Figs (FIGS 0.63%) went public on May 27, 2021. The maker of fitted scrubs and other medical apparel priced its shares at $22, and they started trading at $28.30 before surging to an all-time high of $50.10 a month later. Figs attracted so much attention because it seemed perfectly poised to disrupt the medical apparel market, which was known for selling boxy and ill-fitting scrubs from a fragmented network of aging suppliers.
However, rising interest rates and a more cost-conscious consumer have slowed revenue growth and sent the stock tumbling to just under $7 today. Could this out-of-favor apparel stock bounce back in 2023? Let's take a look.
Image source: FIGS.
Figs carved out its niche by selling medical apparel that was made from its own FIONx fabric, which provided more stretching, anti-odor, anti-wrinkle, and moisture-wicking properties than traditional fabrics. Those more stylish scrubs caught the attention of many medical professionals. Its online-only, direct-to-consumer model also simplified the sales process.
Figs' revenue jumped 138% to $263 million in 2020 and rose 59% to $420 million in 2021. Its active customer base more than doubled to 1.3 million in 2020, then grew 46% to 1.9 million in 2021. But for 2022, Figs currently estimates that its revenue only rose 18% to $495 million -- compared to its guidance of 31%-33% growth at the end of the 2021.
Why did Figs' growth cool off?
Figs' year-over-year growth in active customers, average order value (AOV), net revenue per customer, and total revenue all cooled off significantly in 2022.
During FIGS' third-quarter conference call, CEO Trina Spear mainly attributed that slowdown to "macro trends, including the sustained level of inflation" which started to "weigh more heavily on our healthcare professionals" as well as a muted response to its recent launches of new colors.
Spear expects these headwinds to persist throughout the fourth quarter, but noted its own surveys of medical professionals indicated Figs was still their "favorite brand."
|
Metric |
2021 |
Q1 2022 |
Q2 2022 |
Q3 2022 |
|---|---|---|---|---|
|
Active Customer Growth (YOY) |
46% |
31% |
26% |
24% |
|
AOV Growth (YOY) |
12% |
16% |
6% |
10% |
|
Net Revenue per Customer Growth (YOY) |
11% |
6% |
4% |
4% |
|
Revenue Growth (YOY) |
59% |
26% |
21% |
25% |
Data source: FIGS. YOY = Year-over-year.
That slowdown also compressed Figs' margins. In the first nine months of 2022, its gross margin fell 180 basis points year over year to 70.8%, while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin declined 650 basis points to 18.7%. It attributed those declines to higher freight costs, heavier promotions, and a higher mix of lower-margin products. In other words, Figs faces many of the same headwinds as other mainstream apparel retailers.
Figs generated a net profit of $34 million in the first nine months of 2022, compared to a net loss of $22 million a year ago, but that loss was caused by some big stock-based compensation expenses related to its IPO. Its adjusted EBITDA, which excludes those one-time charges, still fell 8% year over year to $67 million in the first nine months of 2022.
Will Figs recover over the next 12 months?
Figs expects its costs to remain elevated in the first half of 2023 as it ramps up its investments in its new products, fulfillment capabilities, and overseas business. It will also likely continue to use discounts to reduce its inventories, which nearly doubled year over year at the end of the third quarter of 2022. On the bright side, CFO Daniella Turenshine expects Figs to "be in a better inventory position by mid-2023" following those right-sizing efforts.
The company hasn't provided any clear guidance for 2023 yet, but analysts expect revenue to rise 15% to $571 million as its adjusted EBITDA increases 13% to $90.5 million. Based on those expectations and FIGS' enterprise value of $923 million, its stock looks cheap at less than two times its 2023 sales and ten times its adjusted EBITDA.
By comparison, Lululemon Athletica -- which disrupted the yoga and athleisure apparel market with some of the same strategies as Figs -- trades at five times its 2023 sales and 19 times its adjusted EBITDA. However, Lululemon is also growing its revenue and earnings at a much faster clip.
Figs' downside potential might be limited at these levels, but its stock price might stagnate in the single digits in the first half of this year as the persistent macro headwinds throttle its growth and squeeze its margins. If it resolves those issues by the second half of the year, its stock might rise back to the low teens -- but still remain far below its IPO price.
