Q2 2022 Figs Inc Earnings Call
Clear today as you saw Heather and I decided to transition from our titles are co Ceos to Heather as executive chair and myself as sole CEO .
Over many years, including since we've become public Heather and I are frequently asked how a co CEO structure work and who does what.
For us it's always worked seamlessly because we bring complementary skills and experiences to our leadership team and we also have a tremendous amount of respect for each other.
Now that we've gone through our first year as a public company, we feel it's a good time to formalize the division of responsibility, that's already and formally been in place.
As executive Chair Heather will continue her work innovating on product, where she has delivered enormous value to fix and we will continue to do so as <unk> CEO I will continue to manage the company strategy and day to day operations working with the rest of our leadership team to make sure that Biggs continues to thrive.
As a result of my ongoing partnership with Heather the way that business is done at figs will continue very much in the same way it always has.
And with that I'll turn over the call to our CFO Danielle return Chang.
Thanks, Rena and good afternoon, everyone. We are pleased with our second quarter performance as we successfully navigated supply chain headwinds and delivered results ahead of our expectations.
Now looking at our financial results net revenues for Q2 increased 21% to $122 2 million compared to Q2 last year driven by an increase in active customers as we continue to expand our reach globally and maintained strong retention as well as higher average order value or <unk>.
<unk> grew 6% from Q2 2021 to 109 this quarter as we increased closet share.
This growth was driven by both higher units per transaction and average unit retail as we continued strong adoption of our lifestyle offerings led by growth in footwear outerwear and under scrubbed. We continue to find that our lifestyle pieces are additive as orders containing these items had a 27% higher <unk> in the second quarter.
Then orders without lifestyle pieces included.
Net revenues per active customer increased to 227 up 4% from Q2 2021, driven by the growth in <unk>.
As Trina discussed frequency was slightly down year over year, but have since stabilized from Q1 levels as we return to a more consistent product launch calendar in the second quarter.
Gross margin for Q2 was 76% as compared to 73, 3% in Q2, 2021 above our expectations due to lower than expected freight costs.
The 270 basis point decrease as compared to Q2 last year was primarily due to a higher freight expense for both air and Ocean. In addition to shifts in our product mix. This was partially offset by improved product cost and scrubbed, where as we continue to scale.
Moving to operating expenses.
Selling expense for Q2 was $26 8 million, representing 21, 9% of net revenues compared to 19% in Q2 2021.
The increase was due to higher shipping and fulfillment expenses as our transportation partners pass along fuel inflation and higher labor costs.
These higher costs were partially offset by the increase in <unk>.
Selling expense came in better than our expectations largely due to timing of our fulfillment expansion moving into Q3.
Marketing expense for Q2 was $20 8 million, representing 17% of net revenues compared to 15, 3% in Q2 2021 as.
As we told you we would do in 2022, we're focusing more of our investments on brand initiatives to expand awareness.
We believe this is important now because of the large opportunity in front of us given our low market share, particularly in the select cities we are targeting.
This year over year increase was driven by our dynamic marketing Activations in Seattle and Houston. In addition to the return of our first ambassador immersion post pandemic.
This was partially offset by cost efficiencies, we achieved in performance marketing.
We continue to believe the fundamentals related to our customer acquisition remains strong with new customer acquisition, mainly driven by word of mouth.
G&A expense for Q2 was $29 3 million, representing 23, 9% of net revenues compared to 77% in Q2 2021. This.
This decrease was primarily driven by noncash stock based compensation associated with our IPO last year. This was partially offset by higher public company costs year over year.
Taking this to the bottom line, our net income was $4 9 million or <unk>, <unk> and diluted EPS for the quarter.
Adjusted net income was $6 3 million and diluted EPS as adjusted was <unk> <unk> in Q2.
This compares to adjusted net income and diluted EPS of $14 3 million and <unk> <unk> per share in Q2 2021, respectively.
Finally, our adjusted EBITDA for Q2 continued to be strong at $21 5 million for an adjusted EBITDA margin of 17, 6% compared to 26, 5% in Q2 2021.
This change was primarily driven by macro pressures related to higher freight expenses and outbound transportation costs.
Touching on our balance sheet, we finished the quarter with cash and cash equivalents of $170 2 million in.
