The stock price for healthcare apparel company Figs (FIGS +2.25%) is down roughly 28% after it reported first-quarter earnings on May 12. The company announced top-line growth of 26% year over year to $110 million and a net income of nearly $9 million in Q1, but its financial metrics were diluted by some challenges during the quarter.
Figs has one of the most powerful brand names in the healthcare apparel market today. The company is making some adjustments to help it get through what has become a tough economic environment. It still has great long-term expansion opportunities and is now sporting a cheap valuation, which makes Figs stock worth a closer look today.
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since early March, we've seen an intense and persistent surge in the volatility of ocean transit times for receiving our products, largely due to vessels being unexpectedly rerouted by carriers while in transit. Shipping times began to vary, ranging from as fast as 30 days to upwards of 120 days, and it's difficult to see this unpredictability ending soon. The lack of reliability has it reduced our visibility into when our products will arrive, and without predictability, we are less able to mitigate these issues with longer lead times alone.
What caused Figs investors to sell after earnings?
Figs is one of the leading manufacturers of healthcare-related apparel in the U.S., but the company leans heavily on ocean transit to get its products to U.S. stores from overseas manufacturing sites. In 2021, it used (more expensive) air freight alternatives to mitigate shipping issues that were bad for so many companies that year. Late in the year, shipping problems eased and Figs management started moving back to ocean shipping options it was using. Co-CEO Trina Spear explained on the earnings call:
... since early March, we've seen an intense and persistent surge in the volatility of ocean transit times for receiving our products, largely due to vessels being unexpectedly rerouted by carriers while in transit. Shipping times began to vary, ranging from as fast as 30 days to upwards of 120 days, and it's difficult to see this unpredictability ending soon. The lack of reliability has it reduced our visibility into when our products will arrive.
The company is struggling to keep its core items in stock because of these longer, delayed shipping times. For now, Figs sees no end to these shipping struggles. As a result, the company lowered its 2022 revenue guidance by 6%. It also noted that inflation and changing consumer spending patterns are going to slow demand.
NYSE: FIGS
Key Data Points
Why Figs can survive the storm
To deal with the return of supply shortages the company is again turning to air freight alternatives. This is more expensive and will take a toll on gross margins, but it will help keep products on shelves. Figs management said it is still expecting a gross margin of 67% to 68% in 2022, compared to the previous outlook of 70% or higher.
While Figs has and will see the pain from inflation, the company's customers are extremely loyal, which could help maintain its dominance during this tough economic environment. Even in Q1, when inflation started to ramp up, the company saw its average order value jump 16% year over year to $116 and revenue per active customer increased 6% over the same period.
This is because customers love Figs. The company's Net Promoter Score -- a customer satisfaction score from -100 to 100, with a score of 70 being considered "world-class" -- was above 80 through the end of 2021. This trumps even the strongest apparel brands. Lululemon Athletica, for example, only has a Net Promoter Score of 43.
The $67 billion opportunity
2022 could be a rough year overall, but the long-term opportunity for Figs is still on track. Domestically, the company sees room to increase brand awareness. Figs boasted 2 million active customers in Q1, but there are approximately 20 million healthcare professionals in the U.S. alone. The international market is even larger. The company sees a healthcare apparel space worth $67 billion outside the U.S., and Figs is looking to capitalize on that. In Q1, only 8% of its quarterly revenue came from outside the U.S., but this grew 59% year over year -- more than double Figs' total revenue growth. Figs launched operations in seven new countries in Europe in Q1, which shows that international expansion is one of Figs' top priorities today.
Many consumer goods companies are in a tough spot because of inflation and lingering supply chain issues, but Figs is handling the situation. It is making significant efforts to make customers happy, which will only strengthen its main competitive advantage: A strong brand reputation. Additionally, the company is making impressive strides in its expansion strategies, which could pay off over the long term.
Figs stock trades at just 3.7 times sales, a valuation that is in line with Nike and lower than Lululemon. At this price, if the company can continue to increase its brand awareness both domestically and internationally while keeping customer satisfaction high, Figs should be worthy of more consideration by investors.
