A Look at Healthcare Apparel and Lifestyle Company FIGS

In this episode of Industry Focus: Wildcard, we break down the recently public FIGS (FIGS 0.63%), a company with a modern, more customer-first approach to the classic scrubs healthcare professionals wear. Listen in for why FIGS' financials make it look like a software company, and the two big numbers that caught our eye going through the company's prospectus.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on June 2, 2021.

Dylan Lewis: It's Wednesday, June 2nd, and we're talking about a company that makes clothes for doctors and nurses. I am your host Dylan Lewis, and I am joined by a longtime Fool and fellow Scrubs fan, Anand Chokkavelu. Anand, how's it going?

Anand Chokkavelu: Doing well. To be clear, a fan of Scrubs, the TV show. 

Lewis: That's right. Yeah, Bill Lawrence fan, right?

Chokkavelu: Right.

Lewis: I'll confess, we're talking about FIGS, this is a company that makes scrubs and throughout the prep process, the outlining process for this episode, I had the Lazlo Bane Superman song playing in the background in my head. The theme song from Scrubs the TV show.

Chokkavelu: Nice.

Lewis: Which is nice, because I haven't heard in a while, and I feel like that was a show I always loved as a kid. I'm more of a fan of the show than the clothing, but that's because I'm not in the medical industry. A lot of folks obviously need it for their jobs, and we'll be talking about a company today that really is squarely focused on the market of scrubs, daily workwear for medical professionals, and maybe a business that would've been easily dismissed by a lot of people, but Anand, probably belongs at least on the watch list, because it's such an interesting company.

Chokkavelu: Yeah. Spoiler alert, you're going to actually have to contain my enthusiasm. Shockingly, I was shocked, once I looked into this, how much I enjoy this company.

Lewis: Yeah, and so let's dig right into it. The mission for this business is "To celebrate, empower, and serve those who serve others." That's vague enough that it can be hard to get a sense of what it is precisely what they are doing. At core, Anand, this is a lifestyle brand that is serving healthcare workers.

Chokkavelu: Exactly. They're looking to become a premium brand that elevates something people traditionally didn't pay much for, hospital scrubs, right? Healthcare worker uniforms. Like Starbucks did for coffee or Lululemon did for workout clothes or Peloton did for workout equipment, that's what they're trying to do with scrubs. At this point, believe it or not, around 85% of medical professionals buy their own uniforms versus the hospitals. I would've thought that. My wife was a healthcare professional and she claimed that she got out probably right around when she would've been draining our bank accounts buying FIGS. 

Lewis: It's interesting, Anand, in doing prep for the show, I don't have a relative or a family friend or anything like that that works in healthcare, and I had no basis for that number you threw out there of, do people generally use scrubs that are provided by the hospital that are then cleaned on-site, are they tending to buy their own scrubs? I was surprised by that number and that it was as high as it is.

Chokkavelu: Yeah, it was very shocking. I remember, not to get into the distribution and stuff, I was asking her to confirm, how are you buying the scrubs? A lot of times it would be once a year. There would be an expo at the hospital where all the different providers would come and would go and sort through the racks, like T.J. Maxx style. That was the thing that they were doing, so you can see why their tag line is, "Why wear scrubs when you can #wearfigs." They're really just saying, "Look, there's a better way," and then, spoiler alert, then they're going to expand out even beyond that.

Lewis: Yeah, and I think the quick thesis for this company is no one has really given this space a lot of attention. We're coming in here with something that is specifically direct-to-consumer, really geared toward the audience it is intended to serve and designed for people that are going to be wearing it. Frankly, it may be a little bit more flattering than most of the options that are currently out there. Because I think scrubs tend to have the reputation of being boxy when it comes to clothing.

Chokkavelu: Exactly. Hey, you've got folks with pretty decent disposable income, at least above average, in the healthcare workers space. We've got a growing industry and since you have to buy your own, and it's your work clothes, how much do we spend on our button up shirts, right?

Lewis: Yeah. That's right, and COVID's gave us a little bit of a breather on that, I think, because we've been working from home and we work for a casual business. But those are non-negotiable expenses or things that you just gotta have if that's uniform for the job you're in.

Chokkavelu: Right, and what makes them salivate as you're reading through that S-1, you get it. Especially when they were founded, which isn't long ago, but 2013, where some of this with more bricks-and-mortars or even more so in our researchers, more websites and things that we found since then. But basically, they think their competition stinks, and what they're trying to disrupt is that old school clothing makers who sell those commoditized boxy scrubs that aren't built for comfort or fashion. They are competing against folks who use wholesaling and traditional bricks-and-mortar retailing or un-optimized online executions. These are companies that don't have great margins, which keeps you from innovating and marketing. They also were big on talking about being purpose driven, and how they describe themselves as we have built the largest DTC, direct-to-consumer, platform in healthcare apparel, leading the industry in the shift to digital. Makes sense, right?

Lewis: Yeah, and I think that that's really just catching onto, or taking advantage of a trend that we have seen be so successful for retailers. We see increasingly a lot of these strong, up-and-coming retailers out there and consumer brands out there have a much closer relationship to their customers. They own that relationship much more. They're not nearly as reliant on third-party platforms to drive their sales, which is great because it helps them build these loyalty programs.

