FIGS Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 13 speakers on the call.

Operator

Good afternoon. Thank you for attending today's FIGS First Quarter 2024 Earnings Conference Call. My name is Jayla, and I'll be your 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'd now like to turn the conference over to our host, Jean Fontana.

Operator

Please go ahead.

Speaker 1

Good afternoon, and thank you for joining today's call to discuss FIGS' Q1 2024 results, which we released this afternoon and can be found in our earnings press release and in the stockholder presentation posted on our Investor Relations website at ir. Wearfigs.com. Presenting on today's call are Trina Speer, our Co Founder and Chief Executive Officer and Kevin Fossey, our Interim 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.

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 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. Definitions and reconciliations to these non GAAP measures to their most comparable GAAP measures are included in the stockholder presentation we issued today.

Speaker 1

Now I'd like to turn the call over to Trina Speer, Chief Executive Officer of FIGS.

Speaker 2

Thank you, Jean. We are pleased with our Q1 results. Net revenues came in at the upper end of our expected range at down less than 1% and adjusted EBITDA margin of 10.9% exceeded our expectations. We are especially excited to see improved momentum in our business beginning in mid March and into the Q2. Over the last few quarters, we discussed factors that we believed were impacting our performance and we made changes in response to these challenges.

Speaker 2

We got back to our roots in delivering incredible product innovation coupled with impactful storytelling centered around the healthcare community. And we're seeing these actions begin to pay off. As we have said in the past, healthcare professionals need their uniforms to perform at their jobs and need to regularly replenish these products. The highly attractive fundamentals of our business are in large part due to the repeat frequency dynamics of Healthcare Apparel. We are seeing these frequency trends begin to stabilize and we plan to build on this momentum.

Speaker 2

Reflecting on the business, we are delivering strong performance across our growth strategies. Starting with product, we raised the bar on innovation. Over the last 2 years, we've bolstered our product team further building out our design and technical development talent. We've also bolstered our supply chain with best in class manufacturing partners. The results of these investments are beginning to bear fruit.

Speaker 2

In the Q1, we saw strong engagement generated by products including our on ship Sherpa bomber jacket, Seville scrub legging and Isabelle wide leg scrub pants. Notably, these launches also created demand for our core assortment. This is just the beginning. We plan to offer a steady stream of true Pinnacle products, including new fabrications and categories that will push the limits of anything healthcare professionals have ever seen before. We believe this innovation will bring unprecedented functionality, fit, comfort, design with greater velocity.

Speaker 2

The halo from these Pinnacle products is also driving demand for our core styles. As part of our amplified innovation strategy, we have made the decision to accelerate the timeline of our initiative to improve fit consistency across our assortment. We began to introduce our new fit blocks in April and now expect to complete the rollout by October 2024. Our new product innovation will be fused with marketing campaigns rooted in true storytelling centered on the awesome humans that make up our community. In April, as part of our Extreme series, we launched our Call of the Wild campaign featuring Doctor.

Speaker 2

Chloe, a veterinarian who operates on the frontline of wildlife conservation. The product capsule featured our indestructible scrub overall and scrub jumpsuit, each of which quickly sold out. The collection was made in a new fabrication that's tough on the outside and soft on the inside, providing extra durability, stretch, moisture wicking and water resistance. The product launch was amplified by a meticulously executed campaign that celebrated this extraordinary work. The campaign, which we filmed in South Africa, captured the hearts and the minds of our community, drawing 9,000,000 past Sunday, the kickoff Nurses Week, we hosted a celebratory event in New York City with over 100 awesome humans.

Speaker 2

On Monday, we brought 13 nurses from across the country to ring the opening bell at the New York Stock Exchange in recognition of Nurses Week. We also kicked off our annual I'm a Nurse campaign, which celebrates our incredible nursing community. The momentum we have seen in our recent launches illustrates the opportunity we have to truly lead with brand storytelling. At FIGS, we obsess over customer journeys and look at the full marketing funnel to meet our community members where they are. We have an amazing community and we provide the platform for them to share their stories.

Speaker 2

Awesome human storytelling is not new for us, it's in our DNA. And as we look ahead, we have a huge opportunity to deliver more tentpole brand defining campaigns and to put more investment behind top of the funnel initiative. In parallel, we will continue to focus on the unique needs and interests of healthcare professionals and effectively move customers through a full journey, driving not only awareness but also consideration and conversion ensuring that each marketing touch point builds on the last. This approach will lead to greater brand engagement among new, lapsed and existing customers and fuel growth and profitability. Based on our recent strong momentum, we're further leaning in and taking bigger and bolder steps to grow our community globally across channels.

