Q4 2022 Figs Inc Earnings Call
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Speaker 1: My name is Megan. I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
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Speaker 2: I would now like to pass the conference over to our host, Jean Fontanas with FIGS. Jean, please go ahead. Thank you. Good afternoon, everyone. And thank you for joining today's call to discuss FIGS fourth quarter and full year 2022 results, which we released this afternoon and can be found in our earnings press release in the stockholder slide deck.
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Speaker 3: on our investor relations website at ir.wherefigs.com. Presenting on today's call are Trina Spear, our co-founder and chief executive officer, and Daniella Terenshine, our chief financial officer. As a reminder, remarks on this call do not concern past events or forward-looking statements.
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Speaker 4: This may include predictions, expectations, or estimates, including about future financial performance, market opportunity, or business plans. Forward-looking statements involve risks and uncertainties, and actual results could differ materially. These and other risks are discussed in our SEC filings, including in the 10-K we filed today, which we encourage you to review.
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Speaker 5: Do not place undue reliance on our forward-looking statements, which speaks only as of today in which we undertake no obligation to update. Finally, we will discuss certain non-GAAP metrics which we believe are useful supplemental measures for understanding our business. Reconciliations of these non-GAAP measures to their most comparable GAAP measures are included in the earnings release and shareholders deck we issued today.
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Speaker 6: Now I'd like to turn the call over to Train the Fear Chief Executive Officer of SAGES. Thank you, Gene. Good afternoon, everyone, and thank you for joining us today for a discussion of our fourth quarter results in an update on the progress we are making across our strategic priorities.
Speaker 7: For 2022, our first full year as a public company, we deliver net revenue growth of over 20%.
Speaker 8: We saw strong performance in our non-scrub business which increased 59%.
Speaker 9: Additionally, international sales grew 50%, resulting from increased brand awareness and repeat purchases. In teams, our B2B business grew 41%.
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Speaker 10: With respect to profitability, adjusted even though margin for the year with 17.2%
Thank you for attending today's fix it fourth quarter and full year fiscal 2022 earnings conference call. My name is Megan and I'll be your moderator for today's call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end I would now like to pass the conference over to our host Jean Fontana.
Speaker 11: For the fourth quarter, results were ahead of our expectations with net revenues up 13%.
Speaker 12: We achieved a record number of new customer additions leading to a 23% increase in active customers.
Speaker 13: On an LTM basis, net revenue per customer was down 1% to $221 due to lower frequency rates partially offset by higher AOB.
Jim. Please go ahead. Thank you good afternoon, everyone and thank you for joining today's call to discuss <unk> fourth quarter and full year 2022 results, which were released this afternoon and can be found in our earnings press release and in the stockholder slide deck on our Investor Relations website at IR Dot where things dot com presenting on.
Speaker 14: Fourth quarter adjusted EBITDA margin of 13.6% reflects better than anticipated gross margin as well as disciplined expense management.
Speaker 15: While our fourth quarter results exceeded our expectations, extending our market share gains, a number of interrelated factors that we discussed last quarter led to decelerated growth from previous quarters. These include macro headwinds, lower frequency trends, and color launches that did not perform to the elevated levels we saw last year.
Today's call are Trina sphere, our co founder and Chief Executive Officer, and Daniela turn Shine, our Chief Financial Officer.
As a reminder remarks on this call that do not concern past events are forward looking statements. This may include predictions expectations or estimates, including about future financial performance market opportunity or business plans forward looking statements involve risks and uncertainties and actual results could differ materially.
Speaker 16: While we cannot control the macro headwinds, we recognize that there are areas of our business where we can and will do better.
Speaker 17: We remain confident in our long-term outlook and therefore we will continue to invest in our business as the investments we make today will position us as an even stronger company in the future.
And other risks are discussed in our SEC filings, including the 10-K filed today, which we encourage you to review.
Speaker 18: We have identified opportunities and have initiatives underway that we believe will drive accelerated growth in 2024 and beyond.
Not place undue reliance on our forward looking statements, which speak only as of today and which we undertake no obligation to update finally, we will discuss certain non-GAAP metrics, which we believe are useful supplemental measures for understanding our business reconciliations of these non-GAAP measures to their most comparable GAAP measures are included in the earnings release and shareholders' equity issued today.
Speaker 19: In the near term, we plan to remain prudent in managing our promotional activity while moving through current inventory and managing expense headwinds. Before I speak to our strategic priorities, I want to briefly discuss some of the highlights from the fourth quarter. In the near term, we plan to remain prudent in managing expense headwinds.
Speaker 20: Starting with product, we continue to deliver innovation in our non scrubware assortment, which grew 39% to reach 21% of net revenues.
Now I'd like to turn the call over to train up their chief Executive Officer effects.
Jean Good afternoon, everyone and thank you for joining us today for a discussion of our fourth quarter results and an update on the progress we are making across our strategic priorities.