Chokkavelu: Exactly, and 2020 may be the year of e-commerce, in a big way. They're doing that and getting that real feel for their customers. They [...] things like their proprietary -- I don't even know how to pronounce it -- FIONx fabric technology, like an Under Armour would talk about it. They talk about, "Hey, we want to make these for hospital workers," just like people spend so much time with athletes. You think of Under Armour, or Nike, or Lululemon all doing that kind of thing and then they focus on that social consciousness. They've got the threats for the threats program, which is similar to, I think, just about every new direct-to-consumer word has, not to diminish it, but Toms has that. I think Warby Parker does it where, "Hey, you buy a pair of eyeglasses, we donate a pair of eyeglasses." Maybe the same with scrubs to other countries that maybe don't have the income to be purchasing these things, serve a lot of folks, and they call their customers. This is one of the most grading things for me. Awesome humans. That's how they call their customers. Which is cool, it's just one of those where you really have to tow that needle in your branding.

Lewis: Yeah, and that's one of the realities of being more of a lifestyle brand. If you always see these efforts to create catch-on names or create a sense of identity among your customers. We do it here at Fool, right? We call ourselves Fools, and that's a big part of how we position ourselves. What I think I can get behind when I hear something like awesome humans is, they clearly like delighting the customers that they reach, and they are looking to elevate people, make people feel awesome. If you haven't seen any of their products, you haven't been on their website, you haven't seen their digital footprint. I think the best way to describe it is it looks like a very millennial friendly brand. I think about half of their customers are in that 18-35 bucket, and it has the look and feel of a digital first company, very sleek designs. But some of the things that I mentioned before about intentionally designing stuff for their market.

One of the things they pointed out was they intentionally designed pockets into some of their scrubs for wedding rings. They realized that was something that they had to solve as a major problem and I think one of their customer interviews said that they were talking to a doctor who is on his fifth wedding ring because he kept losing the wedding ring tying it into the waistband of his existing scrubs. Just being a little bit more purposeful in the clothing that's being designed for people who need to wear it every day. You could easily see that becoming a competitive advantage, Anand. You could also easily see it being something that gets mimicked as the industry catches on.

Chokkavelu: Absolutely. I can't think of another word but the ring is true, where I remember my wife would always be struggling with what to do with the wedding ring. But yeah, it's just like any of the premium brands. The imitation, can you keep that brand and can you keep people coming and as you grow and keep those margins because they are very expensive scrubs compared to just the regular old Cherokee or Dickies type of scrubs.

Lewis: They are, and they are very much positioning themselves upmarket. You see that, I think purpose-driven companies can get away with that a little bit more because it's a lifestyle brand, it's a purpose driven company. You talked about some of the charitable efforts that they have. When that's the story and the product is really great, people are generally willing to pay up. It's not going to come as any surprise, I think we've said scrubs about 14 times so far in this podcast. The vast majority of the money right now is coming from these scrub lines that they have. I think it's like 13 of their core scrub lines make up over 80% of their sales. But they have an interesting model where they have their staple line. But then they also create specific events that are able to drive traffic to the site and engage with their customers.

Chokkavelu: Yeah, they do drops roughly every week. I was shocked that it was weekly. You're thinking of different styles, different colors. Obviously if 82% are from that core, these are incremental. But they also once you're back on the site or on the platform, maybe you buy one of the core offerings too. Then what they're trying to do otherwise is being that lifestyle kind of thing, which their definition of lifestyle right now it's still pretty healthcare focused where it's lab coats under scrubs, like an under scrubs, which could be worn outside the hospital. Outerwear, activewear, loungewear, compression socks and stuff like mast shields, footwear. They've got that as their, "Hey, if it's super comfortable and you love wearing it at work then you can also find things that people would wear outside of work." That's a growth opportunity.

Lewis: Yeah, and it's an interesting founder story with this company. Because what I was surprised by is some slight healthcare exposure for them, but not hardcore healthcare experience in the way that you would traditionally think about it. But still, founders that identified a pain point and realized that they can come up with a solution that was far better than what was currently out there, and those founders still at the helm for this business.

Chokkavelu: Yeah, co-CEOs. Well, actually, let's start with Heather Hasson, who prior to the 2013 launch, she started her first company at age 22 and ran that for seven years. I'm seeing different things on whether it was a high-end handbag line or whether they made neckties or maybe both. But either way, in the fashion realm. Then, Trina Spear was an associate at Blackstone Group. She was doing Wall Street stuff. How it started is because I was looking for that founder's story of, "I was a healthcare professional. My scrubs were itchy and boxy," and then once I realized their backgrounds, I was like, "That's why I haven't seen the story. But halfway through the few dozen pages through the S-1, you see the letter and you see that Heather Hasson had coffee with a friend who was a healthcare professional, and the scrubs were awful and boxy. Then, it's hard to get them at places because the bricks-and-mortar shops, they would close at 5:00 PM. If you've got a 7:00 AM to 7:00 PM shift, when are you going to get these scrubs? Then eventually, she was introduced to Trina Spear from a mutual friend, and then they partnered up, and then they started going.

