FIGS Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 13 speakers on the call.

Operator

Good afternoon. Thank you for attending today's FIG's Third Quarter Fiscal 2023 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. I would now like to pass the conference over to our host, Jean Fontana.

Operator

Please go ahead.

Speaker 1

Thank you. Good afternoon and thank you for joining today's call to discuss FIG's Q3 2023 results, which we released this afternoon and can be found in our earnings press release And a stockholder presentation posted to our Investor Relations website at ir. Wearfigs.com. Presenting on today's call are Trina Speer, our Co Founder and Chief Executive And Daniella Ternshein, our Chief Financial Officer. As a reminder, remarks on this call that do not concern past events are forward looking statements.

Speaker 1

These may include predictions, expectations or estimates, including about future financial performance, market opportunity or business plans. Forward looking statements involve risks and uncertainties and actual results could differ materially. These and other risks are discussed in our SEC filings, including in the 10 Q we filed today, Which we encourage you to review. Do not place undue reliance on forward looking statements, which speak only as of today and which we undertake no obligation to update. Finally, we will discuss certain non GAAP metrics and key performance indicators, which we believe are useful supplemental measures for understanding our business.

Speaker 1

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'd like to turn the call over to Trina Speer,

Speaker 2

Thank you, Gene. Good afternoon, everyone. Thank you for joining us for our Q3 2023 conference call. We are very pleased to have delivered better than expected net revenues and adjusted EBITDA margin for the Q3. I would like to thank our entire Fix team for their hard work as well as their devotion to our healthcare community.

Speaker 2

Touching on some highlights from the quarter, net revenues grew 11% compared to the prior year period, driven primarily by nearly 20% growth in active customers with another record number of new customers added in the 3rd quarter. Beyond the market share gains we are driving in the United States, we are building demand internationally with record growth of 81%. We are replicating the powerful word-of-mouth dynamics that we fueled in the U. S. Over the last decade.

Speaker 2

Within Teams, our B2B business, We saw strong performance with a growing number of institutions coming to FIGS to professionalize their organization. We also continue to make meaningful progress in normalizing inventory levels, which declined 15% compared to the Q3 of last year. Looking at profitability, we delivered an adjusted EBITDA margin of 17.2 percent ahead of our expectations and generated free cash flow of $46,000,000 for the 3rd quarter. Our Q3 performance underscores our ability to deliver on our objectives and as a result, we are raising our full year net revenue and adjusted EBITDA margin guidance, which Daniella will speak to shortly. Turning to our business highlights.

Speaker 2

As we execute our strategic priorities, we remain committed to our mission of serving those who serve others. Everything we do is centered around the healthcare community from the product innovation we bring to bear to our compelling marketing campaigns to the inspiring ambassadors we partner with to our work around advocacy. Product innovation for FIGS is above all about solving real world problems for the healthcare community With premium products that offer supreme functionality, comfort and style. Our customer first approach to product attracts New health care professionals to our brand and drive loyalty amongst our existing customers, demonstrated by the fact that repeat customers continue to generate Roughly 70% of our net revenues. Our merchandising strategy is to build a product assortment that not only stands alone, but can be matched back To our core scrubs offering to create a complete layering system.

Speaker 2

We leverage customer insights to bring new products across our categories. These are limited edition styles that create a flywheel effect that drives both excitement and traffic whereby customers buy these new styles in addition To replenishing their core. During the Q3, for example, we introduced our Natal scrub tops and massage scrub jogger with a feminine twist while maintaining maximum movement and utility. We also launched our 1st wide leg pant, the high waisted Yandi Cargo Scrub Pant. The success of these limited edition style drops match back with our core scrub styles and reflect our ability to deliver a consistent stream of newness that our customers want.

Speaker 2

Another area of strength is in collaboration. We seek partnerships with brands that are leaders in their industries, have similar values to FIGS And complement our own core capabilities. We have talked in the past about our New Balance partnership where we continue to see tremendous growth in footwear intentionally designed Most recently, we collaborated with Echo, a leading digital health company that is advancing How healthcare professionals detect and monitor heart and lung disease. We launched the co branded 4500 digital stethoscope that was supported by our campaign, Innovation You Can Hear, which exemplified how we create powerful storytelling that captures the attention of our community. Turning to building and deepening engagement with our community.

Speaker 2

Our marketing strategy reflects a combination of engaging campaigns with creative storytelling, Segmentation strategies that align our content to our channels, to our audience and personalized messaging based on our deep understanding of our customers. The efficiency of our marketing engine enables us to reinvest dollars into top of funnel strategies, which helped to drive another record number of new customers In the Q3. As part of our new customer acquisition efforts, we are engaging students who have long purchase cycles As they are just entering their 30 plus year career. We are creating local on campus experiences with customized products for each school with colors and embroidery. We are also leveraging the Teams platform in order to become the exclusive provider to universities and associations.