Speaker 2

This means we're strategically ramping investments primarily around brand marketing in response to the encouraging trends we're seeing in the U. S. Market, strong momentum in our international business and a growing network of institutions joining our Teams platform. International net revenues grew 29% in the Q1 compared to last year, reflecting the reclassification of duty subsidies, which negatively impacted net revenue growth by 11 percentage points. We continue to gain traction across the countries we serve and plan to identify new markets where we believe FIGS can become the leader in healthcare apparel.

Speaker 2

Similar to the building blocks of our success in the U. S, our global marketing strategy focuses on full funnel storytelling with investments in our ambassador program, digital marketing and localized e commerce experiences. Turning to Teams. We made investments in building foundational ordering experiences for 2 of our largest Teams customers with the development of the AYA gifting platform and the Veg stipend experience. Looking ahead, we're eager to evolve and amplify these in other ordering platforms with the support of an outbound sales team and digital marketing effort in order to serve more teams in more ways.

Speaker 2

Finally, with respect to retail, we're incredibly excited by the prospect of being able to serve more healthcare professionals and look forward to the opening of our Philadelphia location. We acknowledge that we're early in our retail journey and we're learning more each day. We remain committed to our test, learn, apply and win approach with locations and format and do not currently plan to meaningfully accelerate new hub openings until we can achieve key proof points. Operationally, we're on track with our fulfillment center transition designed to support greater scale, increased flexibility and reliability and deliver greater efficiency. In addition, the foundational work behind this facility will help us to expand and scale our distribution network globally.

Speaker 2

This will not only support our growth, but enable us to deliver a superior customer experience across geographies. Importantly, we remain committed to delivering incredible brand cultural moments supporting the healthcare community by highlighting the work that they do and by giving back. In January, we opened the FIGS operating theater in Ukwala, Kenya, a state of the art facility that is the first of its kind in the region. It's now creating sustainable change for people in this community who previously had to drive hours to receive surgical care.

Operator

As we look to

Speaker 2

the remainder of 2024, we believe we're on the right path to reignite the excitement in the word-of-mouth dynamics that propelled us to a leadership position in the industry. We're seeing the trends move in a positive direction and we're strategically investing in that momentum while remaining disciplined in controlling our expenses. The long term growth outlook of the healthcare industry and favorable replenishment dynamics coupled with our strong debt free balance sheet and robust cash flow generation provide a solid foundation to execute and invest in our growth plans. As the distant leader in health care apparel, we recognize the urgent need to serve health care professionals, and we are at the forefront of this effort. Now I will pass it over to Kevin Fosse to discuss our financial results and provide an update

Speaker 3

on our outlook. Thank you, Trina. For the Q1, net revenues came in at the upper end of our guidance range, while adjusted EBITDA margin exceeded our expectations, yielding strong free cash flow generation. We were also encouraged to see improving trends, particularly around repeat frequency, indicating that our product and marketing strategies are gaining traction. With a steadfast commitment to serving the healthcare community, we are highly optimistic about our ability to drive accelerated growth into the future.

Speaker 3

While margins are expected to be impacted in the short term, we are confident that these investments will not only drive higher net revenues growth in the future, but also stronger and more sustainable profitability. I will begin my discussion with a detailed review of our first quarter results followed by an update on our financial outlook. Starting with our Q1 results. Net revenues decreased 0.8 percent to $119,300,000 as compared to Q1 last year. Net revenues reflect $1,400,000 in contra revenue associated with duty subsidies paid for international customers.

Speaker 3

As a reminder, duty subsidies were recorded as selling expense in last year's Q1. Active customers for the trailing 12 month period increased 8.6% compared to the same period last year. Average order value increased 1.8 percent to $116 in the Q1, reflecting higher AUR due to product mix and higher UPTs. Net revenues per active customer on a trailing 12 month basis decreased 2.8% to $2.10 versus the same period last year. These metrics reflect the aforementioned international duty subsidies, which negatively impacted both AOV and net revenues per active customer growth by approximately 1 percentage point each.

Speaker 3

Looking at product categories, non scrubs grew 9% reaching 20.5% of net revenues. Gross margin for Q1 was 68.9% compared to 71.3% in Q1 of 2023. The decline in gross margin rate was primarily due to product mix shift. Selling expense for Q1 was $28,500,000 representing 23.9 percent of net revenues compared to 25.9% in Q1 2023. The decrease in selling expense as a percentage of net revenues primarily reflects duty subsidies that were recorded in selling expense last year and are now reflected in net revenues as contra revenue.

