The stock market crash began with the tech sector in late 2021, but now in 2022 it has quickly spread across a variety of industries. Nearly all stocks seem to be tumbling this year, and direct-to-consumer scrubs manufacturer Figs (FIGS 0.63%) is no exception. Shares of the company have fallen some 85% from their all-time highs set one year ago.
However, there's still a lot to like about Figs. It is loved by consumers, and its brand name is arguably the strongest in its niche. It could use this to capitalize on some lucrative opportunities in the future, which is why the company could be worth buying today.
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Why have shares tanked?
Figs' differentiated products have attracted 2 million active customers. The company noticed that traditional scrubs are uncomfortable and poorly suited for the daily activities of healthcare workers. So it created a high-quality product that it touts as more comfortable, functional, and durable than traditional scrubs.
A fair number of consumers seem to agree as the company generated over $110 million in first-quarter revenue. However, Figs has faced supply chain difficulties along with many other consumer goods companies. It relies heavily on ocean freight transportation of its products, and with freight times sometimes over 120 days, the company has struggled to keep its core items in stock.
As a result, Figs plans to move more of its transportation to air rather than ocean transit. This should mitigate the volatility in freight times and give consumers more reliable delivery speeds. However, it will hurt Figs' profits. The company is now expecting an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 17% in 2022, down from its previous outlook of 20%. This will also reduce the company's full-year gross margin projections down to around 67% to 68%, lower than its prior outlook of 70% or higher.
A 67% gross margin for any apparel company is still stellar. Even Lululemon Athletica and Nike don't retain a margin that high; Lululemon only had a gross margin of 54% in Q1, and Nike's was just 47% in its most recent fiscal quarter.
Where Figs could be in 2032
While Figs could struggle with short-term issues, its brand reputation in the space is second to none. The company reported a Net Promoter Score -- which measures customer satisfaction on a scale of negative 100 to 100, with a score of 70 considered "world class" -- of over 80 through 2021.
The company plans to use its brand name in other markets, too. First, Figs wants to expand internationally. In Q1, only 8% of revenue came from outside the U.S., but this could change considering the company just launched in seven European countries in April. If Figs can successfully transplant its brand to Europe, that could slingshot its adoption, especially considering that the global healthcare apparel market is worth $79 billion.
Importantly, its international business is already gaining traction. In Q1, it soared 59% year over year, showing promising signs of hope.
The other opportunity for Figs is its "lifestyle" offering. This includes out-of-work clothes like joggers or shoes so that Figs can be the clothing brand for healthcare workers (and potentially others), both in and out of work. Like its international efforts, its lifestyle offering has started to see success. In Q1, lifestyle revenue jumped 81% year over year, representing 18% of revenue.
How could Figs fall short?
Figs is not a risk-free investment and could face some headwinds over the short term. Given the risk of a recession, there are concerns about the decline in activity Figs could see. The company's scrubs are not cheap, and healthcare workers could easily choose to buy a different brand of scrubs during an economic downturn.
This, however, would be more of a short-term issue. The longer-term concern is that its brand gets permanently damaged. If it becomes unpopular or unfashionable to wear Figs scrubs -- whether it's because the company lost its brand reputation or a competitor with more comfortable scrubs came along -- that would be worrisome.
That said, there hasn't been much reason to believe this long-term risk would come to fruition. Figs has exemplary popularity and quality, and there haven't been any signs of that changing.
Why it's a buy right now
At a valuation below three times sales, shares of Figs look cheap. In fact, it's trading at lower multiples than Lululemon and Nike, both of which are above 3.6 times sales. It will be critical to monitor its customer satisfaction ratings as well as its gross margin and top-line expansion going forward. But if the company can continue to grow at a steady rate, you might want to consider adding a few shares of this company to your portfolio.