Speaker 2

These efforts led to a new partnership with Veterinary Business Management Association, a student organization spanning 38 universities. We also maintain a strong connection with our community by delivering campaigns that highlight Awesome Human, new technical innovation In cultural moments that drive heightened excitement and a call to action. For Breast Cancer Awareness Month, we teamed up with F Cancer on a mission to prevent, detect and unite. We donated $50,000 to this organization to advance health equity through education, community clinics and screening. Some of our greatest moments with the health care community come through our advocacy.

Speaker 2

Beyond the products we deliver, the way we utilize our platform to stand up for their rights and their well-being without hesitation Is what generates such intense loyalty to our brand. This quarter, during the largest strike of healthcare workers in U. S. History, We spoke out in support of higher pay, safe working conditions and sustainable patient loads, all core tenants of our Austin's humans bill. Our Instagram post generated some of our highest engagement over the past year and letters to Congress sent through our advocacy hub spiked.

Speaker 2

To date, our community has sent almost 3,000 letters to Congress through our advocacy hub. Looking at our performance outside the U. S, We are thrilled to see the growing affinity for the FIGS brand across continents. International delivered record net revenue growth of 81%, Reflective of strong performance across countries including our longest standing markets Canada, U. K.

Speaker 2

And Australia. We added 7 new countries including Poland, Kuwait and Singapore during the quarter. And similar to Mexico and the Philippines, Our entrance into these new regions erodes from strong grassroots demand signaling the growing recognition of FIGS worldwide. Turning to our B2B business. Teams delivered exceptional net revenue growth year over year with orders from best in class healthcare organizations Such as the American Student Dental Association, AYA Healthcare and Veterinary Emergency Group, VEDGE, a fast growing emergency care organization with over 60 locations.

Speaker 2

Inbound demand is growing as more institutions are looking to FIGS to help them professionalize their staff with Premium Uniforms. FIGS is best positioned to support these institutions with a best in class technology platform and products that help their professionals Look good, feel good and perform at their best. Turning to retail. I am super excited to share that we will officially be opening our first permanent retail store, which we refer to as a community hub on November 3rd, which is tomorrow in Century City Mall. We are incredibly proud of this achievement not only because this is our first branded permanent retail location, it's really the first of its kind, a space that was created and is Purely dedicated to healthcare professionals.

Speaker 2

In addition to enabling healthcare professionals to feel, try on and become educated about our products, Our community hubs will serve health care professionals through purposeful programming and events on topics that they really care about. In closing, while we are proud of what we have accomplished to date, we have so much untapped potential, which I will speak to following Daniella's review of our financial results.

Speaker 3

Thanks, Trina, and good afternoon, everyone. I will begin my discussion with a review of our Q3 financial performance followed by our revised 2023 outlook. Overall, we are pleased to have exceeded our net revenues and adjusted EBITDA guidance and to be once again raising our full year guidance. We did this while making significant progress toward our strategic priorities, normalizing inventory and generating strong free cash flow. For the Q3, net revenues grew 10.7 percent to $142,400,000 compared to $128,600,000 in Q3 last year, primarily due to an increase in orders from existing and new customers as well as higher AOB.

Speaker 3

We were pleased to deliver a 19.6% increase in active customers fueled by ongoing initiatives to drive brand awareness globally and strong reactivation rates among lapsed customers. As Trina stated, We've reached another 3rd quarter record in new customers. AOV increased nearly 2% versus last year's Q3 led by higher units per transaction or UPT and to a lesser degree by an increase in average unit retail or AUR. AOV continues to benefit from the product mix shift driven largely by the strength in footwear and outerwear. This was partially offset by a higher mix of sales occurring during our planned sample sale in September.

Speaker 3

Gross margin for Q3 was 68.4% compared to 70.6% in Q3 2020 The 220 basis point decline compared to Q3 last year was primarily due to product mix shift. We saw strong growth in non scrubber categories including footwear as well as in certain limited edition styles. Non scrubber grew 26.4% to 19.3 percent of net revenues in the 3rd quarter versus 16.9% in the same period last year. To a lesser degree, gross margin was impacted by a higher mix of promotions as well as higher duties. This was partially offset by lower airfreight utilization and better freight costs.

Speaker 3

Moving to operating expenses. Selling expense for Q3 was $32,200,000 representing 22.6 percent of net revenues compared to 24.8 percent in Q3 2022. The 220 basis point decline was a result of lower fulfillment expenses As we lap elevated storage costs last year and to a lesser extent leverage within shipping expense due to higher AOV. This was partially offset by higher duties related to the increased mix of international sales and a higher mix of promotional sales. Marketing expense for Q3 was $19,000,000 representing 13.4% of net revenues compared to 15.6% in Q3 2022, reflecting digital marketing efficiencies.

