Shares of healthcare and lifestyle apparel brand Figs (FIGS -2.98%) are down 75% year to date. Shareholders experienced more pain after the company released third-quarter earnings. This dramatic decline would lead one to assume Figs must be a business in decline, or an unprofitable stock selling off as interest rates rise.

But Figs' recent results reveal that this isn't the case at all. The stock is profitable and growing at an impressive rate, despite the macroeconomic pressures around it. This dislocation provides an interesting opportunity for long-term investors.

A happy nurse at work.

Image source: Getty Images.

Short-term speed bumps 

Figs is down primarily because the market fears that inflation will take a bite out of its customers' buying power, as they may eschew Figs' higher-priced goods as budgets tighten. Furthermore, the company has some short-term issues that it is navigating through, which it spoke about on its third-quarter conference call. CEO Trina Spears said that some customers are pulling back due to tighter budgets.

An additional issue is that inventory grew compared to last year, which the company attributes to some newly released colorways not being as much of a hit as past releases were. Lastly, the company's gross margin decreased slightly year over year, from 72.7% to 70.6%, primarily due to higher air and ocean freight costs, and heavier usage of air freight. 

The good news is that all of these issues are short term in nature; whereas, the company continues to position itself well for the long term. The company's use of more air freight helped to maintain customer loyalty as it got customers their products quicker at a time of supply chain constraints. The issue is already beginning to ameliorate as freight costs for the quarter came in below the company's expectations.

The company's decision to maintain pricing despite the higher costs should also result in increased customer loyalty. The purse-tightening due to inflation and inventory buildup due to the new colors are short-term problems, and the company's track record shows that it should be able to work through these issues. Here's why. 

Growth through differentiation 

During the third quarter, Figs grew revenue at an impressive 25.2% year over year, driven by increased orders from both new and existing customers, and to a lesser extent by higher average order volume. The company's products stand out from typical scrubs, which are often viewed as a commodity-like product. Figs' scrubs have many advantages over the run-of-the-mill scrub, because they are made using its proprietary lightweight, moisture-wicking, stretchy fabric.

Figs took the same approach that companies take when designing cutting-edge apparel for athletes and brought it to healthcare apparel. Figs' products are further differentiated because they come in an array of bright and vibrant colors, and have more stylish silhouettes than traditional scrubs, which are boxy and not usually noted for being fashionable or comfortable.

This differentiated approach has been a hit with Figs' target market of nurses and other healthcare professionals. While the company says that inflation is taking a toll on its target market, this differentiation is still leading to growth even in a tough environment. In fact, on a trailing-12-month basis, Figs increased its active customer base by 23.6% to 2.2 million. Despite the doom and gloom, this was Figs' second-best quarter to date in terms of customer growth. This differentiation also allows Figs to exercise an excellent gross margin of 71%, since customers are willing to pay a premium for its superior, differentiated products.

Live the lifestyle 

Within this overall revenue growth, Figs' lifestyle segment is growing even faster with 65% year-over-year revenue growth. The growth in this segment is particularly exciting because it helps Figs leverage its popularity with healthcare professionals and grow beyond its core offering of scrubs with casual products like jackets, fleeces, and vests. Figs points out that customers will layer these lifestyle products with its scrubs, leading to increased average order volume.

Its "office-driven" Figs Pro collection has attracted other healthcare professionals, such as doctors and dentists, expanding the company's customer base. This ultimately expands Figs' total addressable market and gives passionate Figs customers a way to express their affinity for the brand in new ways. 

The valuation is getting more palatable  

Unlike many of the stocks that have experienced dramatic sell-offs year to date, Figs is profitable. Shares currently trade at 37 times earnings, which is by no means cheap, but the stock should grow into this valuation over time as it continues to increase revenue and profits as it scales. 

A long runway ahead 

While margins took a slight hit due to inflation in freight costs and the company needs to sort out the aforementioned inventory issues, the long-term picture looks compelling. Figs continues to grow revenue at an impressive rate, while simultaneously building its customer base to 2.2 million and expanding its customers to include other workers within the healthcare space. By expanding outside of scrubs and into lifestyle apparel, the company is leveraging its success with healthcare professionals to increase the size of its total addressable market.

Figs also has a significant international opportunity in front of it -- the company grew international revenue 49% during the quarter. While it has made significant progress in these areas, perhaps most encouraging of all is that Figs estimates it has only penetrated about 10% of the U.S. healthcare worker population, meaning that it has plenty of runway for continued growth ahead. Figs looks like a good long-term growth stock for investors who can stomach the volatility that these types of stocks are navigating through in the current market.