Speaker 3

These costs were partially offset by startup costs associated with the transition of our fulfillment center to a new facility. As Trina mentioned, the new facility will enable greater efficiencies and set the foundation to expand our distribution network. Please note, transitory costs related to the fulfillment enhancement project came in below our expectations, in part due to a timing shift into the 2nd quarter and in part due to lower than expected start up costs. Marketing expense for Q1 was $17,200,000 representing 14.5 percent of net revenues compared to 14 point 2% in Q1 2023. The increase in marketing expense as a percentage of sales was largely due to an increased mix in international marketing spend.

Speaker 3

G and A for Q1 was $36,000,000 representing 30.2 percent of net revenues compared to 28.4% in Q1 2023. The increase in G and A as a percentage of sales was largely due to the continued investments in people. This was partially offset by a decrease in legal fees, lower accrual for charitable donations and reduced professional fees versus last year. Taking this to the bottom line, 1st quarter net income was $1,400,000 or diluted EPS of $0.01 1st quarter 20 23 net income was $1,900,000 or $0.01 in diluted EPS. Adjusted EBITDA for Q1 was $13,000,000 with an adjusted EBITDA margin of 10.9% compared to 13 point 4% in Q1 2023.

Speaker 3

Touching on our balance sheet, we finished the 1st quarter with cash and cash equivalents and short term investments of $259,200,000 Inventory declined 28% to $130,500,000 versus Q1 last year as we continue to make progress in bringing our inventory back to normalized levels. Overall, we are very comfortable with the composition of our inventory. Capital expenditures for the Q1 totaled $4,500,000 This is largely associated with the fulfillment transition project. And finally, we delivered strong free cash flow of $11,100,000 in the Q1. Turning to our outlook.

Speaker 3

Based on recent performance and the positive impact from our brand initiatives we have in place, we are raising our full year net revenues outlook to negative 2% to positive 2% as compared to 2023 and versus prior guidance of down 5% to flat. As a reminder, we expect Q3 to be the toughest year over year comparison in terms of net revenues growth, primarily due to the anniversary of last year's highly successful sample sale in September. Our gross margin outlook for the year is unchanged and expected to be in line with our 2023 gross margin rate. We are committed to enhancing product innovation through new fabrications, advanced features and designs tailored to meet the needs of healthcare professionals with premium products at exceptional value, which may impact gross margin rate in the short term, but we are confident that we will drive higher margin long term. 1st, as we expand and diversify our fabrications and product categories, we anticipate realizing economies of scale over time, subsequently mirroring the margin trajectory delivered by our core scrubware and Phionex lines over the years.

Speaker 3

And second, we expect new innovation to also drive our higher margin core business. Also note that we expect the duty drawback benefit anticipated for later this year to offset some of the headwind from new product innovation. Turning to selling expense. Total transitory costs associated with our fulfillment enhancement project are now estimated to be approximately $13,000,000 slightly below our previous expectation of $14,000,000 We expect to realize the bulk of these transitory expenses in the second quarter. Note that a portion of fulfillment costs that we assume would fall in the Q1 shifted to the 2nd quarter.

Speaker 3

We anticipate the transition to be largely complete by the end of the Q3. With respect to marketing spend, we plan to increase our investment as a percentage of net revenues as we build on our momentum. The majority of the higher investment will be incurred in the Q3 coinciding with a large scale brand campaign. With respect to G and A, we plan to maintain investments in key areas of our business, particularly in talent, while carefully managing expenses to identify savings opportunities. As a result of these factors, adjusted EBITDA margin for full year 2024 is now expected to be between 9.5% 10.5%.

Speaker 3

This reflects approximately 220 basis points of cost headwind from the transitory portion of our fulfillment project. Turning to our Q2 2024 outlook. We expect net revenues growth of between 3% 4%. We expect gross margin to be down versus Q2 last year largely due to a product mix shift. Importantly, while there may be fluctuations in the short term, we aim to maintain a healthy margin rate while also making the right investments in our long term growth.

Speaker 3

Looking at operating expenses. For selling expense, we expect deleverage of approximately 3.30 basis points, which takes into account higher transitory and ongoing fulfillment costs. As a result, we expect 2nd quarter adjusted EBITDA margin to be approximately 8.5%. Our capital expenditures expectation for 20.24 continues to be between $18,000,000 $19,000,000 including $13,000,000 to $14,000,000 in fulfillment enhancement related costs. In closing, we're delighted to see the positive trends in our business.

