Figs (FIGS) Q2 2023 Earnings Call Transcript

Figs (FIGS 2.29%)
Q2 2023 Earnings Call
Aug 03, 2023, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen. Thank you for joining the FIGS second-quarter fiscal 2023 earnings conference call. My name is Kate and I will be the moderator for today's call. [Operator instructions] I would now like to pass the call over to our host, Jean Fontana.

You may proceed.

Jean Fontana -- Senior Vice President, Investor Relations

Good afternoon, and thank you for joining today's call to discuss second-quarter 2023 results, which we released this afternoon and can be found in our earnings press release and in the stockholder presentation posted in our Investor Relations website at ir.wearFIGS.com. Presenting on today's call our Trina Spear, chief executive officer and co-founder; and Daniella Turenshine, our chief financial officer. As a reminder, remarks on this call that do not concern past events are forward-looking statements. These may include predictions, expectations, or estimates including about future financial performance, market opportunity, or business plans.

Forward-looking statements involve risks and uncertainties and actual results could differ materially. These and other risks are discussed in our SEC filings including 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 of these non-GAAP measures to their most comparable GAAP measures are included in the stockholder presentation we issued today. Now I would like to turn the call over to Trina Spear, chief executive officer of FIGS.

Trina Spear -- Co-Chief Executive Officer

Thanks, Jean. Welcome to our second-quarter 2023 earnings call. Our strong second-quarter results demonstrate the resilience of our business, outstanding execution against our strategic priorities, and operational excellence. We delivered 13% net revenue growth as compared to the second quarter last year, primarily due to the 21% increase in our active customer base.

As we continue to widen our market leadership position within the healthcare apparel industry, we generated strong profitability with Q2 adjusted EBITDA margin of 13.7% ahead of our 9% to 10% margin expectation. And we delivered free cash flow of $29 million in the second quarter. In addition, inventory is down from peak levels and we are on track to reach our year-end target of approximately 25 weeks of supply. The fundamentals of our business remain strong.

We operate in a resilient and growing industry. We have the powerful combination of unmatched product innovation and brand authenticity and our business model yields strong positive cash flow due to the non-seasonal replenishment nature of healthcare uniforms. Looking ahead, we believe that we are well-positioned to deliver long-term profitable growth. First, we have ample room to further build our community and grow share of wallet within the U.S.

Second, we are highly encouraged by the opportunities we see in our international and teams businesses. And third, we are just getting started in retail. Now we'll dive into our strategic growth pillars beginning with our solutions-based product innovation. We believe that product innovation is one of the largest around our business.

We have deep knowledge of the healthcare community. We have the design and technical capabilities to deliver best-in-class products and we have the trust of the healthcare community to bring innovation that helps them do their job better each and every day. Our scrubs business drove over 80% of our net revenues in the second quarter supported by the newness we continuously bring to market in non scrub. The diversification of our product assortment across our layering system contributed to net revenue growth of 25%.

Nearly 40% of our active customers purchase at least one non-scrub item illustrating that our layering system resonates with our community. Our collaboration with New Balance in Footwear is a prime example of how we can serve this community in a way they've never experienced before. Our ROAV shoe launched in the quarter is engineered for 24/7 protection, support and comfort for your feet. We also gave the New Balance 70's inspired 327 shoe and upgrade featuring materials and functionality designed specifically for healthcare professionals.

Both launches drove high sell-through rates and sold out in multiple colorways. Most recently, we made a bold entry into under under scrubs with underwear for overachievers making them available in all of our classic scrubs colors featuring smooth lines and no bunching or riding. They are not only comfortable but also invisible under our scrubs. We have a strong pipeline of innovation across fabrications, categories, and styles that we believe will attract new customers and drive net revenue for active customers as we expand our [Inaudible] over the long term.

Next, I will spend a few minutes on how we're building and connecting with the healthcare community. First, I'm happy to report that we delivered another incredible Nurse's Week campaign. I am a nurse putting the spotlight on how nurses are the backbone of our society. We call our Nurses Week, our Super Bowl as we love to celebrate our awesome community.

We also launched our Innovate beyond your imagination campaign in early Q2 to highlight product innovation across FIGSPro, our FREEx fabrication, our own scrub jumpsuits which is our first print offering and our new Balance collaborations including our row and our 327 shoes. These campaigns reflect storytelling including our innovation lab concept, which showcase how products come to life, both on shift and off in a fun and unique way. These campaigns rallied our community as we've never seen before with over 2 million views on our own brief video alone. The strong response to our marketing is evidenced by the 21% growth we saw in our active customer base in the second quarter compared to Q2 of last year.

We acquired the third-highest number of new customers in our company's history leaning into creative optimization strategies. This is a strong positive indicator for the future growth of our business. Our highly efficient marketing engine combined with our discipline around first-order profitability enables us to maintain marketing spend at 15% of net revenues on an annual basis. As we discussed in the past, we are making advances in elevating personalization capabilities and marketing as well as our online shopping experience in our mobile app.