In the second quarter, we grew our inventory balance to $127 6 million.
As we have discussed we are strategically utilizing our strong balance sheet to ensure that we have the supply needed to hit future demand, we are able to increase inventory with little obsolescence risk due to the season less always in stock nature of our uniform product.
Over 30% of this balances and inventory in transit, which has continued to rise as the increase of lead times on the water.
Of the remaining inventory in our warehouse approximately 50% is in core styles in core colors products that live on our site year round and are always available and almost 20% as in future color and style launches that we scheduled early to ensure product arrives before their launch date.
We feel comfortable with this increased use of working capital given our healthy balance sheet and confidence in our ability to sell through this additional inventory.
Moving onto our outlook.
Based on what we can see right now we continue to expect 2022 net revenues to be approximately $510 million to $530 million representing growth of 22% to 26% compared to 2021.
While we are managing supply chain challenge as well and the fundamentals of the business remains strong we recognize that there are significant macroeconomic forces pressure in consumer spending and making it more challenging for us to forecast with the same degree of certainty as we have done in the past.
Overall, we continue to believe in the resiliency of our business given our revenue forecast of 22% to 26% growth, but if macro pressures continue to worsen we could come in at the lower part of our range. While we have a number of upcoming product launches promotions and marketing campaigns, we feel it's prudent to acknowledge the uncertainty in the economic environment.
And the impact that could have on our business.
With respect to gross margin our priority remains the long term success effects as discussed last quarter, given the increased unreliability of ocean freight we shifted more of our freight mix to air to ensure timing consistency for our launches since our last call. We have seen some improvement in freight rates. Although there continues to be fluctuations in transportation rates.
And freight costs are typically higher during high volume periods, such as back to school and holiday.
As a result, we are maintaining our back half 2022 gross margin outlook.
While profitability flow through was better than expected this quarter. Some of that benefit was related to a timing shift for our fulfillment center expansion into the third quarter.
Additionally, we have identified opportunities to reinvest back into the business in areas, such as marketing and international expansion that will drive long term growth and at an attractive return.
Therefore, we continue to expect our 2022 full year adjusted EBITDA margin to be in the range of 16% to 18% we.
We expect the tax rate for Q3 to be in excess of 50% and for Q4 to be in excess of 40% based on assumptions for stock based compensation expense.
We remain incredibly optimistic about the opportunities in front of us and we'll continue to balance our tenants of high growth and profitability through effective capital allocation.
From a flow perspective, we expect our gross margin rate to be similar in the third and fourth quarter within operating expenses, we are planning higher selling expense in the third quarter to support our fulfillment center expansion that shifted between period given.
Given these factors, we expect third quarter adjusted EBITDA margin to be in the mid teens.
In closing.
<unk>, we remain excited about the long term growth opportunities ahead of us and are proud of the team's ability to navigate through these short term supply chain challenges, we are committed to reinvesting in our business and making the long term investments required to work toward our goal of $1 billion in net revenues by 2025, we cannot wait to deliver on all of our plans.
With that I will turn it over to the operator to kick off our Q&A session first with our analyst community addressing their question. We will then answer a handful of questions received from our shareholders through the same platform operator.
We will now start our Q&A session, if you'd like to ask a question. Please press star one on your kind of thank you.
Pat when the banks to ask a question. Please ensure that your line is on mute.
Okay.
Our first question comes from Edward <unk>.
Piper Sandler. Please go ahead.
Hey, guys. Good afternoon, thanks for taking the question and congrats on the quarter.
Two questions from me I guess first.
The quarter itself.
The other peers saw the trading sales trends intra quarter I know you guys provided the kind of previous though that macro could weigh on results, which are driving to be the lower and the guide I guess did you see any change in your trends during the second quarter and then treated a bigger picture question for you.
You and how they have been very successful at managing business together.
First congrats to both of you how does this management shift changed the way that you guys run the business if at all.
And does this allow you to maybe be more nimble or grow faster. Thank you.
Thanks, Ed I'll take the first question so in.
In response to trends that we saw in the quarter as we discussed we did see an acceleration in frequency during 2020 to 2021 due to COVID-19 elevated stimulus stay at home orders and other macro factors.
