructure and technology. While we are proud of these accomplishments, recent trends have become more challenging, which I will speak to in more detail shortly.
But I want to share right up front my fervent position that we are on the right course. During 2023, we took measures to right size our inventory levels, which are leading to some after effects. However, the work we have underway to create a more solid foundation from product to marketing to operations will set us up to succeed in the future. We remain the distant leader in healthcare apparel and have the scale and balance sheet to opportunistically invest across numerous growth levers. Now diving in a bit deeper to provide context on our 2024 net revenue outlook. With respect to the macro environment, we believe there are two factors that are impacting the healthcare apparel industry. First, we continue to see inflation weigh on consumers, including our healthcare community, two thirds of whom make less than $100,000 a year.
They have less spending power than they did two years ago, and are being more intentional about how they spend every dollar. Second, we believe that the sustained fatigue and stress amongst healthcare professionals post-COVID may be impacting behavior. The traumatic experience of COVID followed by the sustained high demand for healthcare workers is taking its toll on our community and may be impacting their purchasing decisions. Our healthcare is human roundtable discussion this past November shined a light on just how much pressure they're under. And we believe we may be seeing this reflected through lower engagement metrics. We are in the trenches with our community on these challenges and are diligently working to help solve them through our Awesome Humans bill.
Despite these external challenges, we remain optimistic about the state of the healthcare workforce long-term. particularly given that healthcare and social assistance jobs are projected to be the fastest growing of any sector between 2022 and 2032, and are estimated to create about 45% of all projected job gains over that period. This is according to the Bureau of Labor Statistics. In addition, a recent survey by the University of Maryland, Baltimore showed that 38% of Gen Z plans to pursue a career in healthcare. Outside of these macro factors, we've also taken a step back to assess our own performance. In 2023, one of our top priorities was to reduce inventory levels back to approximately 25 weeks of supply by year-end. We were successful in meeting our goal with only a modest impact on our gross margin.
We did this in part by bringing back a number of products from prior launches. For example, through our iconic FIGS 10 campaign, we relaunched 10 of our communities favorite colors in 10 weeks. At times, we also leveraged conversion-driven marketing, including promotional messaging to move through our inventory. We believe this may have contributed to the lower frequency and active customer trends we're now seeing. Looking back, we think we got away from the cohesive brand building strategy that ties our product launches to powerful storytelling campaigns. Our success has been based on brand excitement that ignites a word-of-mouth flywheel. This flywheel is what makes FIGS fundamentally different, and we're at our best when it's clicking. In 2024, our focus will be leveling up on innovation and rebuilding our brand momentum through a number of initiatives.
As discussed last quarter, we are evolving our supply chain through best-in-class partners across continents to deliver the most advanced products to healthcare professionals. In addition to innovation and quality and new products, we are enhancing important details like our waistbands, our trends, zippers, fabrications. We have also embarked on an initiative to improve fit consistency across our assortment, which we are excited to roll out over the next year, starting as early as Q2. As we continue to advance our technical capabilities, we also see opportunity to lean further into our layering system by becoming the category-defining brand, across scrub ware, outerwear, footwear, under scrubs, compression socks, bags and so much more for healthcare professionals.
Non-scrubs represented 23% of net revenue in the fourth quarter, reflecting strong performance in a number of these categories, and we see meaningful runway ahead of us. The recent launch of our On-Shift Sherpa Bomber Jacket was one of our biggest to date and is a great example of what we're able to bring to the market outside of core scrubs to address the needs of healthcare professionals on shift and off. Lastly, as we take our product innovation to the next level, we are introducing Extremes. Extremes exemplifies how FIGS can serve even the most extraordinary needs of healthcare professionals. This year, we plan to introduce a series of innovative launches featuring technical products designed to solve problems for some of the most specialized fields within medicine.
Last month, we launched our first Extremes collection supported by an exciting marketing campaign featuring Dr. Luke Bennett, the Medical Performance Director for Hintsa, the medical team supporting Formula One. Our large-scale storytelling campaigns will be designed to shine a spotlight not only on the extraordinary work that these healthcare professionals do every day, but also on just how extreme all healthcare professionals are. We have a series of exciting partnerships within sports medicine and other areas of healthcare as well, including search and rescue, large animal vets and EMT. These big brand moments will be augmented with a series of evergreen and smaller product launch campaigns throughout the year as well as community events and activations that will enable us to engage healthcare professionals in-person.