We expect these initiatives to drive traffic more efficiently and increase conversion, turning to advocacy, which truly sets our brand apart. We further our commitment to the healthcare community with the launch of our first of its kind FIGS advocacy hub, an online experience for our community to learn about the most important policy developments affecting them and where they can advocate for real change through things. The launch of our advocacy hub was supported by a multi-page ad in the New York Times, highlighting the challenges being experienced by healthcare workers and how our awesome Humans, bill would help solve them. Our advocacy hub is truly unique and enables us to leverage our 2.5 million active customers to create one of the largest bases of grassroots advocacy advocates that we know of.

We could not be prouder to be leading this effort. Turning to international, international net revenue increased 52% compared to the second quarter last year, demonstrating our ability to build our brand outside of the U.S. We are encouraged by the success of our localization strategies such as our Canadian Ambassador event. As we deepen our presence in the 13 international markets we've previously entered, we also recognize that there's a growing demand for FIGS across a number of other countries that we don't serve today.

In response to the strong organic traffic trends we saw on our site, we made FIGS available in Mexico, the Philippines, and Saudi Arabia. During the second quarter, results have far exceeded our expectations even before investing any marketing dollars to support these countries. We are excited to advocate our marketing engine to fuel further growth in these markets. We will also leverage our demand insights to determine additional countries that may provide meaningful growth opportunities for our brands.

We have only scratched the surface on building our international presence and plans to strike the appropriate balance of top-line growth and profitability as we do so. Moving on to our team's business, which is where we sell directly to hospitals and healthcare institutions, teams is growing fast and tracking to approximately a mid-single-digit percentage of net revenues. Notably, this growth has come almost entirely from inbound requests. Our teams business continues to see demand across universities, private practices, staffing agencies, and hospital departments as well as concierge clinics, which is an area of focus for us that I'll briefly touch on.

People no longer want a one size fits all approach to their health. They want the kinds of smaller, more individualized concepts that are popping up across all areas of healthcare that focus on prevention and proactive measures, whether it's veterinary care or dental or physical therapy or esthetics. People are demanding more accessible, regular, and specialized care, and it's changing the landscape of healthcare. Just as healthcare is branching out, becoming more specialized, localized in consumer eyes, so too is the experience of the healthcare professional just like laypeople are demanding more from their providers.

Providers are demanding more from their partners. FIGS is their ultimate partner in helping make them look good, feel good, and perform at their best at branding their businesses. Our logo is a symbol of professionalism, style and technology and at supporting their endeavors to pave the future of healthcare. To that end, we are on track to launch an updated version of our teams technology platform later this year that will support the growth of this business.

The platform enhancements are focused on expanding our product assortment to our teams, customers and improving the administrator experience, and expanding payment capabilities. Given the significant tailwinds created by the evolution of healthcare, we are developing a more robust strategic plan to accelerate growth in teams. Next, I will provide an update on our retail strategy along with continued progress toward opening our first permanent store in Century City. This fall, we have also signed a lease for 4000 square-foot location on Walnut Street in Philadelphia, which we plan to open in the first half of next year.

The store located within two miles of five healthcare institutions will have a dedicated space to host events for our healthcare community. Philadelphia is an ideal choice for a second location as a leading market for healthcare education where one in every six doctors in the U.S. has been trained as the fourth highest number of healthcare professionals in the U.S. and is one of our most under penetrated markets.

We are excited to be meeting our community where they are and delivering a meaningful experience and environment like they've never seen before. In conclusion, we are pleased with our second-quarter results and how we continue to build our community of healthcare professionals. We have assembled a best-in-class executive team that has a proven ability to not only advance our strategic priorities but also to remain nimble as we continue to navigate an uncertain environment. We believe that our sustained competitive advantages of unmatched product innovation, brand authenticity, and scale position us well to meet our long-term objectives.

With that I'll turn the call over to Daniella to discuss our financials and our outlook.

Daniella Turenshine -- Chief Financial Officer

Good afternoon, everyone. We delivered second-quarter results above expectations. Strong net revenues growth slowed down to profitability and we generated healthy free cash flow. In addition, we made progress toward our goal of normalizing inventory back to prior year levels.

Overall, we are encouraged by the resilience of our business given the macro headwinds. We remain focused on what we can control by executing on our long-term strategies while maintaining disciplined expense management. I will begin with a detailed discussion of our second-quarter financial results followed by our updated outlook. Beginning with the second-quarter net revenues grew 13% to $138.1 million, compared to $122.2 million in Q2 last year, reflecting an increase in orders and higher AOV.

We delivered active customer growth of 21%, reflecting our third-highest quarter of new customer additions driven by both the U.S. and international markets. We have also seen success in our initiatives to drive reactivation rates with an increasing number of customers returning to the brand. After month 12, AOV of increased 5.5% to $115, compared to $109 in Q2 '22.