Since then it came down a bit in 2022, partly due to supply and has since settled slightly ahead of 2019 levels on the flip side. We have seen continued gains in <unk> as customers are buying more overall when they shop. So we're really excited to see continued growth in revenue per customer despite the macro environment. It sure.
Or is that our customers are still continuing to come and spend more over time in aggregate in the beginning of the quarter, we were still dealing with more supply chain challenges. So it was really great to be able to see trends improved throughout the period as we continue to manage through those issues.
And in terms of.
Great.
To hear from you.
In terms of Heather myself, Heather has always been incredibly.
Really expert on product product genius creative genius. This is really where she adds the most value. She is going to really focus on product innovation.
Im going to be focused on the strategic direction and overseeing the day to day.
Operations of the business I think this is it.
Right thing for the company might do to your point it is going to allow us to move very quickly be nimble and provide a lot of clarity both internally and externally in very much as a natural evolution of where we are today.
Thanks, so much.
Yeah.
Thank you for your question. Our next question comes from IGN at Barclays. Please go ahead.
Hello, everyone.
Let me add my congrats nicely now done navigating through these murky murky waters.
He Trina I guess my first question for you.
I'm curious about sort of consumer behavior you obviously.
Did not raise prices this year, you've made an intentional move not to kind of pass through some of the inflation youre seeing so I'm wondering how customers have reacted to that you did see your product and kind of like and I put value in airports everything is inflating around them and then what's happening with the replenishment leg, obviously the frequency.
It sounds like she is coming back and she's buying more with us.
She replenishing on a longer.
Maybe she's not working as much there was that is that.
Fitting out and then Daniela.
I'm wondering if you can help us sort of you talked about offset by kind of economies of scale and hitting some breakpoints numbers.
Can you parse out at all or give us any color on what that what the AUC would look like ex inflation as you reach these new breakpoints. Thank you very much.
Sure. So I mean, I think in terms of.
Pricing and what we're providing as you know we've always been focused on providing real value affordable accessible products for our health care professionals.
We have a really robust process around how we price I think.
Your question around frequency right, we've seen a repeat frequency.
B moderate a bit actually but in the second quarter, we've improved our repeat frequency versus the first quarter, so and Daniela can kind of dive into that but I think what we have really been focused on is not necessarily how often people are coming to us whether they come back less often and spend more are coming back more often and spend less where we are.
Really focus is on revenue per customer right and what we continue to see that number is going up into the right and so even though they are coming back a little.
Less often when they were coming they are spending more and we don't see any real shift in.
And in trade down we don't see any nobody wanted to go back to the world.
Holding up their pads or or having them hitting their wedding or into the raw shop right. They want to win.
They are coming to buy scrubbed they buy fixed.
Yes.
And as it relates to your second question about the economies of scale that we see in our product costing. So we're really excited to continue to see those offsets in gross margin and product costing as we scale, particularly within our core scrub where within that we have seen some inflation in materials, but it's been great to see that our growth.
Has really.
Outstrip that increase and that's because a lot of what we do is in core scrub where over 50% of our business isn't course clubs in core styles and so we're able to get really strong efficiencies from such a big base.
We expect to see that in the future.
Yeah.
Very helpful Best of luck. Thanks.
Thanks Anthony.
Thank you. Our next question comes from Lorraine Hutchinson Bank of America. Please go ahead.
Thanks, Good afternoon.
To follow up on some comments you made last quarter about trends softening due to macro factors. It sounds like things have improved since then and I guess as you.
Look at it in hindsight.
We just the supply chain issues or do you think something has changed with your underlying customer.
I mean, we don't really see any real change in our underlying customer radar business is resilient recession resistant replenishment driven health care professionals, we need our uniforms to go to work and do their jobs.
We're not completely insulated from what's happening in the broader economic environment from an inflation standpoint, but we do feel like we're more resilient than others.
The health of our consumer is strong.
Thanks, and then I wanted to follow up on the product launches are you back on track at this point I know you moved one out of <unk> into <unk> is that completely caught up.