The success of our brand has not just been about great product innovation and powerful brand marketing. It's the seamless integration of both that generates excitement, leading healthcare professionals to share their FIGS experience with one another. We believe that our Extreme's initiative is integral in rebuilding the powerful word-of-mouth dynamics that helped us to surpass $0.5 billion in 2022, just 10 years after our inception. To lead our integrated marketing strategy, Bené Eaton has joined FIGS as Chief Marketing Officer, bringing 15 years of experience, most recently as Nike's Head of Brand Marketing for New York City. In addition to Nike, her background includes Ralph Lauren and Under Armour. We look forward to having her lead our brand and digital marketing efforts as we work to get back the secret sauce that has driven our success for over the last decade.
While we're excited about our strategic initiatives to drive brand momentum, we know that building new and existing customer engagement in an environment of the headwinds facing our healthcare professionals will take time, which is reflected in our guidance. The healthcare industry is evolving, and we're taking steps to evolve with it while also leveraging our multiple growth levers. Starting with international. Net revenue grew 42% in 2023 versus the same prior year period. The strong performance was driven by growth in our more established markets, stemming from localization efforts and targeting initiatives as well as traction we're gaining in the 10 markets we entered in 2023. Mexico and the Philippines remain our top new markets. And as you may recall, this came with minimal marketing investment.
We plan to add new markets in 2024 as we continue to build our brand globally. We are also excited to share that for the first time in our company's history, FIGS is partnering with the medical team behind sport. Starting with Everton Football Club of the English Premier League, which is the most viewed sports league in the world. Our relationship with Everton's medical team demonstrates our commitment to celebrating healthcare professionals, who have dedicated their lives to serving others, including athletes. Finally, in support of our growing international business, we plan to open a distribution center in Canada in 2025, which we believe will meaningfully improve our margin and enhance the customer experience with shorter shipping time.
Our teams business grew net revenue by 66% as compared to the fourth quarter last year. We successfully launched our Teams app open access test, enabling businesses of any size to purchase scrubs through our platform, which contributed to strong growth in the quarter. We believe that our ability to serve businesses of any size through this platform meaningfully increases our addressable market. In addition to serving these customers with premium products, we also offer personalization, including embroidery. During the holiday season, we created a customized experience for our largest TEAMS customer, a travel nurse agency to offer a gifting experience to their employees. With healthcare evolving to become more specialized, personalized and localized, we see tremendous opportunity to grow this business through an expanded assortment and exceptional online digital experience.
The U.S. concierge medicine market is expected to double to $13.4 billion by 2030. We see this reflected in record membership growth amongst concierge clinics and in the increased M&A activity within the primary care space. These trends validate our efforts to expand our TEAMS business. Turning to retail, we are pleased with the early results of our first community hub since our opening in early November. We believe that consumers still want that in-person shopping experience as evidenced by the fact that in 2023, e-commerce comprised only 15.6% of total retail sales in the United States. Our community hub is attracting new customers to the brand while also enabling us to serve existing customers with an additional shopping channel. Since opening in Century City, we've received requests from numerous healthcare professionals to open a store in their market.
We are targeting a summer opening for our second community hub in Philadelphia. The 4,100 square foot location will enable us to deliver events and programming that align with our community pillars and advocacy efforts. The large store format will also enable us to better showcase our broader layering system, presenting an opportunity to drive higher AOV. To exceed $0.5 billion as a digital-only brand is something we are very proud of and we believe that we can deliver an exceptional shopping experience across multiple channels. Our community hub rollout strategy will remain, test, learn, apply and win. And finally, we are laying the foundation to scale. We are undergoing the transition of our fulfillment operation to a best-in-class tech-enabled facility we will launch later this year that will enable us to scale and provide a better customer experience.
In conclusion, we recognize that industry dynamics are creating some near-term pressure, but we have been and will continue to take steps to offset these headwinds and position ourselves for long-term growth. We are unwavering in our belief that building a brand the right way takes time, but it's the most authentic and valuable way to do it. We are positioning our company to capitalize on the opportunities in front of us while taking important steps to make us a stronger, more resilient company in the future. We remain bullish on our long-term opportunity for several reasons. We are the pinnacle brand in the healthcare apparel space. We've just hit one million followers on Instagram, showing how we have the most loved brand in the industry.