Speaker 3

We continue to flex our marketing spend to optimize our return and maintain a disciplined approach to balancing investments in top of funnel marketing and maintaining first order profitability. G and A expense for Q3 was $36,200,000 representing 25.5 percent of net revenues compared to 21.5% in Q3 2022. The increase in G and A as a percentage of sales is due to higher And in people, including salaries, bonus, payroll tax and stock based compensation expense, partially offset by lower professional fees. In addition, as you may recall, last year we saw an 190 basis point benefit due to a change in our accrual methodology for charitable donations. Taking this to the bottom line, our net income was $6,100,000 or $0.03 in diluted EPS for the quarter.

Speaker 3

This compares to net income of $4,000,000 and diluted EPS of $0.02 per share in Q3 2022. Adjusted net income was $6,300,000 and diluted EPS as adjusted was $0.03 in Q3 2023 as compared to adjusted net income of $4,100,000 and diluted EPS of $0.02 in Q3 2022. Finally, our adjusted EBITDA for Q3 was $24,400,000 for an adjusted EBITDA margin of 17.2% compared to 16.4% in Q3 2022. Turning to our balance sheet. We finished the quarter with cash, Cash equivalents and short term investments of $232,000,000 Inventory declined 15% to $143,000,000 at the end of the 3rd quarter compared to $168,000,000 in the Q3 last year.

Speaker 3

We made significant progress moving towards more normalized levels And expect inventory to decline again in Q4. Lastly, free cash flow was $46,000,000 in the quarter. Moving to our outlook, starting with the top line. We expect 4th quarter net revenue growth to be up low single digits, reflecting ongoing macro uncertainty and recognizing that there may have been some pull forward of demand given the outperformance of the 3rd quarter. We expect the macro environment to continue to weigh on the consumer at least into the first half of next year.

Speaker 3

Moving to gross margin for the Q4. We expect better freight costing to be offset by a shift in product and promotional mix. Looking at selling expense, we expect to incur approximately $2,000,000 in initial start up costs for our fulfillment enhancement project. These elevated costs are expected to extend into the 1st 3 quarters of 2024. In addition, we expect selling expense to be impacted by higher relative growth in our international business, which carries both duties as well as higher shipping expense given that we currently distribute all products from our California facility.

Speaker 3

As a result of these factors, we expect 4th quarter adjusted EBITDA margin of between 11% 12%. Based on our better than expected Q3 performance and outlook for Q4, we now expect 2023 net revenue growth of approximately 8.5% And adjusted EBITDA of approximately 14%. This is up from our previous expectation of 5.5% to 7.5% net revenues growth And 12.5% to 13.5% adjusted EBITDA margin. Overall, we are really proud of what we have delivered in this uncertain macro environment And we remain excited about the long term growth potential of our business as we continue to advance our leadership position within the healthcare apparel industry. We have an incredibly healthy balance sheet with ample cash and no debt and our business model generates strong cash flow.

Speaker 3

We are making the investments today that we believe will drive accelerated future performance as we move past near term macro challenges. I will turn it back to Trina to discuss where we are investing in our business for the long term.

Speaker 2

Thanks, Daniella. We believe that the growth and the evolution of the healthcare industry Combined with our leadership position in Healthcare Apparel and strong balance sheet creates significant long term opportunity for FIGS. As Daniela stated, we will leverage our strong cash flow conversion dynamics and scale to lay the groundwork for multiyear growth. These investments span across several areas of our business. I'll begin with product, the lifeblood of FIGS.

Speaker 2

We are evolving our sourcing strategy to deliver the most innovative and high quality products healthcare professionals have ever experienced. We are Our supplier base with best in class partners. We are working to optimize lead times to bring more flexibility to our supply chain. And finally, we are diversifying geographically to mitigate risk. We are confident that this is the right direction for our company as we widen the moat around our business and advance our leadership position.

Speaker 2

2nd, we will continue to invest in driving international growth to become the global leader in healthcare apparel. We are building our localization capabilities, expanding our ambassador network and deploying brand initiatives in existing and in new markets. 3rd, we are building our go to market strategy for our Teams business to capture the growing trend in more specialized and consumerized medicine. We see a huge opportunity to capture share in an area of the healthcare industry where innovation is lacking. To capture this opportunity, we are upgrading the technology behind our Teams platform to create a seamless experience for administrators, saving them time and resources on procuring the uniforms their staff for staff's need to do their jobs.

Speaker 2

The next generation of this platform is on track and will launch later this year. Finally, we are just one community hub in on our retail strategy. We are going to learn from our early experience and ensure we have The right talent in place to successfully and profitably build out our retail presence. As we build for the future, we are setting the foundation for a global distribution network. Our fulfillment enhancement project is on track for 2024 and we plan to open a Canadian DC in 2025.

Speaker 2

In conclusion, we see tremendous opportunity to leverage our authenticity, industry leading product innovation, strong balance sheet and scale to capitalize on the tailwinds in the growing health care industry. Health care professionals are at the heart of everything we do and serving them is what guides our company From how we approach product innovation, how we engage with our community and how we show up through our advocacy. These are the values that will keep our company on track To serve healthcare professionals like no other brand and to deliver long term profitable growth for our community, our employees and our shareholders. With that, I will turn it over to the operator to take your questions.