Speaker 21: Orders that include non scrub wear delivered a 14% higher UPT than scrub wear only order.
Speaker 22: We saw strengths across several categories including lab coats, Bigs Pro, Footwear, outerwear, and under scrubs.
For 2022, our first full year as a public company, we delivered net revenue growth of over 20%.
Speaker 23: In our Scrubs business, we saw deceleration in our sales trends with color launches continuing to fall short of our expectations, which we will speak to shortly.
We saw strong performance in our non scrubber business, which increased 59%. Additionally.
Additionally, international sales grew 50%, resulting from increased brand awareness and repeat purchases and.
Speaker 24: On a positive note, we are very pleased with the launch of our extended sizes.
And teams or <unk> business grew 41% with respect to profitability adjusted EBITDA margin for the year was 17, 2%.
Speaker 25: Following extensive work behind our fit and product construction, we added 3XL to 6XL to our extended size offering, and a selection of course aisles.
Speaker 26: Since our launch, these products drove 5% of new customers, and 2XL through 6XL reached double-digit sales penetration within the same selection of core scrubs offering.
For the fourth quarter results were ahead of our expectations with net revenues up 13%, we achieved a record number of new customer additions leading to a 23% increase in active customers on.
Speaker 27: We were overwhelmed to see the joy of our healthcare professionals' experience by having access to the comfort, functionality, and style that DIGS has to offer.
On an LTM basis net revenue per customer was down 1% to $221 due to lower frequency rates, partially offset by higher <unk>.
Fourth quarter adjusted EBITDA margin of 13, 6% reflects better than anticipated gross margin as well as disciplined expense management.
Speaker 28: Turning to marketing, we are highly encouraged by our growing brand awareness as we continue to support product innovation through our data-powered, targeted marketing engine. While word of mouth remains our biggest source of customer acquisition, we supplement this with best-in-class digital marketing and in-house creative to efficiently drive healthy new customer growth.
While our fourth quarter results exceeded our expectations extending our market share gains a number of interrelated factors that we discussed last quarter led to decelerated growth from previous quarter. These.
These include macro headwinds lower frequency trends in color launches that did not perform to the elevated levels. We saw last year while.
Speaker 29: retention. We invested in multiple digital and out-of-home channels to share brand moments and educate healthcare professionals about our mission and our purpose.
While we cannot control the macro headwinds we recognize that there are areas of our business, where we can and will do better.
Speaker 30: For the holiday season, we kicked off our hashtag gift figs campaign, inviting our community, family, friends, neighbors, siblings, and strangers to join us in giving the healthcare community the best gift ever. Thanks.
We remain confident in our long term outlook and therefore, we will continue to invest in our business as the investments we make today will position us as an even stronger company in the future.
Speaker 31: We had over 50 ambassadors, influencers, and celebrities help seed this sentiment globally. Moving to International, we saw 76% growth for the quarter and 50% for the year.
We have identified opportunities and have initiatives underway that we believe will drive accelerated growth in 2024 and beyond.
In the near term, we plan to remain prudent in managing our promotional activity, while moving through current inventory and managing expense headwinds.
Speaker 32: Performance was led by strong results in Canada and in the UK. In Q4, we localized our marketing strategies to optimize each market according to its customer needs and preferences.
Before I speak to our strategic priorities I want to briefly discuss some of the highlights from the fourth quarter.
These strategies, coupled with the impact of duty subsidies and other efforts to reduce barriers to purchase, resulted in significant acceleration in sales driven by both repeat and new customers, while seeing continued improvement in marketing efficiency.
Starting with product, we continue to deliver innovation in our non scrubber assortment, which grew 39% to reach 21% of net revenues.
Or is that include non scrubber delivered a 14% higher <unk> than scrubber only order.
Before I speak to our strategic priorities, I want to take a moment to recognize our 10-year anniversary.
We saw strength across several categories, including lab coats fixed pro footwear outerwear and under scrubbed.
Throughout the last decade, we remained steadfast in executing across the core tenets of our business.
And our scrubber business, we saw deceleration in our sales trends with color launches continuing to fall short of our expectations, which we will speak to shortly.
maintaining a deep connection with the healthcare community, leveraging our authentic category-defining brand, and delivering industry-leading product innovation.
On a positive note we are very pleased with the launch of our extended sizes. Following extensive work behind our fit and product construction. We added three <unk> six XL to our extended size offering and a selection of core styles.
As we advance our business to $1 billion in net revenue, we remain hyper-focused on executing solutions-based product innovation and building and deepening our connection with the healthcare community.
Since our launch these products drove 5% of new customers and to sell through six X outreached double digit sales penetration within the same selection of course grubbs offerings.
beyond these strategic priorities. We are embracing our more nascent growth areas to expand our presence and engage with more healthcare professionals through our international business, our teams business, and by building out our retail strategy.
