As you can see, FIGS has a lot going for them:
- Very high gross margins, +70%
- Explosive revenue growth, represented by 59.5% YoY growth
- Actually generating (serious) Free Cash Flow
Also, FIGS has a strong balance sheet represented by ending 2021 with $197M in cash and $0 in debt.
Management feels that the significant and profitable growth is just getting started. The company has shared long-term goals of $1B in revenue by 2025, 70%+ gross margins, and a +20% EBITDA margins.
In many ways, this sounds too good to be true. How could this company be trading at only $1.42B? What are we missing?
A significant top line miss in Q1 and a significant decrease in guidance and profitability.
First Quarter
On May 12, FIGS announced disappointing Q1 earnings:
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Revenue: $110.1M (Actual) vs. $117.3M (Expected)
- EPS: $.05 (Actual) vs. $.06 (Expected)
FIGS also significantly revised their guidance and not in a good way. The company shared that they now expect 2022 revenue to be between $510M-$530M along with an EBITDA margin in the teens – a stark contrast to the $550M-$560M revenue guidance and 20% EBITDA margin the company guided for at the end of Q4 ‘21.
This news sent the stock down more than 20% the day after earnings and another 10% since.
What caused FIGS to revise their guidance? Is the long term thesis still in tact or did something significantly change.
On the earnings call, management shared that there were serious supply chain and macroeconomic headwinds that ramped up significantly during the quarter.
Here is what CEO Trina Spear had to say on the supply chain issues:
“However, since early March, we've seen an intense and persistent surge in the volatility of ocean transit times for receiving our products, largely due to vessels being unexpectedly rerouted by carriers while in transit. Shipping times began to vary, ranging from as fast as 30 days to upwards of 120 days, and it's difficult to see this unpredictability ending soon.”
To combat these increases in transit times, the company has aggressively shifted to using airfreight as a significant mode of transit. Air is a much more expensive mode of transportation and therefore is the reason for the 400 basis point reduction in the EBITDA margin.
Additionally, the company pushed back multiple product launches due to the unpredictability of the supply chain – another key factor in the revenue miss.
FIGS also shared that they were “not immune” to the rising inflation and shift in consumer spending that was a significant theme in Q1. However, CFO Daniella Turrenshine shared that
“We believe these headwinds are temporary and do not structurally change our long-term margin profile. While we anticipate these challenges to continue throughout the year, we believe they will ease in the future, and we will return to our long-term target.”
I agree and the company's continued execution this quarter is a big reason why I am intrigued by the long term prospects of the company. Here are some key operating metrics:
Active customers: 2.0M – 31% increase YoY
- Revenue per customer: $226 – 6.1% increase YoY
- Average Order Value: $116 – 16% YoY increase
- International growth: 59% YoY growth, soft launch in seven european countries in April
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Long Term Guidance – reiterated at least $1B in revenue by 2025 & ~70% gross margins
The company's ability to execute in a difficult environment like this actually makes me more confident in its future. If projected revenue growth in the low 20%, gross margins in the high 60s, and achieving profitability, is the worst it gets? I am in.
Also, the company is putting their customers first, taking a bottom line hit, to ensure that their “Awesome Humans” (the title FIGS gives to their medical professionals) are clothed and feeling good is a testament to management's desire for long term success and maintaining a strong relationship with their consumers.
Another reason that I have confidence in the company in the long run is due to their industry thematics and growth prospects.