Operator

Thank you. We will now begin the Q and A session. Our first question is from Edward Yruma with Piper Sandler. Your line is now open.

Speaker 4

Hey, good afternoon. Thanks for taking the question and congrats on the results. I guess first, I would love to click down a little bit more on the driver of gross margin. I know you talked a little bit about mix shift to non scrub, but I would like to maybe go a little further there. Can you talk about the performance of some of your newer products, Like the under under scrub, lab coats, things that are more evergreen in the assortment versus something like footwear.

Speaker 4

And then as a follow-up, we've gotten Questions on the distribution center investment cadence. So if you wouldn't just mind maybe giving us a quick update on how we should think about that over the coming quarters? Thank you.

Speaker 3

Sure. I can start talking about the drivers of gross margin. So the biggest driver year over year was Product mix shift, both into non scrubware as we saw big acceleration in footwear, but also into our limited edition scrubware. To a smaller extent, it was mix shift promotional mix. We did see some outperformance in our sample sale and also higher duties.

Speaker 3

And again, that was offset By better than expected by better freight, both ocean and air freight.

Speaker 2

In terms of product innovation, we continue to see our layering system resonate with our community. And so we saw that with our underwear, which we launched In the quarter with our outerwear, our Sherpas are actually doing really well, our footwear collaboration with New Balance. And so, Non scrubs as a percent of total is almost 20% of our business. And as we continue to build out these categories, We'll get leverage from a costing perspective, but they need to grow build out and that's what we're really focused on. And you see, we talked a little bit about how these drops, whether it's within scrubs or outside of scrubs, across Under scrubs across our outerwear and our footwear, how we're able to match that back to the core and really, we're seeing our healthcare professionals Engage with these new styles as well as the core and kind of replenishing our core, and those two things are working really well together.

Speaker 3

And on your last question on investments for our fulfillment enhancement project, so we're expecting about $2,000,000 of startup costs in the 4th quarter. Looking into 2024, we're still expecting total kind of project cost to be $16,000,000 to $18,000,000 so $14,000,000 to 16,000,000 Of that taking place in 2024, as a result of that, we are expecting some pressure in selling as a result of this enhancement initiative, but do believe that it's going to enable us to drive better efficiency, better reliability, a better customer experience over the long term. And we're still expecting about $20,000,000 of capital expenses in 2023, with the majority of that taking place in the 4th quarter.

Speaker 4

Thanks so much.

Operator

Our next question is from Brooke Roche with Goldman. Your line is now open.

Speaker 5

Good afternoon and thank you for taking our question. Trina, I was hoping you could elaborate on any Changes or trends you're seeing in consumer behavior that you've seen as you move through the Q3 and into Q4 to date, Have you seen any changes in price elasticity of demand or any trends or changes in How consumers are engaging with the brand as student loan repayments resume and as we see some changes in the macro in aggregate?

Speaker 2

Thanks, Brook. Yes, I think there's we're seeing kind of 2 dynamics going on. The first one is There was a lot of stocking up during the pandemic and, there was obviously a heightened need for scrubs during that time. There were stimulus, interest rates were super low and we are experiencing the hangover effect of that and we see that mainly in our frequency rates. And so we do believe that we at this point have abnormally low repeat frequency and we believe we'll see that normalize over time and We'll see going into next year and beyond what a more normalized cadence will look like from our healthcare professionals.

Speaker 2

But as you know, healthcare professionals, they're buying about, pre pandemic, 4 to 6 sets a year. They're spending about $5.50 a year. And so with us, they're buying more like $0.02 to $0.03 a year and spending about $2.12 So this is a huge opportunity going forward. The second piece that we think is happening is the macro environment. There's still a lot of uncertainty.

Speaker 2

And as you mentioned with student loans And other dynamics, that we think will be a short term headwind. But we do believe We're able to offset some of this repeat frequency with new customer adds and you've seen that in the last quarter.

Speaker 5

Very clear. Thank you so much for that. Daniella, can you comment on inventory rationalization? Are you still targeting 25 weeks of Supply by the end of the year. And how should we be thinking about further cadencing of inventory drawdown over the next few quarters?

Speaker 3

So we're still on track to deliver approximately 25 weeks of supply at year end. Now as a reminder, this is slightly above Our normalized level of 16 to 20 weeks, which we expect to be able to get back to in 2024. Important to note, still about 50% of our inventory is in core styles and classic colors. So sell all year round, never goes out of stock, never goes out of style. And as you saw, we made progress in the 2nd quarter and the 3rd quarter on moving inventory receipts lower and we're going to expect to make further progress There in the Q4 with minimal plan receipts.

Speaker 3

I think we continue to be really focused on maintaining the integrity of our brand With a really disciplined promotional strategy with so much growth ahead of us and we're going to continue to work through our inventory At the right rate and pace for our business, looking into 2024 when we're back at that kind of 16 to 20 weeks of supply, We would expect to grow inventory in line with sales going forward.