AOV was led by an increase in AWS attributable to product mix and growth in UPS, which continue to benefit from the expansion of our layering system. AOV growth also reflects a higher mix of team sales. Gross margin for Q2 was above our expectation at 69.5%, compared to 70.6% in Q2 2022. The 110 basis point decrease compared to Q2 last year was primarily due to product mix and to a lesser extent, higher duties and a higher mix of promotional sales.

This was partially offset by the benefit of poor airfreight utilization and reduced ocean freight rates. Moving to operating expenses, selling expense for Q2 was $33.7 million representing 24.4% of net revenues compared to 21.9% in Q2 2022. This 250 basis point increase was largely due to higher costs within fulfillment including a 210 basis point impact from incremental warehouse storage. To a lesser degree, the increase in selling expense reflects international duty subsidies that we put in place in the middle of the third quarter last year.

Marketing expense for Q2 was $20.9 million, representing 15.1% of net revenues, compared to 17% in Q2 2022. The decrease in marketing expense as a percentage of net revenues reflects the shift to multiple smaller ambassador events in 2023 versus a large single retreat we held in Q2 2022. Our shift to numerous smaller events allows us to connect with the community in a more meaningful way. Better enables us to engage with both existing new and potential ambassadors and creates continuity as we flow these events throughout the year.

Another reason for the decrease in marketing investment as a percentage of net revenues is that brand marketing investments were more concentrated in Q2 last year versus this year. Our focus on driving digital marketing efficiencies enables us to maintain a healthy return on ad spend while driving strong new customer acquisition. G&A expense for Q2 is $34.8 million representing 25.2% of net revenues compared to 23.9% in Q2 2022. The increase was due to higher salaries, bonuses, and stock based compensation as we continue to invest in people.

Our net income was $4.6 million or $0.02 in diluted EPS for the second quarter. Net income was $4.9 million and diluted EPS was $0.03 in Q2 2022. For comparison purposes, adjusted net income for Q2 2022 was $6.3 million and adjusted diluted EPS was $0.03. Finally, our adjusted EBITDA for '22 was $18.9 million for an adjusted EBITDA margin of 13.7%, compared to 17.6% in Q2 2022.

Turning to our balance sheet, at the end of Q2 cash, cash equivalents, and short-term investments totaled $185.3 million, compared to $170 million in the second quarter of last year. Inventory totaled $167.8 million at the end of the second quarter, reflecting progress in getting inventory back to normalized levels while maintaining disciplined around promotional activity to protect the long-term health of our brand. Consistent with past quarters, roughly 50% of inventory on hand was poor of the remaining inventory. We are seeing a smaller mix from future product launches as planned due to lower receipts.

As such, we expect inventory to decrease more meaningfully in the third quarter than we saw in Q2. Lastly, we delivered positive cash flow from operations of $29.4 million. For the second quarter and continue to expect cash flow to be positive for the remainder of the year. Turning next to our outlook, we are maintaining our net revenue outlook and are raising our adjusted EBITDA margin expectations for the full-year 2023.

Overall, we remain pleased with the performance of our business, which reflects better than expected results in the first half of the year. Consistent with the factors we discussed last quarter, our guidance assumes a challenging macro environment in the back half of the year as well as tougher comparison new customer growth as we manage through the challenging environment. We remain focused on driving profitability and strong free cash flow while continuing to make investments in our business to drive long-term growth. Starting with our outlook for the third quarter, as we stated on our prior earnings call, we expect this to be the most pressured quarter of the year in terms of year-over-year net revenue growth due to the timing shift and our product launch and marketing calendars Into Q3 last year associated with supply chain challenges, our product launches and marketing campaigns are back to our more typical cadence in 2023.

In addition, we plan to maintain discipline around our promotional cadence as we prioritize delivering healthy sales growth as a result of these factors. We expect sales to be flat to up low single digits following 25% growth in the third quarter of last year. We expect Q3 gross margin to be approximately 69%. This is slightly below our long-term expectation of 70% plus.

While we are seeing lower freight rates versus Q3 last year, we continue to sell through product purchase at higher ocean freight rates in the prior year. Looking at operating expenses, we expect to leverage selling expense in Q3 primarily as a result of lower storage fees as compared to last year as we move through excess inventory. For now, we continue to expect to leverage year over year due to higher stock based compensation, salaries, and bonuses as we continue to invest in people. In addition, our for Q3 last year reflected a 190 basis point benefit due to a change in our accrual methodology for charitable donations.

As such, we expect dollar expense to be similar to that of Q2. As a result of these factors, we expect third-quarter adjusted EBITDA margin to be between 13% and 14%. Turning to full-year guidance for the full year, we continue to expect net revenues to grow between five and a half and 7.5%. We believe this reflects resilience in our brand given we are lapping 21% growth in 2022 and 60% growth in 2021.

Turning to gross margin, we are passing through the better than expected Q2 performance and now expect the gross margin rate to be above 69% for the year. In regard to selling expense in Q4, we expect deleverage due to initial implementation implementation costs of approximately $2million for our fulfillment project. As a reminder, we estimate costs associated with the implementation and execution of this project to be between 16 and 18 million. We expect to incur the bulk of these non-recurring costs in 2024 based on the outperformance in the second quarter.