Lewis: What's cool is I love getting into the founder's story and getting a couple of examples there of clear passion in metal and just really wanting to be in this, putting in the work to create something really big. There are stories of them going to hospitals, going to care facilities, and setting up booths where they knew that doctors and nurses were going to be switching their shifts. They would set up with free coffee and basically wait for people to come by and, "By the way, here are our scrubs," and start to create those more grassroots relationships with people also working in the expos and doing things like that for healthcare products, but there is a lot of that to the story. Even though they aren't healthcare workers that were necessarily solving a problem, they personally were experiencing a lot.

Chokkavelu: Frankly, as an investor, I like it because that's where you get that, hey, you are not just focused on the healthcare space. They're quickly already thinking about expansion in other places. Then, you've got that with Trina would be Wall Street kind of experience of just and you see it with as we'll get into the financials and things like that. At least from what I've seen just operationally and gameplan, a really well-run company.

Lewis: Yeah, let's dive right into that rather than wait because the numbers are really impressive. The top line for 2020, net revenue was $263 million, which grew 138% year over year. I don't spend a ton of time in the conventional retail space. [...] the consumer goods space, they tend to leave that for Emily Flippen with Industry Focus because she does such a good job with it. I don't think you typically see growth rates like that in this industry.

Chokkavelu: I keep coming back to SaaS. You don't always see that in SaaS this past year with a pandemic.

Lewis: Yeah. What's incredible to even further that SaaS comparison, gross margins for this business, 72%. That's incredibly high for the industry.

Chokkavelu: Yeah. I was just talking [...], who is our cohort on Twitter. He was saying, "I don't know if there are any even premium lifestyle brands." You looked at Lululemon and Yeti and Tiffany. They were all in the 50%'s to low 60%'s. Then when you do look at SaaS companies, remember, FIGS is at 72%, Zoom is at 69%, CrowdStrike's at 74%, and Salesforce is at 74%. It's right there with SaaS companies right now, at least.

Lewis: Not surprisingly, with gross margins like that, even though it may not necessarily be the company's priority to be profitable right now, they are, which just speaks to how much cash is left over after they've done making the product.

Chokkavelu: To find a company that's growing over 100% and get profitability is crazy, and then for them to be making physical goods that have the real cost of goods sold. Amazing.

Lewis: Amazing. I guess for them really, the upfront costs of creating their designs, figuring out what they wanted to do in fabric, doing the development there to create something that feels differentiated is a lot of where that upfront cost is going to be. But once you've figured a lot of that stuff out, the core inputs aren't that expensive.

Chokkavelu: Very fair, but still.

Lewis: I say that as a strength. It's something where as long as you can maintain the pricing power that you have, you're going to maintain those margins because the input costs aren't going to go dramatically up unless they start going into some product lines that alter their cost structure a little bit. Especially when you consider just looking at what's going on with them with their cost to acquire customers, we're seeing them benefit tremendously from the scale they're operating on.

Chokkavelu: Yeah, they're talking about going from $101 to acquire a customer in 2018 down to just $39 in 2020, so you're down 60%. That's because of brand awareness and word of mouth kicking in. To put that $39 cost acquiring perspective, customers are spending $215 with them in the first year. Usually, in any type of business where you're doing a cost to acquire a customer, you take a bath at first, and then you're hoping that it pays off over the long term with over lifetime value. Maybe in the second or third time, they come back to the site in the second year, but they're profitable from the first purchase. If you take their contribution to profit, just the gross profit minus some other direct costs and you take that over the cost to acquire, they're at 1.3. Meaning, if they spend $100 in marketing or advertising, they get back $130 from that first sale.

Lewis: Yeah. It's hard to argue with any investment you would make in a business when those are the numbers that you're able to put up with your customer acquisition costs and how quickly you're able to be repaid.

Chokkavelu: Yeah, there's no payback period, which is weird.

Lewis: Which is amazing. Just to gut check with those numbers that you're seeing. We said $215 for average spend in the first 12 months. That equates to roughly an average order that we're seeing from them about $100. The easy way to just quickly look at their site and understand that is typically, you're going to see their scrub pants at about $48 and the scrub tops at around $40. It's like $38. A set of their scrubs gets you pretty close to that average order right there.

Chokkavelu: I've got my [...] groupings so that you get your package where it's like, "Hey, look. I've got an outfit. Boom." Yeah.

Lewis: Which I think is compelling, particularly as you know, I am going to wear this all the time. I'll buy one kit and see how I like it. If I like it, I'll continue buying more. But it's a nice, easy way for someone to try something out when it's your everyday uniform.

Chokkavelu: Absolutely.

Lewis: We talked a little bit about the leadership structure and the co-founders. Folks also in the show know that inevitably whenever we're talking about a team, especially founding team, like to dig into what we see in terms of voting structure for the business, like to take a look at what we're seeing in terms of employee feedback from Glassdoor and get a sense of beyond all of the awesome founding stories, stuff we're hearing about this business, who is calling the shots and also what is the culture of this company?

