Unlike recent IPOs from high-profile companies like Coinbase or DoorDash, FIGS' (NYSE:FIGS) recent initial public offering has not caught the same level of financial media attention. The company, which went public on May 27, is a direct-to-consumer (DTC) start-up trying to shake up a historically stodgy industry: healthcare apparel.
Here's what investors need to know about FIGS.
The business model
Born on Shopify's (NYSE: SHOP) e-commerce platform, this female-founded and female-led company makes the vast majority of its revenue selling fitted uniforms (scrubs) and apparel for healthcare professionals through an almost entirely online marketplace (rather than through medical supply stores) to a growing cohort of loyal customers. FIGS has gained a reputation for the design, quality, and comfort of its products and for being able to drive word-of-mouth advertising by getting brand ambassadors to promote its products using social media channels like Facebook's Instagram.
This, combined with the fact that healthcare apparel spending has a consistent need to be replenished (healthcare apparel is worn longer and worn out quicker than other apparel types), gives FIGS strong retention numbers. In 2020, FIGS retained 75% of the spending from its 2019 customer cohort, while 50% of first-time customers from 2017 to 2019 came back to FIGS for a second purchase.
These two facts indicate that the company will not have to spend huge amounts on advertising to grow its business since its customers will continue coming back for recurring purchases. This is important for the long-term profitability of the business.
Strong unit economics
For a fast-growing start-up, FIGS is surprisingly profitable. It has only raised $60 million since its founding in 2013, showing that most of its growth has come from reinvesting the cash the business generated from selling apparel. A high gross margin of 73% shows the power of being an online DTC retailer.
FIGS managed free cash flow of $19.5 million in 2020 and $58 million in operating income. Even more impressive, FIGS has achieved this profitability while growing revenue at a triple-digit percentage rate. In 2020, revenue grew 138% to $263 million, while sales have grown at a 146% compound annual growth rate (CAGR) over the last four years.
With a high gross margin and the closed ecosystem that comes with its DTC relationship with its loyal customers, it looks like FIGS could generate 20% or higher free cash flow margin, especially once it stops growing sales at a 100% year-over-year rate (which will happen eventually). This margin profile would be best in class within the apparel industry. lululemon athletica and Nike, for example, only had gross margins of 56% and 43.4%, respectively, in their 2020 fiscal years.
Plenty of room to grow
FIGS' revenue growth rate will likely slow over the coming years, but it still is going after a large market opportunity in healthcare apparel. This is an industry with consistent demand as healthcare workers like doctors and nurses are required to wear their uniforms at all times, leading to high wardrobe turnover. There are currently 20 million healthcare professionals just in the United States, many of whom are potential FIGS customers. In its pre-IPO documents, FIGS management estimates that the healthcare apparel industry is worth $12 billion annually in the U.S. and $79 billion worldwide. With only 1.5 million current customers and $263 million in 2020 revenue, FIGS will not be hitting market saturation anytime soon.
FIGS is also trying to build a cult-like following for its products, similar to Lululemon, Yeti, and Peloton Interactive. This should give FIGS pricing power over competitors as it continues to build its aspirational lifestyle brand.
But what about the valuation?
As of this writing, FIGS has a market cap of $5 billion. This means the stock trades at a trailing price-to-sales (P/S) ratio of 19. The business is growing quickly and does have high gross margins, so FIGS likely deserves to trade at a high P/S. But with only $58 million in 2020 operating income and even less in free cash flow, buying FIGS stock at this market cap means investors are banking on a ton of profit growth ahead. This looks like a great business, but seeing that the valuation is this sky-high and that the company just went public, there's no reason for investors to rush into buying shares of FIGS stock.