Speaker 3

Moving forward, we'll continue to capitalize on our robust balance sheet and cash flow dynamics to strategically invest in our future growth. With that, I will turn it over to the operator to kick off our Q and A session. Operator?

Operator

We will now begin our question and answer session. Our first question comes from Brian Nagel with the company Oppenheimer. Brian, your line is now open.

Speaker 4

Hi, good afternoon. First off, congratulations on the pickup in your business lately. The first question I want to ask just with regard to the, I guess, the adjustments to the guidance and then the discussion around the investments there. So the question is the way I want to ask it is, as we think about, so you're taking revenue guidance up, EBITDA margin guidance down. So are these incremental investments, are you looking at them more as a kind of a shorter term dynamic to capitalize upon this improving trend?

Speaker 4

Or is this something that's going to basically change the cost of doing business for FIGS over a longer period of time?

Speaker 2

Sure. Thanks, Brian. So I think, as you know, the fundamentals of our business have always been highly attractive. At the center of that is the metric of repeat frequency. By the nature of what we sell, uniforms and who we sell to healthcare professionals, we naturally benefit from frequent replenishment.

Speaker 2

And so we saw in the second half of March going into Q2, we saw these trends improve. And we really are attributing that to strong engagement around our product launches combined with the marketing campaigns that we put out that have all been centered around the healthcare community. And so that is where we're seeing the dynamic shift and why we're increasing our revenue guidance for the year. We are being prudent given it's still early days. And we're seeing this dynamic working between product and marketing coming together.

Speaker 2

We're investing behind that and that's where you see the EBITDA guidance. We're bringing that down and that can be almost fully attributed to this increase in brand marketing spend that very much is a short term dynamic as we continue to invest in what's working as we continue to scale and build the business to $1,000,000,000 and beyond.

Speaker 4

Got it. That's helpful, Trini. Then the second question I have, just on the gross margin. So I guess gross margin tracked a little bit weaker than the forecast out there. You had guided it to be down, but you talked about the product mix shift.

Speaker 4

Is that a was that a shorter term dynamic too? Or is that something we should expect to persist?

Speaker 2

So as we shift into building out our categories, building out fabrications, and so in addition to raising the bar in quality as it relates to our features and trends, there may be some higher product costing associated with that. But it's really a short term dynamic because as you've seen with Finex, with our core scrubware over the years, we get economies of scale, over time. And so we look to see that in our new innovation. We look to see a similar margin curve over time that we saw with Core Scrubwear. And so it's all about balancing and gaining leverage from that core to invest in the future of the business, invest in innovation.

Speaker 2

And so the gross margin this year and beyond that's kind of how we think about it.

Speaker 4

Got it. Appreciate it. Thank you.

Speaker 2

Yes.

Operator

Thank you. Our next question comes from Rick Patel with the company, Raymond James. Rick, your line is now open.

Speaker 5

Thanks. Good afternoon and well done on the new innovation here. I'm hoping you can provide some additional color on the shape of revenue growth that you gave. So can you help us with the building blocks for how that growth is achieved as we think about growth in active customers versus frequency and AOV?

Speaker 2

Sure. So as you've seen, we've had a number of gains from let's start with AOV. AOV was $94 in 20.19. We finished this last quarter at $116 That's a function of both AUR and UPT. So AUR is driven by really building out our layering system.

Speaker 2

You're seeing footwear, outerwear, FIGS Pro all have higher retail MSRP. And so that's driving AOB growth as well as UPT.

Speaker 1

And just to add to

Speaker 2

this, I think it's really important to note that the innovation is a key piece to this. Our limited edition scrubware has doubled in the past year and our non scrubware was in it was 18.6% of the business last year, it's 20.5% as of this past quarter. And so really seeing innovation, really seeing this diversification across category, to move beyond in e com scrubs business, we're diversifying by category, by fabrication, diversifying by channel and geography and all of that is really important as we aim to be an iconic brand over the next 100 years. As it relates to the guide, there'll be a modest increase from an active customer perspective, and it actually assumes repeat is down. And so we are being prudent as we're seeing some gains there.

Speaker 5

Great. And can you also talk about the potential to chase demand for the innovation that is working? I know inventory is down 28% and it's where you want it to be overall, but do you have the right inventory to meet the demand for the newer products that you've launched?

Speaker 2

Yes. We feel really good about our inventory balance. As you know, we've made incredible strides over the last year, down 28% year over year. It will continue to decline on a year over year basis every quarter through the end of the year. And we do feel like we have the right inventory across our core, across our limited edition styles, across our Pinnacle pieces that have come in and it's been, I don't know if you saw our indestructible capsule launch, it's killer.

