With a potential recession on the horizon and inflation at its highest point in years, many investors are concerned about the performance of consumer discretionary companies. These businesses sell nice-to-have products, so when consumer budgets tighten, demand should decline -- at least in theory.
That said, Figs (FIGS -0.32%) held up quite well in this challenging macroeconomic environment. The direct-to-consumer scrubs manufacturer saw a higher-than-expected revenue increase in its second quarter -- reported on Aug. 4, 2022 -- showing the resiliency of its brand and the strength of its loyal customer base.
So should investors jump in? I am, and here's why you might want to follow suit.
Image source: Getty Images.
Demand remains strong
Figs, the provider of high-quality scrubs for healthcare workers, had a widely positive second-quarter earnings report. Revenue jumped 21% year over year to $122 million, driven by an increase in the number of orders, despite the uncertain macroeconomic situation in the United States. This surpassed analyst expectations of $119 million in quarterly revenue.
The primary driver of this was Figs' loyal customers. 70% of Figs' revenue comes from repeat customers who continue to shop with Figs. This demonstrates the undeniably robust brand name the company has built for itself. Even though the economic environment looks worrisome, repeat customers are still willing to pay up for Figs' higher-priced goods.
It's worth noting that this could pose a risk. Because the company is so reliant on repeat customers, Figs could see slowing growth if it cannot turn new customers into repeat ones. That said, Figs is doing a marvelous job at keeping new customers; first-order customers have a retention rate of 50%.
This helped the company turn a small profit in Q2. Net income reached $5 million for the quarter. While that represents a small margin, it's noteworthy to recognize that this business can be profitable and see stable demand for its products -- even in an environment that should hurt this company.
Now, the quarter wasn't perfect. While business hummed along, the activity growth per customer stumbled. Net revenue per customer rose only 4% year over year to $227, while average order volume climbed just 6% to $109. But slight demand softness is typical for discretionary products.
Shifting into new markets
Figs also saw healthy adoption in some of its emerging opportunities. Its lifestyle offering -- non-scrubs apparel for both in and outside of the workplace -- grew 70% versus the year-ago period, making up 15% of Q2 revenue. Lifestyle goods range from vests and hoodies to sweatpants and help build even more customer loyalty while driving spending per customer higher.
Figs is also looking to expand internationally. In Q1, the company announced launches in seven European countries as it tries to develop its brand reputation overseas. It started to see progress in this endeavor, and while not as high as its lifestyle adoption, international revenue still jumped 18% year over year.
With the announcement of Figs PRO, the company also made its first move into different job categories. As Figs CEO Trina Spear explains, this announcement enables Figs to sell to not only doctors and nurses, but to healthcare office workers as well:
FIGS PRO is our business casual scrubwear collection we created for the office. This collection serves the need of a wide variety of healthcare providers, including concierge medicine, medical office personnel, hospital administrators, telemedicine, and med spa practitioners.
Figs is a prime opportunity now
After this impressive quarter, shares jumped, yet the stock is still down over 57% from the company's IPO in 2021. Shares also trade at 4.1 times 2022 sales, which is noticeably less than other higher-end apparel companies like Lululemon Athletica (LULU -0.15%). Therefore, Figs stock trades at a relatively low price today.
What's more important, however, is that Figs is executing and proving its worth. Q2 showed that the company has a robust brand name that can help it survive a volatile downward economy. It also proves that its customers are truly loyal and love Figs, which has been one of the company's primary competitive advantages. Additionally, Figs is executing on its potential successfully, signaling optimism about the road ahead.
With the company's recent progress -- and the shares at a cheap price relative to the industry -- this is a stock well worth considering today.