We have ample market share opportunity across geographies, channels and professions. We have a long-term healthcare industry tailwinds. We have a strong balance sheet with $250 million in cash and short-term investments. We have no debt, and we continue to be a cash flow generative business. I remain confident that the strategies we have underway will lead to healthy long-term sustainable growth. Now I want to take a moment to acknowledge the announcement related to Daniella Turenshine's decision to leave FIGS to assume a CFO role at another company. I am so grateful for her contributions over the last 5.5 years as she helped us build the brand that serves those who serve others. Daniella has had the backs of our health care community, and she has been an incredible leader and thought partner to me, and the whole FIGS family.
She has also built out the best of the best finance team leading us to over $0.5 billion in net revenue while also being profitable. We are fortunate to have Daniella with us through mid-April to ensure a smooth transition. Kevin Fosty, our Corporate Controller, has been part of the FIGS family for the last three years and we have every confidence in his ability to serve as our Interim CFO. With that, I will turn the call over to Daniella to provide details on our fourth quarter and full year results and our outlook for 2024.
Kevin Fosty: Thank you, Trina. My time at FIGS has been an incredible experience, and I am so grateful to have been part of this growth journey. I am so proud of what we have accomplished over the last several years. And I truly believe that there is so much opportunity ahead. Our finance team is comprised of some of the best and the brightest, and I have every confidence that we will have a seamless transition under Kevin's leadership. I will now turn my discussion to a review of our fourth quarter financial results, followed by our outlook for the first quarter and full year 2024. We were pleased to have exceeded our adjusted EBITDA margin expectations for 2023. As we consider our 2024 outlook, we are mindful of the current macro challenges and remain focused on leaning into our brand DNA to drive improved and more consistent performance in the future.
Importantly, we have a strong balance sheet to make sound investments in our business to drive long-term sustainable growth. As noted in our press release, our fourth quarter reflects a $4.7 million net revenue reclassification from selling expense to a contra-revenue account. This was associated with an accounting change for duty subsidies that we have been paying on behalf of our Canadian customers. Now turning to our results. Beginning with the top line, for the fourth quarter, net revenues were $144.9 million, flat to Q4 last year. The aforementioned duty reclassification negatively impacted net revenues by $4.7 million. This reclassification was not reflected in our Q4 net revenue guidance of low single-digit growth. Active customers for the 12-month period increased 13% compared to a record quarter of new customer growth in last year's Q4.
As a reminder, we anticipated that the strong performance of our sample sale would pull forward some demand into the third quarter. AOV increased 4.5% to $117 in the fourth quarter, due to higher average unit retail or AUR driven by product mix. Trailing 12 months net revenues per active customer decreased 5% to $210. Gross margin for Q4 was 67.5% compared to 68.2% in Q4 2022. The net revenues impact of the reclassification negatively impacted gross margin by 100 basis points. Gross margin benefited from lower airfreight utilization, improved ocean freight costs and a more favorable promotional mix, partially offset by product mix. Selling expense for Q4 was $28.1 million, representing 19.4% of net revenues compared to 26% in Q4 2022. The 660 basis point decrease was primarily due to lower warehouse storage and associated labor costs within fulfillment as well as improved domestic shipping fees.
As a reminder, selling expense no longer includes the $4.7 million in duty subsidies be reclassified. Marketing expense for Q4 was $20.1 million, representing 13.9% of net revenues compared to 14.8% in Q4 2022. The decline in marketing expense as a percentage of sales is largely due to lower brand marketing, including out-of-home. We continue to drive marketing efficiencies and spend on both new customer acquisition and retention, maintaining first order profitability. G&A expense for Q4 was $35.4 million, representing 24.5% of net revenues compared to 25.2% in Q4 2022. The decrease in G&A as a percentage of sales was largely due to lower legal fees and insurance costs, partially offset by investments in people. Our fourth quarter net income was $10 million.
Our diluted EPS of $0.05 as compared to net income of $3.4 million or $0.02 in diluted EPS in last year's fourth quarter. Finally, our adjusted EBITDA for Q4 remained strong at $26.6 million for an adjusted EBITDA margin of 18.4% compared to 13.6% in Q4 2022. Briefly touching on the full year, net revenues were $545.6 million, an increase of 7.9% year-over-year. Gross margin was 69.1%, a decrease of 100 basis points year-over-year due to product mix shift and to a lesser extent, higher duties and a higher mix of promotional sales, partially offset by lower airfreight utilization and ocean freight rates. As a percentage of net revenues, operating expenses slightly increased to 62.8% from 62.6% in the prior year, primarily due to higher general and administrative expenses, offset by lower marketing and selling expense.