Yeah. So we had a product launch that shifted into the second quarter. Similarly, we've had a few things that shifted out of the second quarter into the third quarter, but we made the decision at the beginning of the year to utilize more airfreight to bring stability to this product launch calendar and thats, mostly going to impact Q3, and Q4, and we feel really good about the back half.
And the decisions, we made in our ability to hit our calendar for the back half of the year.
Thank you.
Thank you. Our next question comes from Bob joke at Guggenheim Partners. Please go ahead.
Hi.
Good afternoon.
Two questions.
Number one is on the lifestyle offerings.
Scrub items can.
Can you just talk a little bit more on sort of the appetite for the lifestyle have you seen any change in regards to the appetite for non the non replenishment type products and then.
Can you just spend a little more time, just what you've learned on the international side, maybe just prioritize which markets have been the most receptive to your entry and sort of how you might scale that from where we are today. Thanks.
Sure I mean, I think our lifestyle.
So first of all thanks, Bob for the question from.
From a lifestyle perspective, we feel really great about our lifestyle offering and a lot of these categories within lifestyle, we feel like we've barely scratched the surface on what's to come and we mentioned under scribes underscores is a massive category that grew 60% year over year lifestyle overall grew 70% year over year and so our layering system.
The way in which we're merchandising our products online with our kits.
It's really resonating, it's really resonating with our community.
We feel like there is so much more to come in terms of what health care professionals are ranked underneath their scrubbers on the outer layers to work out work from work on shifts off ships head to toe. There is so much more that we're excited to bring forth to this to this industry into this market in terms of international cash.
Canada in <unk>.
K, Australia. These are markets that we've been in for.
A couple of years now they're doing very very well, we've launched in seven new countries.
In last quarter, and we made that announcement I think what we're seeing is incredible resort results early on and we have not even we've had such a minimal marketing.
Rounding around these markets and so we're really trying to do is build a strong foundation.
The words, we use our go slow to go fast right build a really strong foundation. So we can build long term sustainable profitable growth.
For many years ahead of us so that's what we're doing.
Okay.
Great. Thank you.
Thank you.
Next question comes from Brian Nagel at Oppenheimer. Please go ahead.
Hi, good afternoon.
Congrats on this quarter.
Well, Michael as well.
So my first question I have thank you so with regard to product market.
The question I have is going to.
The product launches and I guess going back to what was said on would you outlined on the last conference call as a result of the shipping issues. So you delay.
Delayed product launches or spread them out so as you look at the business now.
To your question, yes, our store supply chain issues out there, but it just seemed like you're becoming more manageable.
You, obviously had some of these costs come down Airfreight would you would you would you look to two to once again weeks jewelry <unk> watches work sounded better spot.
I think just based on what we've aired in theres going to be a higher cadence around how we're launching products through the back half of this year and Thats really exciting we're not looking to do anything beyond that we made the strategic decision to air in those products and so they're going to be launching in it.
Nice flow.
Throughout the rest of this year and there is so much that we're doing not only within scrubber, but also to the question earlier around under scribes and outerwear. We also have extended sizing coming later this year fixed pro with a huge innovation that we're going to continue to build on so as you know product innovation is everything to us even with having Heather.
<unk> focus a lot of her time and doubling down on innovation. We're so excited about what's the timing going forward.
Okay.
Got it and then my second question.
Just with regard to backwards.
Or did you Rusty.
With challenging more challenging macro backdrop, but it doesn't sound to me like you're saying I.
My guess is you'll be.
Clarification Youre seeing anything.
Really noticeable in your business is purely macro related.
So the question I have.
About your marketing or the other levers you're pulling with withdrawal marketing that could help to offset could help to cushion a more challenging macro backdrop.
So as it relates to macro we're recognizing we feel really good about the health of our business, but also recognizing that there's just a lot of uncertainty at the moment and we don't fully know what the future will bring in respect to marketing nothing's really changed from how we're thinking about it on our last call still.
<unk> marketing to come in between 14% to 15% of sales for the full year I think it's important to note that how we grow is based on word of mouth. So we're able to be really efficient with our spend and we also benefit from repeat dynamics within our business, where we don't spend heavily to retain customers. They keep coming back because they love our product. So we're always.
Balancing growth and profitability and we're going to continue to do so we're targeting a CAC that makes sense for the business and the strategy makes sense for where we are today is so much room to grow and we continue to think it's incredibly important to invest behind marketing.