Speaker 2

So really exciting things to come. And I think that but we're nimble, right? And so we've seen a number of key launches in the Q1, our Sherpa bomber, our scrub legging, our wide leg pants, and there's a number of pieces I can't say right now because if our healthcare professionals are listening, they'll get too excited. But we're chasing, we're nimble, we're adjusting as we see that demand, we're adjusting as we see that excitement.

Speaker 5

Appreciate the details. Thank you.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from Lorraine Hutchinson with the Company Bank of America. Lorraine, your line is now open.

Speaker 1

Thank you. Good afternoon.

Operator

I just wanted to follow-up on the brand marketing increase that you're doing in the Q3. Trina, you spoke earlier about it being a shorter term dynamic. So when we think about 2526, should we expect marketing to come back down? Or would you expect to be growing revenue sufficiently to just have that cost percentage decline naturally?

Speaker 2

So what I'll say is that we're really making this brand investment intentionally. We're focusing on the spend on what's working. We're seeing the new customers. We're seeing these improved frequency trends. So we're leaning in.

Speaker 2

And we believe that this is going to drive higher growth, paving the way for long term profitability. We are a growth company. So what we've done is we've looked across the marketing funnel and we're taking concerted efforts to right size our spend across upper and mid funnel tactics. And because we do believe we shifted away from this over the past year or so. So I do think what you'll see is that this is going to drive growth and it's going to drive profitability over the long run.

Speaker 2

But these are longer term types of investments. And there's an interesting stat from a consumer landscape industry perspective, upper funnel marketing investments drive awareness that lead to high quality organic traffic, which converts 3 times higher than traffic driven directly from paid ads. This is an important dynamic that we're excited to lean heavier into. So we're leveraging that spend continue to show up and engage our community. Ultimately, this is going to equate to retaining our customers and bringing more healthcare professionals into the fold.

Speaker 2

And as we go into 2025 and 2026, we'll update you as we go.

Speaker 1

Thank you.

Operator

Thank you, Brian. Our next question comes from Ashley Owens with the company KeyBanc Capital Markets. Ashley, your line is now open.

Speaker 6

Hi. Thanks for taking my question. This is Chantana Madoka on for Ashley today. So I just kind of wanted to ask on FIT initiatives. Could we dig a bit deeper into the initiatives behind that that began launching in April where it's been rolled out already and where you're planning to complete by October?

Speaker 2

Sure. Thank you for the question. So delivering consistent fit across our assortment is a non negotiable. This has been something that's been underway for quite some time. But being able to have your uniform fit the same way every time what you ordered 6 months ago as a healthcare professional, maybe you ordered the Katarina top and the YOLA pants, 2 of our best selling items and you come back 6 months later, it has to fit exactly the same as long as your body didn't change.

Speaker 2

So this is a really important initiative. And we believe this transition is going to help improve repeat frequency and retention. And we really want to ensure that we're delivering the best experience to our healthcare community at all times. We expect inventory, like I said, to continue to decrease on a year over year basis for the remainder of the year, even with the pull forward of inventory related to the fit transition. And as we monitor selling trends, we're going to manage our inventory levels accordingly.

Speaker 2

But like I said, we do feel like we're in a very healthy position today. It's why we're able to bring in all of this newness and innovation that we're really excited about.

Speaker 6

Awesome. Thank you. And then just kind of following up on that inventory piece, could you provide us with a refresh on maybe your expected promotional cadence you're planning for this year now that it's at a more normalized level? So how are you thinking about that?

Speaker 2

We're going to continue to be disciplined around our promotional cadence, and we're going to continue to, really utilize promotions in a very celebratory way. Right now, it's Nurses Week, which is our Super Bowl. So you see the offer that we have on our site and it's really about celebrating our community and inspiring the next generation to want to become them. And so we're going to be really leaning into those moments and not shifting our cadence from what you've seen in the past and what you will see year over year.

Speaker 7

Awesome. Thank you.

Operator

Thank you, Ashley. Our next question comes from Nathan Feather with the company, Morgan Stanley. Nathan, your line is now open.

Speaker 3

Hey, everyone. Thanks for taking the question. So you've run 2 sample sales relatively close to each other, at least relative to your historical cadence. Guess, you talked through the thought process there, what kind of uplift it generated? And then do you expect the 1Q sample sale you ran to pull forward any demand from 2Q similar to the prior sample sale in the back half of last year?

Speaker 3

Thank you.