Chokkavelu: We've got the two co-founders, and then this third person, Thomas Tull, was a Hollywood producer who invested about $65 million in 2017, come in. Basically, this is similar to what we see with others where if you are buying into this company, you are buying into them, because it gets a little clergy with what goes where and who owns what, but basically, they control the company. Now, the group of those three, they have a voting agreement where they back each other up on stuff and they own a controlling interest. There are A shares, B shares, and C shares, and there are various things. I think the B shares, they all can convert back to A, take 10 years for the B. Long way of saying, you're trusting the two co-founders and the investor, Thomas Tull, to do what you want them to do.

Lewis: Yeah. If you see their vision and you bought in, that's a great sign, because it means they're not going to have very many roadblocks in executing their vision, at least internally. Whenever that plan meets the market, it's another thing, but you know that they are going to be able to exert their own strategic vision over the company. If you're less convinced, then obviously, that's a red flag. We talk about this with most companies that come public. Because especially if you're coming public at a small enough evaluation and you're a founder, you want to be in a position where you're going to control the destiny of the company. More often than not, especially if you're really a visionary leader, investors also want you to be in that position.

Chokkavelu: Yes. Frankly, if you're in a founder-led business, you're betting on the founder of whether they are controlling interest or not. Frankly, the fact that they keep control gives me some faith in the founder.

Lewis: Yeah. It means they are sticking around. They have skin in the game, we love to see that. Their financial interests are aligned with the company's financial interests, which are aligned with investor financial interests. If you have someone who is creating a category and really upgrading the way the industry works, you want to see that thesis play out over time. Generally, I look at this and say, that's fantastic. Love to see that. They're going to be able to call the shots. With a company of this size, I think they debuted around $5 billion or so. Founders and the executive team have an outsized impact on the direction of the business because of the size of the company.

Chokkavelu: Right on. Let's get to the customers, maybe. We've got 1.5 million active customers. Meaning, these are people who have bought once in the past 12 months. Now, we always try to get behind retention, because ideally, if it's a big brand, you want people who are repeat customers. They say that 60% of their active customers were repeat customers, and they give some retention numbers. They say in 2020, we retained 75% of the 2019 prior cohorts net revenues, including 100% of the 2019 net revenues generated by 2018 in prior cohorts. I don't know how you are reading this [...]. That's good.

Lewis: It's a little confusing. We actually had a similar conversation last week, where we were trying to unpack a retention number for a company we were looking at. Basically, anytime it falls short of something that is an easy comps figure, it can be confusing for investors because that's what we're looking for with that cohort analysis. I think we're getting something that gets close to this here. I like seeing that they're able to create repeat customers with at least the majority of their active customers. I think that that's a strong sign. What's been incredibly impressive for me is the growth within their active customers. They went from, I think, about 600,000 active customers a year ago to, I think, it was 1.3 million by 2020. This is a company that has experienced massive growth. Ideally, you're enjoying that customer growth and you're getting continued spend from your existing customers. That seems to be the case based on the numbers that we see here. I'd like for this to be stated in a little bit of a cleaner way though.

Chokkavelu: Yeah. I do give a little, because it's not like, I will talk about SaaS companies again, but we're, "Hey, I've got my subscription," and then next year, if I don't subscribe again, I have churned off. Whereas with clothing, you might be getting scrubs from five different manufacturers of clothing and you might love it, but maybe it's two years later that you're going to buy something, in which case it would maybe count as churn in the traditional sense, but you love it and that's fine, or you're someone who just bulk buys and buys every two or three years and just gets 10 scrubs.

Lewis: Yeah. What's so hard about that is, non-purchasers could actually be a sign of loyalty and satisfied customers. If you're buying a ton of stuff in one year and then it's last year for that year and then the following year you don't order anything, that metric would fail you, because you would say, well, there wasn't any customer growth for that individual customer. The reality though is they bought a lot of products, and if it holds up and they're happy with it, and they buy in year three, that's a very successful customer relationship.

Chokkavelu: I'm going to guess it's like any other thing, especially brands that really resonate where you've probably got some folks who have 50 pairs of scrubs. Then you've got other people who are like, "I have three and I wash them every few days."

Lewis: Yeah. I guess it just depends on how often you want to do laundry. It fits probably what it comes down to.

Chokkavelu: Hopefully, they're doing laundry.

Lewis: Yeah.

Chokkavelu: It's quite disgusting.

Lewis: To put a couple of more numbers to what's going on with their customer base, by the company's own count, women make up about 83% of their customers, and roughly half of their customers are in that 18 to 35 demographic. Not terribly surprising on the age demographic. I think they really are positioning themselves as a bit of a millennial branded. It strikes me in a lot of the same way as what I tend to see advertised to me on Instagram, and I'm 30. I'm right in the middle. I think I've actually been advertised big funnily enough. To put just a sense of basically customer buying power, approximately two thirds of the customer base earns less than $100,000 a year and one third of the customer base earns less than $50,000 a year. I think the reason they call that out is when you get into some of these lifestyle brands and you start seeing some of these price tags, it's natural to wonder, where is the sensitivity point with pricing? Is this an accessible product or not?

