What happened
Week to date, shares of Figs (FIGS -2.61%) were up 12% through Thursday's close, according to data provided by S&P Global Market Intelligence.
The move higher came after an analyst raised earnings estimates and the near-term price target for the stock to $11. The news lifted enthusiasm around the company's ability to handle the cost pressures from inflation in the new year.
So what
The shares have been richly valued over the last year. This explains the stock's underperformance, as expensive growth stocks lost favor with Wall Street analysts in 2022. However, the tide could be turning.
Cowen analyst John Kernan sees the medical clothing supplier growing fiscal fourth-quarter revenue by 16%, with earnings per share (EPS) coming in at $0.02, or $0.01 above the consensus estimate. That is the highest EPS estimate on the Street at the moment.
A key finding is that the analyst sees improving margins in the second half of the year. Figs' gross profit margin dropped a few percentage points in the third quarter, which management attributed to higher transportation costs, promotional sales, and a higher percentage of sales coming from lower-margin merchandise. However, if inflation eases up this year, it would turn the recent cost headwind into a tailwind for profit growth.
Data by YCharts
Now what
In the near term, management is working through excess inventory, which may pressure margins with continued promotional sales or discounts through the first half of calendar 2023. These prospects present some uncertainty for earnings in the next few quarters, especially if consumer spending turns out to be weaker than expected.
Over the long term, investors should expect Figs to deliver strong top-line growth and high margins. The company's direct-to-consumer sales model and growing brand awareness are key advantages that should lead to above-average returns for investors.