Speaker 2

So we do a sample sale once a year, and we don't look to comp period over period, right? So last year it was in Q3, this year it's in Q1. And it's really about when we look to do that, when it makes sense to engage our community with that type of exclusivity, you're able to kind of get older styles and older colors and it's a really exciting time. And so that's what that was about. I do I don't believe also just given what we're seeing in the trends that there is going to be a pull forward into Q1 from Q2.

Speaker 8

Great. Thank you.

Operator

Thank you, Nathan.

Speaker 2

Thank you.

Operator

Our next question comes from Matt Koranda with the company, ROTH MKM. Matt, your line is now open.

Speaker 9

Hey, thanks for taking the questions. Just wanted to circle in on the purchasing dynamics and the inflection that you saw later in the quarter. So maybe just curious if you can drill down on where you think the inflection is coming from. Is it coming from new customers to the brand? Is it coming from existing active customers that are tightening their purchase cycle?

Speaker 9

Or is it active customers that basically went dormant for a period of time post pandemic? Just any detail around that and maybe just to unpack regionality if there is any or any sub segments among your healthcare professionals?

Speaker 2

So we've really seen that improvement coming from the repeat frequency, right? It's customers active customers, it's customers that have lapsed that are coming back that are so excited by the innovation and so excited by our storytelling. And so that it really does illustrate the power of our plan, the plan that we've spoken about, bringing true innovation combined with impactful storytelling and that working. We believe and we've always seen in this business that repeat drives new repeat frequent repeat customers are walking around their hospitals, walking around their institutions, wearing figs, acquiring customers for us. This word-of-mouth dynamic is super And we And we've seen you asked about geography, we've seen strong frequency and reactivation in both the United States as well as in our international markets.

Speaker 2

And we're seeing not only just with repeat in terms of our active customers, but also in terms of a number of other metrics across the business.

Speaker 9

Okay. That's helpful. Thanks, Trina. And then just in terms of the change to the margin guidance, I just wanted to make sure that we're all super clear. It sounded like you said gross margin for the full year shouldn't change, so we're still expecting kind of flattish gross margin for the year.

Speaker 9

So all of the incremental EBITDA margin cut is essentially coming from the marketing line?

Speaker 2

That's correct. So gross margin relatively flat year over year and the EBITDA update is really around us investing and doubling down on what's working and doubling down on engaging our community in awesome ways. We have $259,000,000 of cash. We have no debt. This is a highly cash flow generative business and we're investing in ourselves.

Speaker 9

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

Operator

Thank you, Matt. Our next question comes from Dana Telsey with the company, Telsey Group. Dana, your line is now open.

Speaker 7

Hi, good afternoon, everyone. Trina, as you think about the product mix shift that is ongoing, what are you going to? What are you going from? How is the pricing on new product changing or adapting? And now we're in the middle of Nurses Week.

Speaker 7

What are you seeing this year that's different than last year? Is there a pickup of momentum? Is it a product category that you're seeing with that momentum improving? Thank you.

Speaker 2

Thanks, Dana. Great to speak with you again. So I think, we set out to diversify the business from a product standpoint, diversify by category, our outerwear, our under scrubs, our compression socks, what are professionals wearing to work, at work, from work, on shift, off shift, head to toe. We're not just a scrubs company anymore and you see it in the numbers. Over 20% of this business is everything outside of scrubs.

Speaker 2

And even within Scrubs, we've made huge strides from an innovation standpoint, like I mentioned, doubling, as a contribution to the business, our limited edition scrubware. And so I and a lot of that does come with higher AUR. So that's great to see. New innovation drives UPT as well, which gives leverage, as you know, across freight, fulfillment and marketing. And while product margins at the beginning are a bit lower on paper, the order economics really do offset that.

Speaker 2

And so I think we're projecting for the year an AOV gain from AUR and UPT like I just discussed. In terms of Nurses Week, I think we're off to a really strong start. It's really exciting to see the engagement. We actually kicked off Nurses Week at the New York Stock Exchange with our nurses on the podium with, you know, back to what we're all about, celebrating this community in awesome ways, in memorable ways and getting the whole world behind them to see the work that they're doing and celebrate them and and just, you know, put them on a pedestal, which is literally what we did. And I'm so excited that we had that moment and how do we continue to engage with them.

Speaker 2

It's going to be an exciting year.

Speaker 7

Got it. Any learnings from the retail store and when does Philadelphia open?

Speaker 2

The retail store. So the store has been great. 40% of our community that is purchasing within the store are new customers and this is in our most penetrated market of Los Angeles. So that's great to see. Health care professionals are like everybody else, right?