Chokkavelu: Now, those are really interesting. When you consider that, it's the suit for a healthcare professional. $100, $200 for a suit, that's not that crazy.

Lewis: Yeah. Particularly one that's more comfortable wicks water away, you feel better in. Has a little bit more of what you're looking for in terms of pockets and storage and that stuff. I totally get it, and I really get it when I look at the net promoter score for the company. Because I think more than anything else we've talked about so far in terms of customer retention, the accessibility in terms of price, this is the thing that sticks out to me as this company is onto something.

Chokkavelu: Yeah. I'm not sure exactly how they got the Net Promoter Score because I think you can, depending on sources as we'll see, but they're claiming a Net Promoter Score of +81. Now, anyone who knows Net Promoter Score is gasping right now. What it is is basically on a scale of 1-10, they ask people, ''How likely are you to recommend the company to a friend?'' If you say nine or 10, the company gets a point. If you say seven or eight, it's a push. Anything lower than seven, six and below is a negative one. The scale is negative 100 to positive 100, so they're positive 81. If you interview 100 people and they all say, eight, or nine, or 10, that's 100. If they're all six or below, it's -100. For comparison, at least what I'm seeing on the internet, is Apple, 47-89 depending on the source. You're in that Apple type of territory.

Lewis: Yeah, it's easy to look at a number like 81 and think it's a B-, but I think that's actually an A+, because you have to adjust your scale, -100 to 100. It's really impressive. I think it speaks to how well they address the audience that they're meeting. I think they're trying to engage that audience in a couple of different ways. They're digital first and you see that in some of the initiatives the company has, particularly the Ambassador program where they're tapping directly into that awesome human demographic that they're meeting as customers.

Chokkavelu: Yeah. They've got that. You actually can apply to be one They say on the application, ''Please note that if your social media is private or missing, we won't be able to consider your application.'' Clearly, they are looking for influencers, right?

Lewis: Yeah. I mean, I get it.

Chokkavelu: Smart.

Lewis: If you can organically create those relationships rather than have to broker them through agencies, why wouldn't you?

Chokkavelu: Yeah. Did a quick sanity check on their social media just in terms of Instagram followers just to make sure because I didn't want to see 10 Instagram followers. They have over 500,000 Instagram followers. Peloton only has 1.5 million, which was shockingly low and Lululemon, 3.6 million. For scale, those are all comparable. Somehow Under Armour has 8.6 million. They've struggled a bit with their scale, it's not the be it and end-all, but it does show that they're being savvy on social media and they're expanding their audience.

Lewis: I think one of the big questions from me looking at the company was, it seems like they are delighting the people in their core market and they're showing really great customer growth. How big is this market? Because as someone who doesn't work in the healthcare space, doesn't really know anyone that works in the healthcare space or would need to wear scrubs everyday, I have truly no concept of how many people wear scrubs on a day-to-day basis. I had to back myself away from my core assumptions here, we know what I was thinking, doctors, nurses, and start thinking a little bit more broadly about it. I literally, in preparing the show, was Googling like, who wears scrubs? Just to see who I was forgetting here. You have dentists, dental assistants, pharmacy technicians, veterinarians, physical therapists and I'm sure a lot of other occupations that I'm leaving off the list. The company estimates 20 million people working in the healthcare sector. We mentioned 1.5 active customers. It's hard to know exactly how they're pairing those numbers up. But the point is, there is a substantial amount of growth for them. There's a lot of customer acquisition in front of them if they are able to offer compelling products to the people that are currently using them.

Chokkavelu: Exactly. With that $5 billion market cap and only about $300 million in sales, so that's a 16 times sales. Right now you have to have a lot of growth for that to work out even with their profit margins. How they said they're going to grow was very compelling. Top level getting to the Dylan thing of how big is the space? Basically, the healthcare space is the largest and fastest-growing job segment for the Bureau of Labor Statistics. That's great, big and growing fast. It's expected to grow 15% a year from 2019-2029. So 15% versus 4% for overall jobs. Then, in terms of that total addressable market, you're talking $12 billion in the U.S. Those current sales are under 3% of that $12 billion, and then you've got $79 billion globally and both of those numbers are growing. So they can grow with the whole space, they can grow by taking market share from other scrubs providers, they can extend deeper into that lifestyle brand. Even though I'm not a healthcare provider, their scrubs did look comfy though, the sweat panty-looking things. I could see, maybe if this is one day a multi-bagger, maybe I'll force myself. If it's a five-bagger, then I'll buy a set of scrubs --

Lewis: That'll be your treat for owning shares, right?

Chokkavelu: Yeah. It'll be their treat for providing me a five-bagger, right?

Lewis: Yeah. It's a dividend of sorts, Anand.

