In Q2, I was actually a big fan of the company's dip in FCF as I thought it was a sign of good management as the company looked to move to faster, albeit more expensive, shipping methods and higher inventories. FIGS did this in order to protect their consumer relationships and keep the LTV of the customer as high as possible.
When you have nearly $200M in cash and zero dollars in debt, these are the things you can do.
However, in Q3 we saw the FCF losses continue with a $16M decrease in FCF taking the YTD figure to $44M. A significant amount of the decrease in FCF was from a continued increase in inventory, but the larger the inventory gets, the more concerned I get we have an inventory issue.
Specifically, the company shared that 20% of the inventory was "pull forward" inventory including future styles, but from the comments on the call, it does sound like there is still an inventory issue and a miss on sales is a big reason why.
The power of being positive $60M in FCF ( like in 2021) vs. serious negative FCF like in 2022, have serious impacts in the long run – specifically when you think of returning capital back to shareholders or looking to do an acquisition.
Additionally, the overall tone for me on the call was concerning.
There were a lot of phrases like “did not generate same sales lift we have typically seen in the past” and expecting “customer demand to continue to be impacted by macro environment.”
We also received not the greatest commentary regarding the company’s $1B revenue forecast by 2025, and it seems in doubt. This is how Trina answered the question regarding this goal:
“So, as it relates to the $1 billion target, we're still incredibly focused working toward our goal of $1 billion but recognize that there is a lot of volatility in the macro. And therefore, the timing of this goal is a bit more uncertain…”
This does not sound someone too confident of achieving their $1B goal by 2025.
There still was definitely good news in the quarter including continued international launches in countries like New Zealand and Israel, 65% net increase in lifestyle products, and an average order value increasing by 10% year over year. Additionally, the company either met or beat Wall Streets expectations for the quarter.
However, to me, the negative far outweighed the positive.
I am a significant believer in Trina, Heather, Daniella, and the FIGS team and the opportunity in front of them. As you will see on Friday, we still have a nice slug of the stock. However, after reading this piece, it seems like our position should probably continue to decrease.