Adjusted EBITDA margin was 15.8% as compared to 17.2% in the same period last year. Touching on our balance sheet, we finished the quarter with cash and cash equivalents and short-term investments of $246.7 million. Inventory decreased 33% to $119 million at the end of the fourth quarter, reaching our target of approximately 25 weeks of supply for year-end. Overall, we are comfortable with the balance of core and limited edition inventory levels and believe we will be back to normalized weeks of supply in 2024. Capital expenditures for the year totaled $16.3 million, of which $12.2 million is associated with the fulfillment enhancement project. Before turning to our guidance, I want to reiterate some of the comments Trina discussed in regards to factors impacting our business.
First, we believe macro challenges, such as inflation, will continue to pressure health care professionals in the near term. We believe this could be exacerbated by the rising fatigue and stress among some workers in the industry. Looking at our own business, during 2023, as we focus on getting down inventory to more normalized levels, we believe we may have shifted a bit too far away from our approach of tying product launches to brand storytelling campaigns. We believe that the strategic actions we are taking in product and marketing will ultimately drive improved performance, though we recognize that this will take time, which is reflected in our outlook. Looking at profitability, we expect selling expense pressure associated with our fulfillment enhancement project and deleverage on G&A to pressure adjusted EBITDA margin in 2024.
We are confident in the steps we are taking to drive improved performance and therefore, we plan to continue to leverage our strong balance sheet and cash flow dynamics to make strategic investments that will position us to scale our business for future growth. Now moving to guidance for the full year 2024. As a result of the aforementioned factors, we expect net revenues to be flat to down mid-single digits as compared to the full year 2023, reflecting pressure in frequency trends and active customer growth. Looking at cadence, we expect the third quarter to be the most challenged of the year as we anniversary the strong volume generated by last year’s sample sale as we continue to work down inventory levels. Turning to gross margin for the year, we expect to be roughly in line with our 2023 rate as we elevate products with new fabrications and trends and continue to see product mix shift.
We expect this to be offset by a duty cost benefit later in 2024. Turning to selling expense, transitory costs associated with our fulfillment enhancement project, are estimated to be approximately $14 million or about 250 basis points in 2024. In terms of ongoing fulfillment-related costs, we expect that the cost associated with the new facility will offset the savings we gained on storage costs to house excess inventory last year. Therefore, 2023 represents a good baseline for what we expect selling expense to be as a percentage of sales following the completion of our transition to our new fulfillment center. Longer term, we expect to gain leverage as we scale. In terms of cadence, we expect the majority of these transitory costs will be spread within the first three quarters, with the second quarter carrying the highest expense.
The bulk of the project involves moving our fulfillment to a new facility in 2024 while simultaneously continuing operations in our current facility to ensure a smooth transition. The projected $14 million in transitory costs are largely associated with temporarily running the two concurrently. The new facility will operate with state-of-the-art robotics and new technology that we expect to increase reliability, flexibility and efficiency as well as improved order delivery times. In addition, we expect this new facility to have the capacity to support $1 billion in net revenues as we continue to scale our business. G&A is expected to deleverage based on our net revenue outlook. We are taking a close look at our cost structure to identify savings opportunities, but we’ll continue to invest in the areas of our business that drive growth.
We expect D&A to increase commensurate with the increase in capital expenditures. As a result of these factors, adjusted EBITDA margin for full year 2024 is expected to be between 11% and 12%. This reflects approximately 250 basis points of cost headwind from the transitory portion of our fulfillment project. In terms of our Q1 2024 outlook, we expect net revenues to decline in the low single digits reflecting pressure on active customer growth and continuation of slower frequency trends. We expect gross margin to be down versus Q1 last year due to investments in innovation and product mix shift. Looking at operating expenses. For selling expense, we expect the transitory fulfillment project cost to impact Q1 by approximately 370 basis points.
Offsetting this will be the benefit of the cost savings from nonrecurring storage fees from last year as well as the duty reclassification. Net-net, we expect selling expense to deleverage by approximately 70 basis points, which also takes into account higher ongoing fulfillment costs. As a result, we expect first quarter adjusted EBITDA margin to be approximately 7.5%. Capital expenditures for 2024 are expected to be between $18 million and $19 million, including $13 million to $14 million in fulfillment enhancement related costs. In conclusion, we believe, we have identified areas of opportunity to reignite demand in our business, but also recognize that this will take time, and we are still facing macro headwinds. We remain excited about the long-term prospects for our business.
We are the distant leader in health care apparel with distinct competitive advantages in product innovation and brand love, coupled with the scale and balance sheet to invest in future growth. With that, I will turn it over to the operator to kick off our Q&A session. Operator?
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