We now expect adjusted EBITDA margin for the full-year 2023 to be between 12.5% and 13.5%. We expect capital expenditures of between $24 and $26 million for the full-year 2023. This reflects approximately $20 million in fulfillment costs with the remainder being related to software investments and our retail store buildout. In conclusion, the progress we are making across our strategic priorities and our strong market share position within the healthcare apparel industry positioned us to capitalize on the significant growth opportunities that are still ahead.

As such we will continue to invest in these long-term strategies, leveraging our strong balance sheet and healthy free cash flow. Furthermore, we remain confident in our ability to return to a high teens plus adjusted EBITDA margin as we move beyond fulfillment investments and transitory costs. With that, I will turn it over to the operator to kick off our Q&A session. Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] The first question will be from line of Ed Yruma with Piper Sandler. Your line is now open.

Ed Yruma -- Piper Sandler -- Analyst

Hey. Good afternoon. Thanks for taking the questions. I guess first just on some of the innovation, I know you mentioned a couple of things that you launched.

You mentioned the sell out of the -- curious if you can give us some insight into how the undershrubs performed, maybe some new lab coats and then second, obviously some nice gross margin outperformance there. Maybe just help us unpack a little bit how the impact of lower freight rates will kind of flow through the gross margin line over time and how we should think about promos really for the -- for the back half of the year? Thank you.

Trina Spear -- Co-Chief Executive Officer

Thanks, Ed. Great to have you on. Yeah, we saw a lot of great product innovation in the quarter. As you know, FIGSPro is an area that we're really focused on.

It's becoming even more important as we see the evolution of the healthcare industry. You know, as we discussed on the call, concierge medicine, it's a meaningful opportunity for us to expand our presence as we believe clinics are going to enable individuals to play a greater role in their healthcare. Health care is everywhere and people are owning their healthcare more and more. So we're going to continue to invest in fixed pro and you saw that with our high collar lab coat, our high waisted wide leg scrub trousers, which both received excellent response.

But in addition to our existing categories, we're also building new ones. And so you know, in our goal to completely redefine the experience of being a healthcare professional, we are adding new categories that have never existed. And so you saw that with our launch of our underscrubs underwear for overachievers. So you know, we're pleased with the early read early feedback on our underwriter scrubs.

But it's another example of where we are increasing our share of wallet by addressing all the needs of our healthcare professionals from head to toe with our complete layering system.

Daniella Turenshine -- Chief Financial Officer

And to your question on the gross margin outperformance, we're really pleased with the results that we saw in the quarter. We delivered better than expected gross margin due to ocean freight as you mentioned, but also product mix and also lower air freight utilization than we anticipated. We are expecting that ocean freight benefit to have less of an impact in the second half as we're materially bringing down the number of receipts that we're bringing in. But we do expect to see that opportunity in ocean freight looking into 2024 and beyond with the lower rates that we're getting today.

In respect to your question on promotional cadence, we're planning to keep a similar promotional cadence year over year in the back half. You know given our inventory composition is 50% core classic always on our site always in stock year round and the remaining balance is also a uniform that's seasonless and never goes out of style. We don't feel that we need to change our promotional cadence to move through our inventory balance. And so we're really focused on protecting the brand over the long term and that's what we're going to continue to do.

So we're not anticipating any changes to our promotional cadence in the back half of the year.

Ed Yruma -- Piper Sandler -- Analyst

Great. Thank you.

Operator

Thank you. The next question will be from the line of Dana Telsey with Telsey Group. Your line is now open.

Dana Telsey -- Telsey Advisory Group -- Analyst

Hi, Good afternoon, everyone. The inventory increase was down more than expected. It's nice to see the reduction progress. Can you expand on what you're looking for in the third and fourth quarter as we move on? And I have one follow-up to that.

Thank you.

Daniella Turenshine -- Chief Financial Officer

Thanks, Dana. So getting our inventory into a more normalized position is a big priority for us. And as you saw in the second quarter, like we said, we did bring that down. The first quarter really represented a peak and we're going to expect to see it sequentially decline from here.

So we are going to see even a bigger reduction in the third quarter as we really bring down our receipts in the back half of the year. I think it's important to note that we're still going to be delivering a lot of newness to the customer. We're still bringing new products and innovation. It's just going to be in shallower buys.

And because of that, we feel really confident in our ability to get to 25 weeks of supply by year-end and bring that inventory down to a much more normalized place.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you. And then just following up on the RV drivers, what did you see? It seems like the layering system, whether it's with shoes, with outerwear, you're gaining more as you call it, more of obviously the -- the mindshare and the wallet share of the -- of off to work and off work and on work in terms of what they're doing, what -- what Are you seeing and how do you see the health of the consumer moving forward? Thank you.