Okay, well, thank you and congrats again.
Yeah.
Thanks, Brian .
Thank you. Our next question comes from Rick Hatfield of Raymond James. Please go ahead.
Good afternoon, and congrats on the strong execution.
I'm, hoping you can expand upon your guidance for gross margins in the back half you had some nice upside in the second quarter. Despite the headwinds related to freight which seemed to be showing signs of improvement. So I'm, hoping you could provide additional color on.
What your expectations are for the gross margin for the back half relative to three months ago, just curious whats changed for the better and what you might be incrementally more cautious.
So as we discussed on our last call, we do anticipate gross margin being lower in the back half of the year than the first due to a few factors. So first of all we decided to airfreight more product in the second half than we did in the first to ensure that we hit our calendar and that we could fill fulfill demand in a timely manner.
And while we have seen rates come down more recently, there is still much higher than pre COVID-19 levels, and we're being cautious about the potential for continued volatility, especially as we begin to enter high volume back to school and holiday season. So we want to make sure. We're encapsulating everything and also giving ourselves room for the situation at <unk>.
As we've seen it just be really dynamic in the past.
Thanks very much.
Okay.
Thank you. Our next question comes from brokerage at Goldman Sachs. Please go ahead.
Good afternoon, and thank you so much for taking our question.
I'd love to dig into the outlook that you have for AMV, given several moving pieces here with product mix shifts the promotional backdrop and also new product innovation that you have planned for the back half can you help us understand where you think that might move as you continue to build out your lifestyle portfolio.
Thanks, Brooks O'neil do you want to take that yeah. So whether it will be it's the same trends that we've been seeing for several quarters, so lifestyle mix drives.
Higher average unit retail as you know our lifestyle products are generally higher priced we also saw higher AUR within lifestyle, so increasing shoes, and outerwear, which are which are higher price products in the portfolio.
And again <unk>, increasing as customers, adding the full look to their cart really excited to see.
Orders with a lifestyle piece had 27% higher <unk> than Theyre scrubbed only counterpart in the future we're going to continue to execute on the same strategies that have driven up to date, so continuing to focus on product innovation and really building out the full layering system and also continuing to focus on the digital products and make improvements there. So.
We're excited.
We think it's going to continue to to grow year over year and are excited to see see it from here.
Yes.
Great. Thank you.
Just one quick follow up I think I heard you talk about size expansion.
As as an opportunity for new innovation into the back half of this year can you talk to us a little bit more about that opportunity and what you see its impact on the fixed brand and the business overall.
Oh, Yes, we're super excited about this and we've been talking about it for a very long time, and we feel as though we're almost there so in terms of size.
<unk> extended sizing inclusivity has always been part of what we do here and who we serve and we have such a broad diversity of health care professionals that we are.
Serving every single day, and so right today, we have extra extra small up to two XL for women extra small to two XL for men we have.
And Paul and regular actually relaunched our Petite top yesterday, which is super exciting so.
It's always been a part of what we do so launching three <unk>. So we're looking to launch later this year.
Really incredible thing.
And it's something that will very much.
B and very exciting for our community.
Okay.
Thanks, So much I'll pass it on.
Okay.
Thank you. Our next question comes from John Cannon at Cowen.
Please go ahead.
Okay.
Thanks, Bill and congrats on a nice quarter. Thanks for taking my question.
Okay got it.
Inventory it looks like the dollars and the growth rate accelerated from Q2.
Into Q2 from Q1.
The theme, we've seen across soft lines retail how do we think about inventory dollars as we get into the back half of the year.
Just the overall costs associated with this inventory that's on the balance sheet relative to where it was last year.
From an AUC perspective.
Definitely so we're seeing shipments come in faster than anticipated port congestion clears and some of the inventory plan for <unk> will actually be arriving in three Q. So visibility in the supply chain has meaningfully improved and we made the decision to airfreight and bring goods in sooner.
To ensure we were positioned to hit our product calendar.
I mentioned in my prepared remarks, approximately 50% of our inventory is in core styles and core color products that live in our tight year round and are always available and another 20% and future launches that we brought in earlier. So we feel really good about our ability to sell through this with little risk.