Speaker 2

They want to engage with brands both online and off, and we're seeing that in our Century City store. Philly is coming in late summer, which we're super excited about, on Walnut Street, and it's a great space. It's a larger format than Century City, and we're really excited about the community space on the 2nd floor, where we're going to be able to engage with speaking events and different activations. It's going to be so awesome. So, I'll send you that invite, Dana, because you got to come.

Speaker 2

Okay.

Speaker 7

Thank you very much and nice to see the progress.

Speaker 2

Thank you.

Operator

Thank you, Dana. Our next question comes from Bob Drbul with the company Guggenheim. Bob, your line is now open.

Speaker 10

Hi, good afternoon, everyone. I guess, Trina, I was just wondering if you could talk more about sort of the customer a little bit. You mentioned pressures on the healthcare professionals last quarter, and I think that impacted demand. Is it changing now? If it hasn't changed, what do you really think is spurring some of the demand?

Speaker 10

And I guess the other piece of this is, do you think the replacement cycle is bottoming?

Speaker 2

Thanks, Bob. So we're seeing signs, like I said, that repeat rates have bottomed and are now rising and heading in a positive direction. This is something we've talked about for a while and so it's really exciting to see that. It's still early days, but these leading indicators make us very hopeful about the health of our consumer, about the health of the healthcare professionals that is starting to turn a corner. And more generally, we've spoken about some of the systemic issues with healthcare professionals.

Speaker 2

We remain focused on fixing the structural issues in healthcare and it's why we fight so hard on advocacy for our community with our awesome humans bill. So that's really something that we are going to continue to fight for. In terms of the replacement cycle, we're nowhere near the normalization of repeat dynamics in this industry. You saw that repeat frequency, that replacement cycle, if you will, it kind of it was definitely normalized pre COVID, pre pandemic. It spiked during COVID and we're still in a bit of a lull, but it's great to see that that's bottomed.

Speaker 2

Thanks, Bob.

Operator

Thank you, Bob. Our next question comes from Brooke Roach with the company Goldman Sachs. Brooke, your line is now open.

Speaker 11

Good afternoon and thank you for taking our question. Trina, you've spoken to the green shoots that you've been seeing in the non scrub category as well as new limited edition product. Can you elaborate on the growth rates and frequency trends that you're seeing within your core U. S. Scrubs business?

Speaker 11

And is the core scrub customer engaging more at full price? Or has more of this green shoot growth been driven by key promotional moments?

Speaker 2

So I think what we've seen is with the innovation is that it's not only driving sell through in those styles and in those categories, it's also driving the core. And it's 2 things that we say here at Fix is Pinnacle drives core and repeat drives new. And so that dynamic of launching new products, new innovation that has really been exciting, year to date, is driving not only engagement in those styles and engagement in those categories, but also engagement in the core. And so that's great to see. And core is kind of a lagging indicator to the sell throughs across the Pinnacle or across limited edition.

Speaker 2

In terms of sorry, Brooke, what was your second piece of that question?

Speaker 11

Just whether or not that consumer is engaging more at full price or if more of these screenshots have been driven by promotional moments?

Speaker 2

We haven't seen much shift year over year from the engagement across full price versus promotional moments. So we continue to be incredibly disciplined and you see it in the gross margin, incredibly disciplined around our promotional cadence, incredibly disciplined around that level of promotion. And so the we it's exciting to see that engagement level isn't just coming during those

Speaker 11

moments. Great. And then just finally for me, can you help us break down the growth expectation that you have between your international and your U. S. Business for both 2Q and the full year given the updated guidance forecast?

Speaker 2

Look, I would love to give it to you, but everyone's telling me I can't. So we don't break that out, but international continues to grow phenomenally well. And I would just take out the duty reclass when you look at that international growth to give you the full picture of that. But we're really excited about not only what we're seeing internationally. From a U.

Speaker 2

S. Standpoint, a lot of what we're seeing in terms of repeat frequency is that engagement around our storytelling, engagement around big brand moments. And so that's why we're continuing to invest. It really is in that U. S.

Speaker 2

Customer.

Speaker 11

Great. Thanks so much. I'll pass it on.

Operator

Thank you, Brook. Our next question comes from John Kernan with the company TD Cowen. John, your line is now open.

Speaker 5

Good afternoon. Thanks for taking the question.

Speaker 8

Trina, you talked a lot about TAM factoring the IPO process. Wondering how your view of addressable markets evolved and how your share is progressing as we get through 2024?

