Figs (FIGS -2.55%), which went public just about a year ago last May, was one of 2021's hottest IPOs. But 2022 hasn't been kind to the healthcare apparel maker as it is now down 80% from its 52-week high and down nearly 70% year to date.
Figs has declined because of the same issues that are affecting the broader market, including inflation and supply-chain concerns, as well as the fact that it lowered its earnings and sales guidance on its latest earnings call. But Figs still has many of the hallmarks of a good, long-term investment.
Here are the top three reasons I view Figs as a buy at these levels.
1. A differentiated product
In an industry where most of the wares are viewed as a commodity, Figs stands out for having a differentiated product. It makes scrubs out of its patented fabric that is stretchy, antimicrobial, moisture-wicking, and lightweight. And it makes them in a broad palette of bright, vibrant colors, while also offering them in more fashionable silhouettes than traditional scrubs.
Co-founder and CEO Heather Hasson thought about the fact that apparel companies were focused on innovation to give athletes an edge on the field and brought this mindset to healthcare apparel. This is important because it gives the company pricing power, meaning customers are willing to pay more for it.
Here's some evidence of Figs' pricing power: While the company is not yet profitable on an operating basis -- which isn't uncommon for a recent IPO -- the company boasts 70% gross margins, which means that it is able to make a significant profit on the products it sells. When the company becomes profitable on an EPS basis, it is going to be very profitable.
As further evidence of Figs' differentiated product, the company has a net promoter score (NPS) of 81. Net promoter score measures customer satisfaction by how likely a customer would be to recommend the company's products or services to a friend or colleague. A score of 80 is considered to be world-class by Bain & Company, so Figs' high score stands out. This high net promoter score trumps those of some of the stalwarts in the apparel space like Nike and Lululemon.
2. Cutting out the middleman
Figs uses a direct-to-consumer (DTC) model, selling its products directly to nurses and medical professionals online instead of in medical-supply stores. This cuts out the middleman and is more profitable for the company, supporting its 72% gross margins. It also gives the company a closer connection with customers and enables them to get more insight and data on customer preferences and trends. The company now has two million customers, which is a 31% increase year over year.
3. Nursing is a growing profession
The first two were bottom-up reasons to invest in Figs. But on a top-down basis, Figs is appealing in that it gives investors exposure to nursing, which is a fast-growing profession with little likelihood of disruption. Unlike many other professions, nurses won't be transitioning to a work-from-home model, and they aren't likely to be displaced by artificial intelligence or machines.
The United States has a rapidly aging population as the baby boomer generation reaches retirement age, and by 2040 over 20% of the U.S. population is projected to be 65 or older . Older people typically have more healthcare needs than younger people, so the demographics bode well for the nursing profession.
As a growing, popular brand that is gaining traction with nurses, Figs is a solid way to get exposure to this secular, durable trend. Furthermore, it is estimated that there are about 20 million healthcare workers in the U.S. and Figs says it has about 1.5 million customers, so there is still plenty of growth runway ahead even before accounting for the future growth in the profession.
Is Figs a buy?
Figs shows many of the signs of a good, long-term investment. It is a growing brand with a passionate following. Its differentiated product, high net promoter score, and DTC model enable it to generate solid gross margins and revenue growth. Despite the traction that Figs has gained so far, there is still a long runway ahead of it for further growth.