Apparel company FIGS (FIGS -0.52%) has stayed relatively under the radar since its IPO in May 2021, yet the company has performed extremely well. Unlike other IPOs that jump 100% or more during the first months of trading before suffering a long, hard fall, FIGS has been a steady performer. The stock rose 36% in its first day of trading, and shares have remained above that first-day benchmark ever since, now up almost 60% from the IPO price of $22 per share.

FIGS, however, saw its stock sell off after reporting strong earnings, becoming the latest victim of a fickle market. Here's why I think investors should take advantage of this opportunity to pick up shares at a discount.

A healthcare worker exiting a helicopter

Image source: FIGS.

Supply chain resilience

FIGS is the leading direct-to-consumer retailer of hospital scrubs. The company focuses on providing comfort, durability, and style in its products, making it an appealing choice for the 85% of healthcare professionals who buy their own scrubs.

As the company described in its IPO prospectus, "We branded a previously unbranded industry and de-commoditized a previously commoditized product -- elevating scrubs and creating premium products for healthcare professionals." It uses a proprietary fabric called FIONLite, which is lightweight, waterproof, stretchy, anti-static, and made from recycled polyester. Considering the fact healthcare professionals can be in their uniforms for over 12 hours a day, there is an enthusiastic market for durable and comfortable scrubs.

With a leading brand in healthcare apparel, FIGS has also expanded into new products for both inside and outside of work, including hoodies, joggers, and jackets. This non-scrubs category made up just under 13% of total sales last quarter.

Since FIGS is a manufacturer, it'd be natural to assume the company is suffering from the same supply chain shortages that have affected even the biggest companies like Amazon, but you'd be wrong. In fact, FIGS barely missed a beat as gross margin in the third quarter dipped just one percentage point from the prior-year period, and revenue increased quarter over quarter.

FIGS has three advantages over traditional apparel companies. First, FIGS has predictable demand because of its customer base, who need their scrubs for work compared to the variable demand of casual apparel. Second, the company runs with very few stock-keeping units (SKUs), and 80% of FIGS' volume comes from just 13 styles. This allows it to anticipate what customers will want while simplifying inventory management, which limits out-of-stock issues.

Lastly, its direct-to-consumer model provides the company with loads of data regarding when and what its customers will need, allowing FIGS to forecast demand for the next year and share that information with its suppliers.

The next Nike?

A strong brand, high-quality product, and the community FIGS has formed with its customers mirrors the advantages of iconic apparel companies like Nike and Lululemon. However, FIGS enjoys gross margins that neither of those companies can achieve. At 72.7% last quarter, it eclipses gross margins of 58% and 47% at Nike and Lululemon, respectively.

These high margins have accompanied impressive growth for the company. Third-quarter revenue grew 34% year over year to $102.7 million -- beating Wall Street estimates -- and active customers were up 58% to 1.7 million. FIGS is not just a U.S. story, either. The company saw 149% revenue growth in its international markets -- the U.K., Australia, and Canada -- to $6.9 million.

Though net income of $7.0 million was down year over year, it still topped analysts' estimates. Management cited "higher non-cash [compensation], costs associated with being a public company, and investments in our team" as the primary reasons for its earnings decline. 

Boring but lucrative

While scrubs might ultimately seem like a boring industry, it isn't a small one. Industry sales totaled $12 billion in the U.S. and $80 billion globally, according to the company, and FIGS is the leader in this fragmented category.

It has had a very good life as a public company, and now down 10% following an earnings report that showcased its robust supply chain and continued growth, this is a great opportunity for investors to start (or build on) a position.