Trina Spear -- Co-Chief Executive Officer

Yeah. I think from the health of the consumer we saw it was great to see our new customer growth up 21%. And to your point around aof, you know it's continuing to show strength which is great to see and that is being driven by to your point non scrubs and the expansion of our layering system. You know a really interesting metric that is encouraging is that 40% of our active customers have bought at least one non scrub item.

And so you know, we're not just a scrub company anymore. We really are on our way to becoming an iconic lifestyle brand for the healthcare community and beyond. And so you know, we're excited to continue to deliver innovation across the layering system, continue to solve problems for our community on shift off shift and all the activities that they're doing throughout their day.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

Operator

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

Brian Nagel -- Oppenheimer and Company -- Analyst

Hi. Good afternoon. So the question I have with respect to EBITDA margins, so we saw very nice progress here in the quarter. It sounds like a lot of these headwinds are challenges that we've been discussing over the last few quarters.

Maybe you're getting a better handle on that, Daniella, you read in your comments you reiterated plan to get back to that EBITDA margin or just EBITDA margin in the high teens. So how should we think about the timing of that, the trajectory, I mean what is the fall in place here and how long is that going to take in order to see those -- those historic EBITDA margins again?

Daniella Turenshine -- Chief Financial Officer

Thanks, Brian. As you said, we continue to believe we will get to a high teens adjusted EBITDA margin. Think it's helpful to look at the different components. So first, we think that gross margin of 70% on an annualized basis is achievable as we expand our layering system, we're leaning into product innovation really beyond the scope of what we've done in the past.

But and as part of this, we're going to likely see some fluctuation in margin across categories, but we're going to continue to drive efficiencies in the core to really invest in this new innovation over the long term. We do expect 2024 to be burdened with the film and project costs, but we're expecting to move past that in 2025. In the near term, we may see a higher cost per order as we invest behind customer experience, but we're going to leverage that as we scale. Also as our sales accelerate, we believe we can leverage G&A and continue to remain really efficient in our marketing spend as we have been.

I think just taking a step back, we're really excited about what we're seeing as our business evolves. We're gaining a lot of traction in our layering system, we're growing our customer base and we're in early stages of international and teams and just starting retail. So our discipline around balancing growth and profitability has really enabled us to maintain a strong balance sheet to push these levers to drive future growth. And we're in a super unique position really to capture the opportunities across global healthcare.

And we believe that we can drive these growth levers over the next several years, while ultimately also achieving a high teens adjusted EBITDA.

Brian Nagel -- Oppenheimer and Company -- Analyst

That's very, pretty. And then follow up from a bigger picture perspective just on the health of your consumer, again going back to some of the commentary over the past couple quarters, you know, it seemed as though there was pressures, external type pressures on your consumer. So as you're looking at your consumer now, maybe react to the innovation and colors or do you think you're seeing an overall healthier consumer for?

Trina Spear -- Co-Chief Executive Officer

You know, I think you know, you are seeing, like I said, the new customer growth is really great to see, but we also are seeing that our customers are taking a bit more time between purchases on average. And you know, they're saying we still love FIGS. We still love the brand, but we're going to be stretching our dollar a bit more in this macro environment. But when we do come, we're spending more and that's how -- that's what you're seeing in the AOV.

And so you know that's kind of how we're thinking about it and we're really focused on is what we can control, driving intentional product innovation, tailoring our marketing message with specific creative that's aligning to our customers and continuing to build out our community. And so we're encouraged by our ability to continue to execute across our strategic priorities.

Brian Nagel -- Oppenheimer and Company -- Analyst

Yeah. Appreciate all the color. Thank you.

Operator

Thank you. The next question will be from the line of Brooke Roach with Goldman Sachs. Your line is now open.

Brooke Roach -- Goldman Sachs -- Analyst

Good afternoon and thank you for taking our question. Trina, Perhaps if I could follow up on Brian's question regarding customer engagement. You mentioned that customer frequency trends are still lagging a bit. I was wondering if you could comment, have you seen any stabilization in that customer frequency this quarter specifically.

And as you launch new innovations into the marketplace, are you seeing any change or uptick in reactivation rates on that?

Trina Spear -- Co-Chief Executive Officer

So I can start and then Danielle, if you want to take on, I think what we're focused on is -- and you're seeing it in the marketing efficiency. We're really have shifted our marketing to be more focused on all the areas of how we help our healthcare professionals in their jobs and shifted a bit away from marketing purely around launches. The other thing that we're doing is we've upped our game from a creative standpoint. They say cash is king and we do believe that here, but also creative is queen.

And so really diving into and doubling down on creative and creative is our superpower. So we're continuing to progress on a lot of what we've talked about in terms of creative aligning with channel aligning with audience. And finally, we've made a lot of strides on conversion rate optimization with the launch of the set, which has been a really great way for new customers to choose the exact top -- the exact pant that they need to go and do their job. And so those are some of the areas that we're focused on not only from a new customer standpoint but also from getting customers to come back and continuously engage with the brand.

