Figs (FIGS 3.18%), the maker of high-end healthcare apparel, was one of last year's hottest IPOs. However, like many high-flying growth stocks that surged in 2021, Figs flew too close to the Sun and has come crashing back down to Earth in 2022. Shares are down more than 75% from their 52-week high.

However, Figs is doing a lot of things right, like building a passionate, loyal customer base while expanding into complementary new markets. This could make the beaten-down stock a compelling opportunity for long-term investors.

Happy healthcare professional in scrubs.

Image source: Getty Images.

The Nike or Lululemon of healthcare?

The apparel sector is littered with companies that failed to differentiate themselves over time and eventually became commodities, and their stock prices often show this result. However, companies like Nike and Lululemon have managed to differentiate themselves over time and have earned premium valuation multiples from the market. Nike has earned a price-to-earnings (P/E) multiple of nearly 30 times earnings, while Lululemon trades at about 40 times earnings.

Figs has been hailed as "the Lululemon of healthcare" by billionaire investor Ron Baron. What sets it apart from just a commodity maker of scrubs? It creates desirable, differentiated high-end products that people are willing to pay up for, and it has built up a passionate and loyal customer base, just like Nike and Lululemon. The fact that customers are willing to pay more for its products is evidenced by the company's outstanding gross margin of 71%, which compare favorably to both Nike and Lululemon.

In addition to these venerable gross margins, the strong brand loyalty that Figs has built is evidenced by the fact that 70% of its revenue during the most recent quarter came from repeat customers. This indicates that customers are happy with its products and eager to come back for more when needed. Figs also boasts a first-order retention rate of 50%, meaning that half of all customers who place an order for the first time come back for more.  It is often said that it is easier to make money from a current customer than to get a new one, so it is good to see that Figs is winning a lot of repeat business.

Of course, without acquiring new customers, a company isn't going to grow over the long term, but Figs is making progress on this front as well. The company is rolling out marketing efforts in a handful of specific cities with high concentrations of healthcare workers (such as Houston, Seattle, Philadelphia, and Chicago), and these efforts have been well-received -- CEO Trina Spear says its pop-up truck in Houston had 600 visitors a day, with lines going around the block.

Figs has a net promoter score of 81. This metric measures how likely a customer would be to recommend a product or service to their friends or colleagues. A net promoter score of 80 or above is considered outstanding by Bain & Company, the firm that created the metric.

The high gross margins, high level of repeat business and high net promoter score indicate that Figs is building a durable, long-term advantage. 

Expanding beyond scrubs 

Figs is simultaneously successfully expanding into new markets. During the most recent quarter, the company says that what it calls its Non-Scrub/Lifestyle apparel sales grew by 70%. Figs is doing this by releasing products like its FIGSPRO line, which Spear describes as "our business-casual scrubwear collection that we created for the office." Spear says that this line serves a wide array of workers within the healthcare setting, including "concierge medicine, medical office personnel, hospital administrators, telemedicine, and med spa practitioners." 

The company is also making outerwear like jackets and vests and even collaborating with New Balance on several different sneakers. Nurses and other healthcare workers who are already fans of Figs are more likely to buy some of its lifestyle apparel or to buy a coat that they wear on their way to work. Office workers in a healthcare setting may see their colleagues wearing Figs and are then more likely to buy some of its business-casual offerings for themselves.

I like the way that Figs is expanding into adjacent segments with complementary products and growing its addressable market without pushing the boat out too far or getting away from its core focus on the healthcare sector. 

A good long-term investment? 

During the second quarter, Figs grew revenue by 21% despite a challenging economic environment and became profitable. While shares look expensive on a price-to-earnings basis right now and price action could thus be volatile in the short term, if the company can maintain its high gross margins and continue to expand its passionate, loyal customer base, Figs looks like a compelling growth stock that could be a long-term winner for years to come.