Speaker 5

Thank you so much. I'll pass it on.

Operator

Our next question is from Dana Telsey with Telsey Advisory Group. Your line is now open.

Speaker 6

Hi, everyone. Congratulations and nice to see the progress. Trina, you mentioned the sourcing diversification opportunity. What are you doing exactly? Where are you going?

Speaker 6

And what do you see as the opportunity in lead times as I would think that could also be a gross margin driver? And then just secondly on the more efficient marketing spend in digital marketing, how do you planning marketing going forward? Thank you.

Speaker 2

Thanks, Dana. Okay. So from a sourcing strategy perspective, we're developing new supplier relationships, And really leveraging their capabilities to help us continuously up our game, and continuously execute on new ideas. And that Comes in the form of fabrication, styles, details that our healthcare professionals need to do their jobs. And it really comes from the lens of bringing product that solves problems for people.

Speaker 2

And so That's where we're focused. To your point about lead times, we do believe the optimization of lead times will help us it's going to create a lot more flexibility, Being able to deliver and respond to what we're seeing with our community and what they want and what they need and deliver that in a more timely way. So we're excited about that as well. And we're also aligning with sourcing partners across geographies From Asia to the Middle East to LatAm, and yes, to diversify and get better lead times per share, but also to access the best in class Manufacturing talent and to mitigate risk through geographic diversity. And so we're really excited about the shifts that we're making.

Speaker 2

Our ethos around gross margin is unchanged. And so as this strategy unfolds, we're going to be focused on Leveraging our high margin core to drive more innovation while maintaining an extremely strong margin rate. As it relates to marketing, we're continuing to execute on our strategy of Driving bottom of the funnel CAC gains and taking those gains and investing in top of the funnel. And As we reach stepping points in cities across the U. S.

Speaker 2

And now in some of our international markets as well, we see word-of-mouth driving our cap down. And so we have to take those gains and invest in top of the funnel, driving brand awareness, driving more healthcare professionals in the Fizz family. And so that's why we're able to maintain our efficiency and you're seeing that quarter after quarter.

Speaker 6

Thank you.

Operator

Our next question is from John Kernan with TD Cohen. Your line is now open.

Speaker 7

Good afternoon. Thanks for taking my question. How should we think about the long term margin structure of the business? Gross margin has been very stable in fairly volatile macro. I guess when we think about G and A and selling expenses, what are the opportunities long term to see some leverage on these line items.

Speaker 7

It sounds like selling has some expenses coming on for next year for distribution. But just curious, How do we think about both those expense line items going forward? Thank you.

Speaker 3

Thanks, We continue to believe that we'll get to a high teens adjusted EBITDA margin. I think it's helpful to think about kind of the different components of what needs to happen. You spoke to our really strong gross margin rate. I think we're going to continue to deliver that very strong gross margin. Trina spoke about evolving our supply chain to drive greater innovation and quality.

Speaker 3

We're also expanding our layering system. And so both of these items we might see some short term fluctuations. But really we're positioning the business For the longer term and we have a lot of confidence that these changes that we're making are really going to enable us to be better positioned 3 to 5 years from now and also gain a lot of efficiency over time as we scale, particularly to selling. So we do expect 2024 to be burdened with fulfillment project costs, but we are expecting to move past that in 2025. In the near term, we may see a higher cost per quarter as we invest behind customer experience, but we're going to plan to leverage that as we scale.

Speaker 3

In addition in selling, we do expect to see a higher penetration of international, which does carry duties and higher shipping costs And that's going to have a short term impact on selling expense. But once we open a Canadian DC in 2025, We should be able to drive significant cost savings related to duty and shipping expenses. And over time, we believe we can leverage G and A And continue to remain really efficient in our marketing as we always have been. I think just taking a step back, right, we have a strong balance sheet, Strong cash flow generation to really invest in our future growth now. And so we really want to take advantage of our leadership position to Capture the opportunities across global healthcare.

Speaker 7

Understood and thanks for the very thorough answer. Just maybe one quick follow-up on the previous, I think it was First question on inventory. Do you expect inventory to grow in line with sales next year or should we be still be cycling down year over year in inventory?

Speaker 3

I think in the first half, we'll still be working to get to that 16 to 20 weeks of supply. Looking into the back half of twenty twenty four is when we would expect To see inventory grow more in line with sales once we're in that normalized place.

Speaker 8

Got it. Thank you.

Operator

Our next question is from Alice Zhao with Bank of America. Your line is now open.

Speaker 3

Hi. Thank you for taking my question. I'm hoping to get more detail about Teams and International since those are the two areas Driving your new customer acquisition. How big is each as a percent of sales now? What are the long term impacts To AOV, as both of these categories grow, I.