Chokkavelu: That's right. Then, international expansion. We talked about that $12 billion in the U.S., $79 billion globally, which means the rest of the world is 5X the opportunity in the U.S. Now, assuming similar proclivity to buy these kinds of high-end products. Then, the other one, which is a big one for me, is other sectors beyond healthcare. There's 40 million people outside the healthcare space. They are in service-based industries that have to wear uniforms. This is food service, hospitality, construction, transportation, that kind of thing. Probably not as uniform as scrubs, but there's probably a pretty big opportunity there.

Lewis: Yeah. Even just looking at their site and seeing what they offer, I think footwear is probably a pretty decent growth opportunity for them as well because you have jobs where you're on your feet all day. If you want a good shoe recommendation, talk to a doctor or a nurse, or a restaurant worker. Those are the people who are going to be able to tell you what's comfortable for 8-10 hours a day. They have, I think, a collaboration with New Balance, but that's another opportunity for them as well. I think there are some opportunities outside of the core healthcare market or the core healthcare use case where you're expanding for what doctors, and nurses, and other healthcare providers might wear from you outside of scrubs, moving into more traditional garments. I'm a little bit more skeptical of that. I think I highly believe that they can serve their core audience well with the core product. The expansion stuff is always going to be something I discount just because I've seen how hard it is for some of these other lifestyle brands to make that jump.

Chokkavelu: Totally agree. For me to buy the stock, I wanted to make sense healthcare only. Healthcare only, U.S. only, perhaps even.

Lewis: Because then everything else is upside. If you make it hard, I think this is where you're going with this. If you make it hard to make the bull case and the bull case is still really strong, then all of the other stuff is gravy on top of it and more often than not, some of that is going to materialize if it's a really quality business that has some optionality.

Chokkavelu: Exactly.

Lewis: All of the glowing reviews here aside there are some risks associated with this business. I think one of the big ones is this is an expensive product relative to the rest of the market. I spent some time looking at other sites that aggregate scrubs and so these aren't direct-to-consumer, these are more like scrubsandbeyond.com, which basically says exactly what it is. Uniform advantage, just looking at their sites to see, they're aggregating stuff. You mentioned before Cherokee and Vicky's being major suppliers in that space. There are a lot of companies in that space and for the most part I was seeing stuff priced below what FIGS is offering, for the most part in the $20 to $35 range. I was also seeing stuff that starts to look a little bit like FIGS, not necessarily as sleek and modern as they are designed, but getting a lot of the same thing where it's more form-fitting, more comfortable, less boxy. You're seeing more intentional pockets worked into this stuff. This would not be crazy, we've seen the story play out before where there is a really innovative company that looks at a space with more intentionality that anyone else has and then the competition catches on and starts doing exactly the same thing.

Chokkavelu: Yeah, I know one which I think started around similar timing but Jaannuu looks like it's running a very similar playbook, that's J-A-A-N-U-U. It's venture capital backed but definitely you quickly look at their website, look at FIGS website and all that stuff, and they're definitely going after the same thing.

Lewis: Yeah, and when there's a good idea money flows after it. When you're posting the topline growth that they are in the margins that they are, other businesses are going to pay attention. I wouldn't be surprised to see industry incumbents even build more millennial oriented sub-brands within their offering to try to compete there. We've seen a lot of legacy retailers do that in another industry as well.

Chokkavelu: Absolutely, and/or little acquisition here and there.

Lewis: Yeah, I mean, I think with all of that what's hard too, I can't help but make some comparisons to Lululemon with this company in part because the design is so central to why people buy it. These are not heavily branded scrubs though and in the same way that Lululemon and Under Armour were offering a lot of patterned workout material. The pattern is what made it cool, it wasn't the logo that made it cool and that made it easier for other people in the industry to hop in. I think if it's an aesthetic thing they're going to have a harder time but if the performance is there and that proves out that's where you retain customers and maintain the space that you have as a leader in industry.

Chokkavelu: The performance and branding is, I remember I knew a guy who would wear a polo shirt every day, pokes some fun out of it and he'd say, "No, no these are the best shirts." They're far superior to any other shirt. It all feeds each other. You want at least the perception of, hey, this is the best brand, or this is the best clothing, or performs the best, it's the most comfortable, whether the reality is the same or not?

Lewis: Yeah, and one other thing I'll throw out there is I think this is both risks and opportunity and very often that's the case with a lot of these things is for the most part, again, fairly similar to Lululemon, the women's market is driving a lot of the results for the company by and large the healthcare sector it's mostly women so that's not terribly surprising.

Chokkavelu: 75%.

Lewis: Yeah, so like those numbers stack very quickly, you realize why that 83% number is there. The men's business could be a major growth lever for them but it could also be something that is unfelt, doesn't materialize in the way that you might expect it to so it depends on how you look at that, how you choose to discount that, and how realistic you think it might be. But one of the nice things, Anand, is we don't have to speculate too much about the market reaction to this company because it's already public. This is a prospective show where the company has already made its shares publicly available and curiously enough they were the pilot company for an IPO access program that Robinhood was working on.

Chokkavelu: Correct, yeah it popped up on my phone and I saw it. We were talking earlier and didn't think anything of it because I saw $5 billion. I saw mixed hospital scrubs, goodnight, like really this is the first one you do and now I'm falling in love.