Got it.
Looking into next year, obviously, some of the supply chain and freight costs have.
Normalized at least on a spot basis.
Just curious do you have any thoughts on the recovery potential from a margin standpoint.
What you were hit with a free perspective this year.
So there remains considerable uncertainty in the macro environment today, we do believe that if we return to a more normalized supply chain environment and this kind of is the continued path that we can return to our long term target. So we're going to continue to monitor what we're seeing in the supply chain.
And keep everyone updated on what that means for 2023.
Yes.
Got it thank you.
Okay.
Thank you for your question.
Question comes from Noah <unk> at Keybanc capital markets. Please go ahead.
Thanks for taking my question and congrats on a great quarter.
Just really quickly I want to make sure I'm understanding so.
Your commentary around improving the supply chain improvement quicker than expected.
Shifts anything in terms of product launches into the second quarter that were previously expected in the back half.
And then just a follow up.
Many of your peers have called out headwinds from fuel surcharges from carriers just wanted to see if you were.
Experiencing any of that thank you.
So as it relates to the second quarter, we did see a product launch move from the first quarter into the second quarter and we've seen one move from the second quarter into the third quarter, but.
Nothing has shifted forward.
As it relates to things that were originally planned for the back half moving into the second quarter.
As it relates to fuel surcharges.
It's definitely something that we have seen and it is one of the reasons, we see selling deleverage I think it's important to note that we've been able to really offset some of these increases from fuel surcharges by the leverage that we get in deep.
Table too.
Keep some of our margin and profitability that way.
Thank you.
Thank you for your question at this time there are nice to have a question and I would like to pass it back over to Trina.
Thank you so much operator, so we have a few questions from our SAP platform. Thank you all for writing and it's so exciting senior question first one big stock is down since the IPO what is <unk> doing to increase profit margins.
First off with respect to the stock price and I think I've said this on multiple calls like this.
In the short run everyone I think everyone knows now the stock market is a voting machine, but over the long run it's a weighing machine and that's where we're focused we're focused on building our company over the long run an iconic brand over the next 100 years and most of that market is extremely volatile and that's due to a ton of different macro issues that I'm sure you're hearing all over the news.
News and a lot of other calls so that's not where we're focused we're focused on the fundamentals of our business and executing every day.
And right now the market isn't really.
Reflecting the fundamentals of our business in.
In terms of our profits even in the current environment, we're continuing to put their significant growth with strong profitability.
That was true again in this quarter right, where we grew 21% and had an adjusted EBITDA margin of 18% were really proud of that.
In considering our growth and our profitability. The fact that we have a largely non discretionary replenishment driven business.
We're also serving the fastest growing job segment in the country, we believe that our true value will be reflected in the long run.
The second question. We received are you concerned with companies, who sell knockoffs of your products at lower prices.
First off everyday fix what we say is we don't look left and we don't look right we focus on ourselves this.
This is an execution game. This is about innovation of product. This is about connecting with our community and that's what we're looking to do that said the company selling knockoffs of our products generally do very little business. There are a tiny fraction of our size and given the uniqueness of our designs and the fact that we're the first rate and where the first it will always be the first to offer more health care.
<unk> innovative products over the long run.
Been able to obtain multiple design patents and have a lot of IP protection on all of our products.
And so we're really really excited by that so.
So everyone knows we do take our IP very seriously and.
And we look to take enforcement action against any company, who is attempting to succeed by wrongfully copying what we've created.
And finally, it's important to emphasize that what's really important in dealing with knockoff knockoff is to constantly innovate and connect and so that's what we're going to continue to do.
Third question and I think I answered this as part of the other questions. We received from our analysts, but when will things you offering extended sizes.
This is a great question and like I said earlier really really exciting to be able to bring <unk> to this to our community.
And we recognize that this is.
Important it's really important for our brand it's really important that we serve all parts of our community.
And we're working around the clock to make this happen.
To offer our community best in class fit across a full range of sizes.
We're really excited to launch this later this year.
With that thank you all for your questions. Thank you for joining us for this second quarter 2022 call and have a great day.
Thank you everyone for joining in today's conference call you may now disconnect.
Oh.