Daniella Turenshine -- Chief Financial Officer

Just building on what Trina said, Brooke, we did, you know we saw frequency trends come in as expected. And I think as we've spoken to, there is pressure on the consumer today. But we're really focused on the things that we can do to drive that to drive the business forward. In terms of reactivation, it was one of the strongest numbers of resurrected customers in the second quarter.

And we think that's really being driven by the strategies that we're doing to communicate directly with them. We're utilizing our personalization strategies to really segment and speak to this cohort of customers and we're really meeting them where they are through different social channels where they're engaging and really targeted messaging. And I think what's important to note is that we see many of them are still on our email list and communication channels. And so they're still really engaged with the brand and we're finding the right messaging to bring them back.

Brooke Roach -- Goldman Sachs -- Analyst

If I could just ask one quick follow-up, as you increasingly get some momentum behind the teams business, I was wondering if you could contemplate how you're thinking about the composition of U.S. marketplace dollar growth over the course of the next couple of years. What proportion of that growth do you envision coming from individual customers that are coming to your website and purchasing just for them versus the composition of customers that are coming for a teams order driving the dollar growth in your business for 2024, 2025, and beyond?

Daniella Turenshine -- Chief Financial Officer

So as we discussed, teams is about mid-single digits of our business today, but it's growing very quickly. So as we look over the next five years, we do expect that teams business to be a larger proportion of our sales over time as Trina spoke to. We've been doing a lot to engage with concierge clinics where we see that they are focused on professionalizing and standardizing their workforce and really focusing on how we can improve our platform experience to better serve them. So we're seeing really strong growth today, which we're really encouraged by and we do expect that to ultimately be a bigger portion of our business over the long term.

Operator

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

John Kernan -- TD Cowen -- Analyst

That's not my question and congrats on the progress earlier about prior to that march. The target. In the context of that, how do we think about G&A line and the selling line? It sounds like selling is going to have some pressure into next year. You mentioned the filament G&A there's various components to that.

But how do we think about those two line items?

Daniella Turenshine -- Chief Financial Officer

Yeah. Thank you, John. So looking at selling specifically, we are looking at 2023. We are lapping higher storage fees and driving leverage in the second half as we expect to see storage expense sequentially decline in the third and in the fourth quarter.

We did speak to that that's going to be more than offset by some of the initial investments that we're making in our fulfillment project. As of right now, we expect those costs to be approximately $2 million in the quarter. We continue to expect that the fulfillment enhancement project to approximate $16 to $18 million in totality with the bulk of those costs expected to occur in 2024. And so we are expecting to continue to see pressure in that line item next year.

And overall we've quantified about 250 basis points of pressure and selling in 2023 related to those transitory costs within fulfillment. But looking into 2025 when we're past the implementation expenses, we will expect to see selling normalize. I think within G&A, you know, as we discussed, we're continuing to invest in our people. And I think over the long term, we have a lot of opportunity to leverage from here.

But we want to make sure we're making the smart investments to drive growth over the long term. And we're going to utilize our strong balance sheet and our free cash flow generation to make sure that we're making those right investments that are ultimately going to enable us to scale and grow.

Operator

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

Rick Patel -- Raymond James -- Analyst

Thank you. Good afternoon, everyone. I'm hoping you could provide some color on new customer ads. Just any insight on the contribution of us versus overseas customers? And then second on the team's business, about mid-single-digit percentage of revenue, I'm assuming that's all scrubs, but hoping you can touch on the opportunity for non scrubs within teams as well?

Daniella Turenshine -- Chief Financial Officer

So within the new customer acquisition, I think it's really important to note that it was driven by both domestic and international. So we're continuing to see a lot of growth in our international business. We spoke to the localization strategies that we're doing in our existing markets that are helping to drive growth, but also opening new markets like Mexico, Saudi Arabia, and the Philippines, which has been a really bright spot in the second quarter domestically. We're really focused on personalizing our messaging so that we're matching the channel to the content to the end consumer and we've seen a lot of success there.

Trina Spear -- Co-Chief Executive Officer

And the second question just OK. Yeah, non scrubs within teams, I think for us part of what we're excited about in terms of upgrading our platform is to be able to widen our assortment to our teams and really let them purchase not only just our scrubs but also, our fleeces and our vests and our compressed compression socks and our shoes and everything that we offer. So that's really exciting. I think the other thing that is really exciting about teams is that even if you come to FIGS and you're buying scrubs for everyone on staff, right, everyone within your clinic, everyone within your organization.

We also give the individual the ability to come back to us and buy all the other elements of their uniform directly with us, even if it's not part of the team's account. So there's a lot of synergies between our -- our e-commerce business and our teams business and it's exciting to see even when non-scrubs isn't a direct teams purchase, we're able to capture that through our e-com business.

Daniella Turenshine -- Chief Financial Officer

And then a question on promotions, it looks like the second quarter was less promotional versus last year. Is that a function of nurse's week just being very strong or does that reflect consumers being more active during the non promotional periods? So we continue to follow a similar promotional cadence in the second quarter year over year. And I think what we saw is that still a little bit of mix shift to these more promotional times, but it wasn't -- it was to a lesser extent that we saw in the first quarter. Our Nurses Week event was a strong performer as customers really engaged with our messaging, how we're supporting nurses and giving back to them.