Speaker 3

E. Does Teams provide an AOV benefit given the bulk orders? And And then does international AOV tend to be higher or lower than domestic? And then lastly to summarize all that, if you could touch upon the contribution margins for Both of these categories as well. Thank you.

Speaker 3

So looking at our Teams in international businesses, so speaking to the AOV that we see in each of those, Teams does carry a higher AOV as these are generally larger orders. It also has a higher contribution margin. So Gross margin is pretty similar. We do see some offset in higher discounts for these bulk orders, but generally they're buying more Our core product, which helps to keep gross margin relatively stable. And then we got a lot of benefits below gross margin looking at efficiencies in outbound shipping.

Speaker 3

And also today, it's entirely inbound, so no marketing expense. So Teams, really accretive from a contribution margin standpoint. International, today carries a slightly lower AOV, but we see a lot of opportunity to drive that higher over time. From a contribution margin perspective today, we're really focused on keeping the experience similar for our international customers. And so to do that, we're subsidizing a lot of the shipping and duty expenses as we sell from our distribution center in California.

Speaker 3

From a marketing perspective, as Trina mentioned, we're really efficient. And so as we expand our distribution network, As we open a Canadian DC in 2025 like we spoke to, we see a lot of opportunity to drive better profitability in international over the long

Operator

Our next question is from Adrienne Yih with Barclays. Your line is now open.

Speaker 9

Great. Thank you. Good afternoon. My one question, my first question is on the Community Hub that you press released Pune, can you talk about kind of the store, if you have any metrics at all and I know it's kind of the first store, But really kind of the intention behind it, is it intended to be more of a showroom environment, or is it a kind of fully Standalone box with depth and breadth of inventory. And then my second question for Daniella is on the supply chain, it sounds like you're sort of Back to normal supply, but it doesn't sound like there's a ton of inbound manufacturing.

Speaker 9

When would you think that the kind of When would you restart up kind of manufacturing and how much of the new product that you would be kind of manufacturing is going to be new versus core? Thank you.

Speaker 2

Thank you. So in terms of the store, CommunityHub, we couldn't be more excited about it. It's the 1st Solely branded health care apparel store in the world, which is crazy to say because this was a dream that we had about 11 years ago. And since then, there's really been No place for health care professionals to go, and not only get their uniform so they can do their job, but also connect with each other. And we're really excited about that, providing that.

Speaker 2

And so that's why we're so excited about the programming we're going to have and The way in which we're going to engage with our community, I think our community is going to be able to learn more about our products. They're going to be able to try it on, Really understand their size and all the different styles or different fabrications. And this is I mean, we couldn't be more I think the largest, most iconic brands have stores and our plan is to be a very large, very iconic brand for a long, long time. It's not a showroom. So we carry inventory and so you can get what you need and you can leave the store with the uniform that you need.

Speaker 2

You might have Go to work the next day and you want to wear your new FIGS and we want to provide that opportunity. And so we're officially opening tomorrow. So we will be providing you with all the detail in the future. But if you are in LA, please come by.

Speaker 9

We'll congrats on that.

Speaker 2

Thank you.

Speaker 3

On your question on inventory, so we're really Proud to be working down our inventory balance while sustaining such a strong gross margin rate. We have Work to bring inventory down by lowering receipts in the Q4, but I think it's important to note that we're still bringing in new products Just in shallower buys, it's not going to feel very different to our customers and it's still going to enable us to drive excitement and engagement. We're going to continue to Plan lower core orders to bring our inventory balance down while still bringing newness and innovation going into 2024. Great. Thank you very much.

Speaker 3

Best of luck. Thank you.

Operator

Our next question is from Rick Patel with Raymond James. Your line is now open.

Speaker 10

Thank you. Good afternoon. I'm hoping you could dig deeper into the International business. So you've launched in a lot of new markets within the past couple of years. What have you learned about what works, what doesn't?

Speaker 10

And then as we think about the next year, do you have more countries in the pipeline that you expect to launch in? Or are you going to focus more on your existing markets?

Speaker 2

Thanks, Eric. Okay. So I think from an international perspective, what we've Learned is that our localization strategies are really working. When we're localizing our messaging, our communications, Even our products and what we're showing on our site at any given time, obviously our currency, being able to check out, and pay in local currency, It's really important. So localization is really going well.

Speaker 2

I think the other thing that is working well is How we're being opportunistic, right? We're seeing the demand organically from a number of countries and we're opening them up and we're not even really spending on marketing And we're seeing that demand and we're seeing that build in markets that maybe we weren't even planning over a year or So ago to open that market and that's been really exciting. So and I think the other thing that's been really great to see is the word-of-mouth dynamics. They are very similar to what we've seen in the United States, that we're seeing different markets in these tipping points around, how people are coming back and engaging with the brand over time, How referrals and people are telling their friends or colleagues about FIGS and that's been really great to see. And so going into next year and beyond, I think we're going to continue to be opportunistic.