Speaker 2

John, I knew the TAM question would come from you, but I'm glad to see it. So we feel really good about our ability to continue to penetrate the health care apparel market. It's $80,000,000,000 market globally. It's $12,000,000,000 in the United States and we're doing over $500,000,000 in sales. There's a lot of runway ahead of us and you see that in the international growth and you see that actually in the teams growth, which we haven't talked about yet, but it's really exciting to see that business continue to scale.

Speaker 2

So, and then I do think and we've talked about this, we're creating TAM. Non scrubs is essentially mostly TAM creation. And so having that be over 20% of our business is a great sign that yes, there's the scrubs market, but we are innovating every day. And I would say a large portion of what we're doing even within scrubs is not in that TAM. So, we very rarely speak about TAM here because innovation changes TAM, and that's what we're looking to do.

Speaker 8

Understood. Thanks. Kevin, I think you said the fulfillment investments this year are 2 20 basis point headwind.

Operator

How do

Speaker 8

you recover that margin over time? What type of top line growth does it need? And what are the returns that you expect to generate off this investment? Thanks.

Speaker 2

So John, all of that investment is transitory. So those 2 20 basis points is all the transitory costs of having 2 facilities open at the same time as we move to our new facility. So that will all go away next year.

Speaker 8

Got it. All right. Thank you.

Speaker 2

Yes.

Operator

Thank you, John. Our next question comes from Angus Keller with the company Barclays. Angus, your line is now open.

Speaker 12

Hi. This is Angus on for Adrian Yee. Thanks for taking my question. What are some of the long term opportunities on the selling expense line as a result of the fulfillment center shift and change in fulfillment partner? And at what point do you start leveraging those?

Speaker 12

Is it a function of time? Or do you need a certain amount of international revenue to get there?

Speaker 2

So we feel really good about our moving to our new facility. There is a number of things that this is going to help us do to create a better experience for our customers, higher reliability and really set us up from a from to your point to as we scale, we're going to gain leverage, right, from this new facility. It's really tech enabled. There's a ton of robotics. And so as we move beyond our sales today, we're set up to drive meaningfully much bigger business in this facility.

Speaker 2

From an international perspective, we've talked about our Q1 timing as it relates to opening up a Canadian facility. And so not only is this facility in and of itself something that we're going to gain leverage from over time, it's also setting us up to build a global network of distribution. And so this is an exciting start as we really look to make it very easy to get your package. You shouldn't have to wait more than 2 to 3 days, right? And so how do we do that?

Speaker 2

On a global level? This is setting us up to really ensure that it's fast, it's convenient, it's reliable and you get what you need to go to your job and do it well.

Speaker 12

Great. Thank you. And I guess just secondly, curious if you could talk about the and this is kind of a follow-up on Brook's question. Curious if you could talk about the performance spread between rest of world and U. S.

Speaker 12

In 1Q, given the rest of the world growth was outpacing the U. S. Pretty meaningfully. So I guess what's working in those international markets that maybe isn't resonating as well in the U. S?

Speaker 12

Thank you.

Speaker 2

Sure. I mean, so it's really different strategies, right? The rest of the world, we're really leaning into bringing on new health care professionals. There are 140,000,000 health care professionals around the world. And many of them, you know, it was similar to the U.

Speaker 2

S. In that they had these baggy, boxy, ill fitting scrubs and it was just awful. And so, really first off getting them to know what FIGS is, entering these markets and localizing, localizing from a translation, speaking their language, from a currency standpoint, from a site experience standpoint, from merchandising the product that makes the most sense for them based on where they live, really understanding their holidays and how they want to engage with things. And so that's been a huge highlight from an international perspective and something that we're even still early days on. I mean, there's a number of countries that we haven't even fully translated into their language.

Speaker 2

So it's a lot of opportunity. From a U. S. Perspective, we really are encouraged by what we've seen with our product launches, driving people back with our campaigns and our storytelling, engaging this community in deeper ways. And there's a whole part of this country that doesn't just like international doesn't yet know about FIGS.

Speaker 2

And so how are we bringing new healthcare professionals into the FIGS family is a huge focus for us. But we believe that the brand big tentpole brand moments is really how we're going to get that awareness both in the U. S. And globally coupled with localizing internationally. That's our strategy.

Speaker 9

Thank you.

Operator

Thank you, Angus. There are no additional questions waiting at this time. I would like to pass the conference over to Trina Steer for closing remarks.

Speaker 2

Thank you for joining us. This is great speaking with you all and look forward to speaking to you next quarter.

Operator

That concludes the FIGS Q1 fiscal 2024 earnings conference call.

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FIGS Q1 2024
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