But I would say not -- not a ton of change on -- on the promotional cadence and what we're seeing from our customer behavior.

Operator

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

Alice Zhao -- Bank of America Merrill Lynch -- Analyst

Hi. Thanks for taking our questions. I'm curious about the consumer purchasing patterns on return rates. Can you just talk about how merchandise return rates have trended this quarter and if changes in that metric have impacted shipping and fulfillment costs?

Daniella Turenshine -- Chief Financial Officer

So we haven't seen a ton of movement on return rates. We did see a little bit of an uptick, but it's mostly driven by product mix as customers are continuing to engage in our newer styles and newer categories. And so we see a slightly higher return rate to start, but that comes down over time as customers become more familiar with those products and we have more repeat customers purchasing them. So I wouldn't say really a ton to note on return rates and didn't have a -- a large impact on the quarter.

Alice Zhao -- Bank of America Merrill Lynch -- Analyst

Got it. Do you ever give the percentage or arrange for that rate?

Daniella Turenshine -- Chief Financial Officer

It's not something that we give on a regular basis, but our return rate is one of the lowest in e-commerce. And so it's something that really that's a big benefit for us and something that ultimately helps us to drive that really strong profitability that you see.

Alice Zhao -- Bank of America Merrill Lynch -- Analyst

Got it. I have a quick second one, just on your sales guidance for the full year that was maintained kind of despite this quarter's beat and the great new customer acquisition numbers you're seeing. How are you kind of thinking about the components that drive sales for the rest of the year? Then Is it AOV or order frequency or something else you're incrementally more cautious about or are you just being kind of conservative?

Daniella Turenshine -- Chief Financial Officer

So our guidance in the second half reflects a couple of factors. As you may recall, we had very strong new customer growth in the back half of 2022. And so while we're continuing to grow new customers, we are expecting the growth here to moderate from the first half of the year. We do really think that our ability to continue to grow new customers on top of some really challenging comps speaks to just how under penetrated we are and how much market opportunity there is ahead of us.

As it relates to our Q3 outlook specifically, we did have a timing shift in our product and marketing launch calendars in Q3 of last year. So the Q3 compare is just tough in 2023. The cadence is more typical of what we would expect to see. I think it's important to note that we -- as we've discussed, we remain really committed to discipline promo.

So we're not buying sales with promos and we're really growing in a sustainable way. And in addition, we are incorporating, you know, the sustained inflationary pressures that we've seen. And that's really kind of the difference between what we're seeing in the second half versus the first half performance.

Operator

Thank you. The next question will be from the line of Matt Koranda with ROTH MKM. Your line is now open.

Matt Koranda -- ROTH MKM -- Analyst

Hey, everyone. Thanks for taking the questions. Understanding that the cadence of promotions is not changing for you guys, but I did notice that ATG wasn't on the site in recent weeks. And just wondering if there's any significant change we should note in terms of the promotional strategy that you have, just if maybe you're clearing product in different channels or how we should be thinking about sort of the strategy toward promotions in the back half of the year?

Trina Spear -- Co-Chief Executive Officer

Yeah. I think it was literally awesome today gone tomorrow and it's gone, which is exciting. I think we're really, you know, want to ensure that when we launch products you come and you engage with our products, we have promos at specific times throughout the year and we're being really disciplined around how we, you know, offer promotions to our community. And that is the plan.

Matt Koranda -- ROTH MKM -- Analyst

OK. Got it. And then on teams, it's interesting you noted even without really playing much offense, you're at a mid-single-digit percentage of revenue. Just curious if we should be thinking about a strategy that you have to play more offense there in terms of either hiring an external sales force or just marketing more aggressively toward the right decision makers on that front to juice growth on the team's program?

Trina Spear -- Co-Chief Executive Officer

Yes. I think given the gross growth we've seen and how healthcare is changing and evolving in front of us, we are executing a strategy to proactively drive growth in the future in the teams business. It's starting with the upgrade of our teams platform and making that more scalable. We're creating a dedicated customer experience team that's providing a more, you know, more close knit white glove experience.

We're developing our plan around a more robust outbound strategy and that relates to marketing as well as sales. And so there's a lot that we're doing investing behind this business and we're really excited about what it can be in the future.

Operator

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

Adrienne Yih -- Barclays -- Analyst

Great. Thank you very much. Just three quick questions, Danielle, you talked about kind of starting to see the capitalized average unit costs come down as you move through the inventory. Can you also talk about sort of when you might have renegotiated some of these big contracts for contracts and whether that's an added potential benefit in the back half? My second question is I believe you said that teams was mixing up average unit retail and possibly margins.

So can you talk about kind of the content of what they're buying there and how that's driving the -- the piece of it? And then lastly, either Trina or Daniella, can you talk about the fulfillment upgrades, So what -- what -- what are the goals after you make those fulfillment upgrades? Is it capacity, productivity, reduced cost or all of the three? Thank you very much.