Lewis: For them I think it's a wonderful marketing opportunity. We talked about the IPO process often being a marketing event for businesses and I think for them to say, we're a consumer brand, we know that a lot of our customers are folks who, you heard those income bands before, probably have some disposable income. In addition to being customers giving some of those people opportunities to be early investors, a really nice story to be able to sell to investors in the market.

Chokkavelu: It's a Shopify, use the Shopify platform and on Shopify site they show FIGS is an example of folks who use scrubs so it's all nice. Now, the one thing on the Robinhood thing is you do wonder, you're worried about, we talked about, hey, waiting on an IPO because a lot of time you want to see the performance over a few quarters and hey they can be an initial pop that dissipates, that's something to factor into, that, hey, it's the first IPO on Robinhood. 

Lewis: Yeah, could be a little hot in activity. There could be a little bit of enthusiasm around that. It seems like so far the stocks are pretty warm in the market. I think the IPO priced at $22 which is actually above the initial range they've been working through and it is well above that now trading in the low $30s. We talked about it with the valuation, Anand, this is not valued like a retailer. I think so long as the growth rates continue to be really strong, it doesn't necessarily need to be valued like a retailer.

Chokkavelu: Right. 16 times sales for that $5 billion. What does give you some comfort is just the profitability there, that's already there and that gross margin and so you talked about operating leverage as it goes on if they can maintain those margins. That could get interesting.

Lewis: I think it could and I think it sets us up well for folks that were last week, we debuted the stoplight framework which is your way of assessing companies and being able to give yourself an easy shorthand. Having walked through the S-1 now, let's do that exactly. The first category you have here is the upside and whether or not you see this as a 10x in five to 10 years for folks that maybe didn't listen to the show, previously simple rule, red, orange, yellow, green, dark-green, signaling exactly how all systems go you are with that category.

Chokkavelu: Dark green being the best, red being the worst. Yeah, with that upside, the 10x, so a lot of the things we've talked about. I love the brand because it means hey they can charge a lot. Those gross margins are indicative of how good the brand is so people are willing to pay those prices, and then that growth, and the execution that they're doing, and how they've been running the company. All of the operational things I've really liked but that valuation of $5 billion, $1 billion I'd be dark green all the way but I'll go light green for this one because of that.

Lewis: Yeah, I mean, they don't need to be growing at triple digit topline year-over-year to be putting up pretty impressive numbers that are going to be satisfying a lot of growth investors that are buying those stocks. There's a rich valuation here. I think even if they wind up working themselves down into the high double-digits fairly soon, I don't think that that's going to cause screeching breaks on the growth story and that the valuation is going to be hurt too much. I like with that gross margin, we talked about the profitability part of it but knowing that this is a purpose-driven company and one that I think is relatively aware of its own space and the realities of its customers, that also leaves a lot of money for them to do things that they think are simply good, regardless of whether what they want to be doing in terms of becoming more profitable business, becoming more scalable business. It opens things up for them to be charitable, to be truly mission-driven because there's so much cash left over after they've paid the core costs of making a product.

Chokkavelu: Exactly.

Lewis: I think to your point, $5 billion is a little bit bigger than I thought they'd come to market. But if they become a category owner it's not crazy to think of it as a multibagger. 10x, it's hard because I don't have a great comp for it and 10x might be a little frothy in the next five to 10 years but even going through that exercise I think they fall short and it's a three or 5x, it's a wonderful return.

Chokkavelu: Yeah to that point, if it was an immediate 10x, they'd be bigger than Lululemon, that's tough.

Lewis: Yeah, I think it's tough particularly when they're dedicated. What I think the pro and the con of being a real dedicated provider is the market opportunity is going to be smaller so you have some competition but you don't have competition that's nearly as deep-pocketed. The con is unless you can find some really interesting growth avenues in adjacent markets that TAM is going to be your TAM. You don't run into as much optionality as maybe some other retailers might. The second criteria you have here, Anand, is downside, basically, how low is the floor? What does a worst-case scenario look like for you? Pretty strong response from me here too.

Chokkavelu: Yeah, so it's also like green because it's already profitable and cash flow positive. Amazing for a company growing like they are, there's brand risks, they've had a marketing snafu or two in the past and I think a lawsuit for unfair business practices from one of the old line folks who are in the entrenched space. I haven't looked too deeply into it but it's not all that surprising that you're going to try anything to thwart an upstart but all of those are potential risks. But again, it's print money which is this.

Lewis: It is. It's nice to know that you can look at a business and say, I don't need to squint too hard to figure out what this thing looks like in the future. We have a pretty decent sense of what a more mature version of this company looks like. The financials are probably pretty similar, it's just that the topline's bigger and the bottom-line's a lot bigger too. You might see them go and spend some more in marketing if they want to try to take advantage of the publicity moment that they're enjoying right now, and with those customer acquisition costs being where they are and the return on investment being there, I certainly wouldn't fault them for doing that. But even with all of that, it's an incredibly strong and healthy business for how young it is. I just took a quick look over, we didn't do this earlier, but just looking at the debt and the cash position they have. As of March 31st, $74 million in cash, their liabilities, just taking a quick look here seeing if I can find it.