Speaker 2

We're obviously going to invest in our existing markets and ensure That we continue to build the brand. And as we see the brand awareness grow, we're going to continue to invest behind that. But we're also going to be opportunistic as we open up new markets next year.

Speaker 10

And can you also touch on the outlook for promotional events in the Q4? I'm curious if you expect a similar cadence to last year or if you have different activations in mind.

Speaker 3

So our guidance assumes that we continue to maintain Discipline around our promotional events. As you know, we don't typically do kind of like for like events every quarter and we think that's really important to ensure that our customer Waiting for the next event and we also just have more flexibility as a D2C only company to be really nimble in our strategies and adjust Based on our inventory position, based on the volume, based on what we're seeing in the customer kind of spend. So we're always going to focus 1st and foremost on protecting our brand, but we also recognize that customers have Been leaning into promotions during this difficult time. So we're going to plan to respond accordingly depending on the environment.

Operator

Thanks very much. Our next question is from Bob Drbul with Guggenheim. Your line is now open.

Speaker 11

Hi, good evening. This is Arun Rezai for Bob Drbul. I wanted to follow-up on Adrian's question about the community hubs. Can you point finding meaningful digital halo effects or any uptick in the area that you're implying? Because I'm pretty sure the area is very heavy on healthcare community.

Speaker 11

So I just wanted to understand What was behind the location? And also I wanted to ask about the competition. Any updates On a competitive environment, are the promotions driven by new players or promotions solely by macro? Thank you.

Speaker 2

Sure. So, as it relates to our community hub in Century City, it's really central. It's central to Healthcare clinics that are actually located in Century City

Speaker 8

Mall,

Speaker 2

like One Medical, like Kindbody and others. And there's also a number of hospitals Within a few miles from Century City Mall. So we did a lot of analysis around and as you know as a DTC company we have so much data Around our customers and where they live and where they work. And so utilizing that to figure out where to put our community hub and that will be our strategy going forward to That will help us decide where to go next and where to put our store. So, And to your point, I think the digital halo is really important.

Speaker 2

Stores in many ways are profitable billboards and they are able to drive Our digital business as well, you try on your uniform in the store, you figure out your size, And then you can kind of shop the next time online after understanding that. And so there's a lot of benefits. Other retailers have seen AOV is much higher than what they see online. There's also a lot of, different metrics out there around Other retailers and what they see as it relates to omnichannel, and how, the repeat effect of having an omnichannel business across both online and off. And so we look to see that over time as well.

Speaker 2

As it relates to the competitive landscape, We really haven't seen much change since we talked about this last time. From our perspective, we're adding new customers at a record rate. We're continuing to widen the moat between us and everybody else. The next closest competitor continues to be about onetenth our size. And how are we widening the moat?

Speaker 2

We're doing it with new product, innovation, elevated quality. We're engaging our customers. We're advocating for them. And so we do remain the leader in the space. And we're going to continue to invest in widening the moat between us and everybody else.

Speaker 2

And during this given this environment, I think a lot of companies are pulling back, and they are standing still. And what we're doing is, given we have $232,000,000 of cash, we have no debt, we're generating cash, we're making investments, Really smart investments so that over time, we are widening that moat, between us and everybody else And continuing to show up in the most authentic and the most, the most meaningful way In purpose driven way for our community.

Speaker 11

Awesome. Thank you. Good luck.

Speaker 5

Thank you.

Operator

Our next question is from Matt Koranda with ROTH MKM. Your line is now open.

Speaker 12

Hey, everybody. Thanks for taking the questions. Just on the new customer adds in the quarter, Is there any specific breakdown of how many came from international versus sort of the core domestic market? And then on the new cohorts that you've been acquiring, Any notable differences there versus your core consumer just in terms of product mix, full price versus off price propensity, AOBs, etcetera?

Speaker 3

So looking at our new customer adds, international we're really pleased with the growth that we saw in the quarter, but It's also great to see that domestic is continuing to add more new customers year over year and I think that really just speaks to The opportunity that we have within the U. S. To continue to penetrate and grow our brand awareness. So we continue to see A healthy mix between the 2. We're not seeing a lot of difference in the new customers that we're adding today.

Speaker 3

We're seeing similar Occupations, obviously, we've spoken about some of what we've seen on the spending patterns in terms of higher AOV, offset by lower frequency. We're seeing that across the board on our new customers and our repeat. Otherwise, yes, they look pretty similar to the customers that we've been acquiring.

Speaker 12

Okay, great. And then just on the store strategy, I think it's been asked in different ways, but I just wanted to put a finer point on the question. Are stores in your view at this point a growth driver with sort of 4 wall ROI metrics that you would expect to sort of achieve? Or are these Kind of more of a brand beacon. How should we be thinking about sort of the store strategy?

Speaker 12

And I know obviously with the understanding that it's early just given that we had the first one, but Just wanted to ask specifically on that.