Daniella Turenshine -- Chief Financial Officer

Thanks, Adrian. On your first question, so we have seen ocean freight rates come down considerably and we have walked in those rates at a much, much more beneficial place than we've been over the past couple of years. As we discussed, we're not anticipating a ton of benefit from that in the back half of the year because we've really materially lowered the amount of inbound receipts that we're bringing in as we work to bring our inventory down to that target of 25 weeks of supply. And so those inbound receipts that those lower ocean freight rates are just going to have a smaller impact on overall gross margin.

But we do expect that to be a benefit looking into 2024 and beyond. On the team side, we have mentioned that teams is a driver of Aof and really that's through higher units per transaction as these teams orders are bulk orders for hospitals and institutions looking to outfit their workforce because of that they have a really interesting margin profile. And so teams, while slightly lower gross margin because we're offering discounts for those bulk purchases if you look down the PNL, it's actually a really strong contribution margin profile, stronger than our core business because we're getting efficiencies and outbound shipping on those larger orders. And we're really efficient in marketing as it's been entirely inbound today.

And so it's a really great tailwind that we're seeing as we continue to grow this team's business as we continue to shift more into it, it has a strong return on our financials as well for fulfillment. So for the fulfillment project, really what we've spoken about is we're looking to set the groundwork for our distribution network and this is going to enable us to scale, provide a better customer experience, ensure that we're getting our packages to our customers in the time that they want them and doing that with a really heightened level of customer experience. And so that's where really we're really focused with this fulfillment enhancement initiative. It's about efficiency, speed and ultimately providing a better experience for our customers.

Operator

Thank you. The next question will be from the line of Bob Drbul with [Inaudible]. Your line is now open.

Bob Drbul -- Guggenheim Partners -- Analyst

Hi. A couple of questions for me. The first one is just in the back half of the year, do you see -- as you guys do some new color launches is -- is there any risk to those type of launches? You've had some challenges for the last few quarters on some of the color. So I'm just curious if you're taking any significant risk there.

And then the second question, I have is just on the new countries I guess as you've had some countries that you're a little bit more established in, is there any major discrepancies around what you're selling in some of the countries you've been in for a couple of years now versus some of the newer ones? I'm just concerned? Or just interested in how the response has been in terms of mix or the reception of the brand in some of the newer countries versus some of the older countries?

Trina Spear -- Co-Chief Executive Officer

In terms of our product innovation and product launches, I think what we're really doing here is we're continuing to bring product that solves problems for our healthcare professionals and whether that product comes in our classic colors or in our new colors. You know, our goal is to bring products that people love. And so we're going to continue to do that. I think we have been really encouraged by what we've seen in non launch days and how we've driven our business through you know, day in and day out interacting and engaging with our community and having them come even when we're not launching products.

And I think our evergreen always on marketing is supporting that as it relates to international. Sorry, Bob, Just want to make sure I get your question right on that.

Bob Drbul -- Guggenheim Partners -- Analyst

I guess just on the international side, some of the countries you've been in for a little bit longer time frame now. Are you seeing much difference in the reception or receptivity of the brand versus some of the newer ones that you're just entering and just testing it?

Trina Spear -- Co-Chief Executive Officer

No. I think we've seen very similar behavior across newer countries as well as ones like Canada and Australia and U.K. We have -- we mentioned it earlier, but it's been really exciting what we're seeing with Mexico, Philippines, and Saudi Arabia. These are countries where we just saw the demand.

We opened up the market. We haven't spent any money on marketing and so that's been really exciting. But in terms of what they're engaging with what they are, whether it's our scrubs really, you know, you really do come to FIGS for our scrubs to start as you gain trust. And as you get to know us better, you're buying our fleeces, you're buying our vest, you're buying our scrubs.

And so that's been great to see and so we don't see a lot of difference between our, you know, longer standing countries and our newer ones between product mix.

Bob Drbul -- Guggenheim Partners -- Analyst

Thank you.

Operator

Thank you. That concludes today's Q&A session. I will now pass the call back over to Trina for closing remarks.

Trina Spear -- Co-Chief Executive Officer

Thank you so much everyone for joining us on our second-quarter call and we look forward to seeing you in the next one.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Jean Fontana -- Senior Vice President, Investor Relations

Trina Spear -- Co-Chief Executive Officer

Daniella Turenshine -- Chief Financial Officer

Ed Yruma -- Piper Sandler -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

Brian Nagel -- Oppenheimer and Company -- Analyst

Brooke Roach -- Goldman Sachs -- Analyst

John Kernan -- TD Cowen -- Analyst

Rick Patel -- Raymond James -- Analyst

Alice Zhao -- Bank of America Merrill Lynch -- Analyst

Matt Koranda -- ROTH MKM -- Analyst

Adrienne Yih -- Barclays -- Analyst

Bob Drbul -- Guggenheim Partners -- Analyst

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