Chokkavelu: There's no debt.

Lewis: No debt, so there you go. 

Chokkavelu: That's why you can't find it.

Lewis: Yeah. Looking forward to the line items, trying to scramble here as we're taping, but yeah, that gives you a ton of flexibility as well. They are able to plan long term and not having to make interest payments really lets you control your own destiny.

Chokkavelu: I think that was pre-IPO, so I think there's a little extra money in the conference too.

Lewis: More cash on the table, always a good thing.

Chokkavelu: Yeah. I think a lot of it was that investor Thomas Tull sold his shares, but I think some did come to the company too.

Lewis: Anand, your third criteria is the wow criteria and this is, as you subtitle it, the most important thing. You want to explain that a little bit before you break it down exactly how it applies here for FIGS.

Chokkavelu: Sure. My most important thing, well, I guess it could be two things, most important criteria maybe, but it's also just, what's that one thing you're telling people when they say, "Why are you buying a scrubs provider?" For me, it's the brand. Beyond all that we've talked about already, just the amount of anecdotal, "My relative or my friend loves them," from trusted people on Twitter. I know, a lot of people I know in real life too, but these are people who don't own shares. A lot of times you get stuff from people who own shares and you've got a discount that a lot. But just the love, I think it might've been Matt Frankel's wife is a healthcare provider as well. I think he was saying like, he gets that weekly box from FIGS or something close to that or something. That's powerful.

Lewis: Yeah, and the numbers back it up, which I think is huge. You can be sold the story of the direct-to-consumer brand, but if you're not seeing it come through in the retention and the top-line growth and the customer acquisition, and taking more and more of a market, especially when that they are pitching themselves as disruptors in, then you start to question it. But I don't really see anything that disrupts that narrative looking at the S-1.

Chokkavelu: No.

Lewis: I think that's a pretty strong wow factor for me. If there's a single point, I think you could get out between the net promoter score of 81 and the top-line growth of +130% being whatever that wow factor is. I like for that to be a stat so that I tie it to something that I can keep an eye on overtime. I know we all have our different parameters for those things, but those are the wow moments for me with this business.

Chokkavelu: I don't know if we said the color, but dark green for me. You didn't see me affusing or hear me affusing.

Lewis: Then your first category, how excited are you to own it in 10 years and where do you clock in here?

Chokkavelu: Light green again. If valuation were lower, this would be dark green as we were talking about. But otherwise, as we're researching this, I was getting really worried coming to this podcast because I just kept wanting to do more research. Then once you do too much, I feel like that's such a great sign if I'm excited to do more research instead of just, "Yeah, I get it, whatever." But once you're doing SEO searches on premium scrubs, nice scrubs, and seeing where they go in relation to other ones and the marketing they're paying for things like that. By the way, side thing, they have some room to grow on the SEO side on that front. Now I think they were on the second page for premium scrubs or nice scrubs or something, but that's an upside. But basically, yeah, I'm pretty darn excited.

Lewis: Your final criteria, Anand, is the confidence level and your ability to assess. Where do you check in on this?

Chokkavelu: This is where we get out of the green into the yellow. Given that I hadn't heard of this company before, Raven had featured it as an IPO. Even then, I just dismissed it until now, and that their physical goods maker, it's easier to assess, but also you're relying on brand that one bad marketing campaign or one controversy could just really ding you were one imitator who just does it really well, and then a second and a third and Cherokee or Dickey is getting something to gain more. Yeah, I'm not as confident.

Lewis: In the consumer space, I'm always going to provide a discount on myself if I am not the core user for the product. Sometimes that means I'm taking a pass on something that winds up being a wildly successful investment just because I'm not the core user and I don't feel like I have a good enough finger on the pulse here. In this case, the numbers are so strong, I'm willing to overcome that. But it's always helpful to at least give yourself a moment of pause there.

Chokkavelu: If I was the doctor my parents wanted me to be, I'd be at least light green.

Lewis: Well, I'm glad we got to kick this one around. I have to give a shout out to our listener Nate who put this one on my radar, so we owe the show to Nate really because I think I pinged on and was like, "Hey, do you want to do this?" He was like, "Yeah, it sounds great," and it was only from that listener email.

Chokkavelu: Thank you, Nate.

Lewis: Yes, thank you, Nate. Shameless plug, if you have something you want us to hit, [email protected], you can tweet us @MFIndustryFocus, and Anand is incredibly active on Twitter. Anand, what's your handle in case people want to get in touch with you?

Chokkavelu: @anandchokkavelu, so easy.

Lewis: Anand, I will see you on Twitter if I don't see you on Zoom earlier. Thanks so much for joining.

Chokkavelu: Absolutely.

Lewis: Listeners, that's going to do it for this episode of Industry Focus. If you're looking for more of our stuff, subscribe on iTunes, Spotify, or wherever you get your podcasts. As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the glass today, and thank you for listening. Until next time, Fool on!