Speaker 2

Yes. I mean, CommunityHub's retail is definitely a growth driver With 4 wall EBITDA profitability, they will also be a brand identifier. We look to be an institution within cities Across the United States. And I also think that what we're doing in person with our community is going to unlock a lot of what we're doing digitally. I think there's a lot of synergies between what we're doing within our community hubs and that's why we're calling them community hubs and it's not just about that transaction, it's about much more.

Speaker 2

It's about that connection. It's about having events and programming that aligns with what our community cares about. And that alignment and that, we have this die hard fanatical community. And every time we show up in person, Whether it's our pop up shop, whether it's our activations, whether it's our mobile experiences, they want more of us. They're in 5 hour lines waiting for FIGS.

Speaker 2

And so This is only going to continue to drive the business, and not just what we're doing with, our community hubs. It's also going to drive teams Teams are going to walk in that store and say, hey, how do I get fixed for my team? It's going to drive what we do, with digital. And then, you know, you Shop online, you return in the store, etcetera. There's a lot of dynamics there that are going to be really beneficial over time.

Speaker 2

And so we're really excited to see

Operator

Our next question is from Ryan Nagel with Oppenheimer. Your line is now open.

Speaker 8

Hi, this is William Dossett on for Brian Nagel. Good afternoon and nice quarter.

Speaker 2

Thank you.

Speaker 8

So excuse me for going back to the quarter, but just to ask about Near term sales guidance and understand this better. You indicated there may have been a pull forward in Q4 or Q3. Could you elaborate on what you may have seen that caused that and to what degree this may have affected the quarter? And also any idea that you can give us on how demand tracks throughout the quarter?

Speaker 3

So related to kind of the Q3 and what we saw with the outperformance. As we discussed, our planned sample sale outperformed our expectations. We do believe there was potentially some pull forward associated with that, but We're really proud to pass through the majority of the beat and raise full year guidance for the 2nd time this year, in a really uncertain macro environment. Can you repeat your second question?

Speaker 8

Just, yes. Well, thank you for the first part. And Yes. Just any idea for how the demand tracked throughout the quarter?

Speaker 3

Yes. Thank you. So looking at the Q4, I think is what you're asking. And I think The Q4 guidance is not necessarily reflective of what we're seeing for our growth rate quarter to date. It's really more of an expectation of What we expect to see in the quarter for aggregate, as a reminder, we don't do like for like events.

Speaker 3

We change our launch Calendar, so it's hard to extrapolate kind of what's happening in our quarter to the full period. I also think just given we have a lot of volume in front of us With our upcoming Black Friday Cyber Monday event, we just want to be cognizant as we're guiding that There's a lot left in the period and that our consumer, especially at our income level, can be strained. And so we're taking all of that into account in addition pull forward potential that we discussed when thinking about our Q4 outlook.

Speaker 8

Perfect. Yes, that's very helpful. My next question was on gross margin is a follow-up to a previous question on gross margins. Just the product mix shift, How did it change since you last laid out expectations in August? Is this just a temporary or more sustainable shift?

Speaker 8

And then looking to Q4, you all noted that better freight would be offset by A shift in products mix and promotional mix. So just wondering if you could size the quantity of those impacts To gross margin, at least directionally.

Speaker 3

So looking at our gross margin for the Q3, we did cite Product mix shift as the biggest impact year over year, mostly driven by mix shift Into non scrubwear, we spoke about the strong performance in both outerwear and footwear, which are categories that generally contain a lower gross margin rate. And also mix shift into more of our limited edition scrubware. That was really within our expectations from August. I'd say what did Was a little different from what we expected was some of the outperformance of the sample sale, which had a bit of an impact on gross margin. I think related to that, we're really focused on how we continue to move through our inventory while simultaneously protecting the brand.

Speaker 3

It was all non core product. And we're going to continue to move through inventory at the right rate and pace and deliver a really strong gross margin rate. Looking at the 4th quarter, Similar to Dynamics, we're expecting what we saw in the Q3, with product mix as we continue to Shifting to more non scrubware and also our limited edition scrubware, offset by better freight and Promotional mix, product mix will be the biggest impact, followed by promotional mix.

Speaker 8

Thank you. And then one last housekeeping item if I may. Just can you discuss how to look at share based compensation within Your expense structure longer term, if there's any changes?

Speaker 3

Definitely. So within our stock based compensation today, we have some portion of it that's really non recurring. And so looking longer term, A portion of our executive stock based compensation is going to roll off at the end of 2024 and then we'll have another portion roll off At the end of 2025. So we will start to see a more normalized stock based comp as a percentage of sales by Q4 2025, which we expect to be about half of our current rate as a percent of sales.

Speaker 8

Thank you very much. Good luck.

Speaker 3

Thank you.

Operator

There are no further questions in the queue at this time. So I'll pass the conference back to the management team for any closing remarks.

Speaker 2

Thank you so much for joining us, and we look forward to seeing you again soon.

Operator

That concludes today's conference call. Thank you for your participation. You may now disconnect your line.

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Earnings Conference Call
FIGS Q3 2023
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