Consumer goods companies with strong associated brands are often overlooked in the investing world. Even today, companies like Lululemon and Peleton have industry-leading names that investors may not fully appreciate.
Another company that went public in 2021 could go on this list. Figs (FIGS 1.48%) is a household name in the healthcare space, and you would be hard-pressed to go into a hospital without seeing a doctor wearing a pair of its scrubs. Having a strong brand combined with a great product has been a recipe for success for apparel stocks, and I think Figs could be another winner with this formula. Here's why.
Image source: Figs
A brand-driven company
Figs is the leading scrubs maker in the U.S. with over 1.9 million active customers. For a long time, healthcare professionals have needed to buy their own scrubs, but many offerings are scratchy, poor fitting, and uncomfortable. Considering that nurses and doctors may wear these scrubs for 10 hours or more on any given day, comfort is extremely important. Figs has thus focused on making a superior product.
For example, the company has patented FIONx, its lightweight, stretchy, and water repellent fabric made from recycled material. The company wants its customers to love its products and proudly wear them both in and out of work. That strategy includes other more fashionable offerings such as jackets, vests, and hoodies.
Not only does Figs have some of the best products on the market, but it also has one of the strongest brands in the industry. The company has a Net Promoter Score (NPS) of 81. This score measures customer satisfaction on a scale of -100 to 100 with a score of 70 or more considered "world-class." Figs' score is better than some of the most prominent brands in the world, including Peloton (70), Nike (52), and Adidas (39). This shows how valuable and popular the Figs brand has become.
Its success is also seen in average order volumes, which have increased steadily since the company went public. In Figs' preliminary fourth-quarter earnings, the company reported its average order value was $113, an increase of 15% year over year and 11% sequentially.
Unsurprisingly, this combination of a strong brand and superior product has led to impressive financial performance. The company generated $103 million in third-quarter revenue, up 34% year over year. And Figs is profitable, a rarity among recent IPOs. The company recorded $7 million in third-quarter net income and over $50 million in free cash flow through the first nine months of 2021. With such a strong financial position, the company can continue to invest in its growth going forward.
Why Figs could win in 2022 and beyond
While investors should be focused on at least the next five years rather than just one year, Figs looks especially appealing in 2022. The company has amassed a loyal following for its products, and this should allow the company to raise prices in line with inflation so the company can maintain its impressive profitability.
While the brunt of inflation hit businesses in the fourth quarter of 2021, the company was able to increase its gross margin throughout the year. In 2020, the company had a margin of 72.3%, but as of the third quarter, gross margin was up slightly to 72.7%. Figs has demonstrated the benefits of strong pricing power with the ability to pass higher costs onto customers instead of hurting its margin profile.
Looking beyond 2022, however, Figs is eyeing both the international healthcare space as well as other industries where uniforms are common but subpar, the restaurant industry being just one example. However, Figs' main focus is still on the home front. The company only has a 3% market share in the U.S., so there is still plenty of room for it to grow domestically too. These growth avenues have management targeting $1 billion in revenue by 2025 -- more than double management's $410 million outlook for 2021.
Risks to consider
The company's products are by no means cheap, and its brand allows it to demand a premium. However, there are plenty of discount competitors out there, and if prices for its products rise while low-cost competitors' don't, Figs could see slower growth.
Trading at 10 times trailing revenue, the stock similarly commands a premium valuation, even though this is the lowest price-to-sales ratio Figs has boasted since going public last June. Other major apparel brands like Lululemon trade at seven times sales, so there is still potential for its valuation multiple to shrink with a lower share price. However, with such a strong business and the adoption it's seeing across the U.S., I would take this 57% sell-off from its all-time high as an opportunity to invest in a category-leading business.