We were overwhelmed to see the joy of our health care professionals experienced by having access to the comfort functionality and style that biggs has to offer.
While remaining confident in our long-term potential, we see 2023 as a year of foundational focus as we move through inventory and deploy strategies to accelerate growth.
Turning to marketing we are highly encouraged by our growing brand awareness as we continue to support product innovation through our data powered targeted marketing engine.
Starting with products, we are putting more firepower behind our innovation by embedding greater technical features and functionality into our products across our layering system to further differentiate figs as the leading and premium scrubware brand. Within our scrubs business, we are optimizing design, standardizing features such as trims and waistbands, and determining how we can maximize productivity.
Word of mouth remains our biggest source of customer acquisition, we supplement that with best in class digital marketing and in house creative to efficiently drive healthy new customer growth and retention we.
We invested in multiple digital out of home channels to share brand moments and educate healthcare professionals about our mission and our purpose.
with the optimal breadth of styles in our offering. In addition, we will continue to inject limited edition styles, which generate strong engagement and evaluate which of these styles should be added to our core offering based on sell-through performance.
For the holiday season, we kicked off our hashtag gift figs campaign, inviting our community family friends neighbors siblings, and strangers to join us and giving the health care community the best gifts ever faced we had.
The Rafaela scrub jumpsuit is a great example of a limited edition style that we transitioned to core. Color remains a key driver of excitement, and we are leveraging our data to fine-tune our launch strategy to drive greater frequency.
Over 50 ambassadors Influencers and celebrities help seed this sentiment globally.
Moving to international we saw 76% growth for the quarter and 50% for the year.
Performance was led by strong results in Canada and in the U K in Q4 are we localize our marketing strategies to optimize each market according to its customer needs and preferences.
Turning to non-scrubs, we intend to build upon proven categories including outerwear, footwear, and performance under scrubs with a greater level of technical innovation. We will expand newer categories such as our Vigs Pro offering, which is a healthcare office-ready collection that provides premium style and functionality. As part of our commitment to quality innovation, we are making our supply chain even stronger.
These strategies, coupled with the impact of beauty subsidies and other efforts to reduce barriers to purchase resulted in significant acceleration in sales driven by both repeat and new customers, while seeing continued improvement in marketing efficiency.
We are working with existing partners while developing new partnerships with best in class manufacturers to enhance design capabilities to improve consistency across fit, construction, and speed to market.
Before I speak to our strategic priorities I want to take a moment to recognize our 10 year anniversary.
Throughout the last decade, we remain steadfast in executing across the core tenants of our business.
Ultimately, our goal is to create an even higher standard within the healthcare apparel industry. Today, we believe there is no close second to the quality we deliver.
Maintaining a deep connection with the health care community, leveraging our authentic category defining brand and delivering industry leading product innovation.
Tomorrow, I am confident all this work will further widen that gap. Turning to marketing, we remain focused on developing deeper engagement with our community through a diversified strategy.
As we advance our business to $1 billion in net revenue, we remain hyper focused on executing solutions based product innovation and building and deepening our connection with the health care community.
For our 10-year anniversary, we kicked off 2023 with our Figs 10 iconic series. 10 weeks, 10 iconic colors, 10 years of Figs. It was very gratifying to see the very positive feedback we received as we brought back our fan favorites.
Beyond these strategic priorities, we're embracing our more nascent growth areas to expand our presence and engage with more health care professionals through our international business, our teams business and by building out our retail strategy.
While remaining confident in our long term potential we see 2023 as a year of foundational focus as we move through inventory and deploy strategies to accelerate growth.
Our 360-degree mass campaign, We Are Not Done Being the First, highlights Figs as always the first brand to create products that redefine everything we know about the healthcare professional's uniform. Our campaign and messaging will always have a fun and unexpected brand voice. And as we raise the stakes on product innovation, we will also inform customers about product functionality and the
Starting with product where.
Putting more firepower behind our innovation by embedding greater technical features and functionality into our products across our layering system to further differentiate <unk> as the leading and premium scrub where brands.
technical features and use cases to emphasize the value in our premium product. As we address the trends we've seen around frequency, we are focused on driving more consistent and personalized engagement within the healthcare community. As such, we are supplementing our launch campaigns with more evergreen strategies to drive higher frequency by speaking to different sub-segments of our community.
Within our scrubber business, we are optimizing design standardizing features such as trends in Waistbands and determining how we can maximize productivity with the optimal breadth of styles in our offerings.
In addition, we will continue to inject limited edition styles, which generate strong engagement and evaluate which of these styles should be added to our core offering based on sell through performance.
We will also continue to optimize our existing media channels while strategically investing in new channels to meet our customers where they are spending time. We have been more intentional in our communication, aligning our messaging with specific audiences across our diverse sets of digital and out-of-home channels.
The Rockdale scrubbed jumpsuit is a great example of a limited edition style that we transition to court.
Color remains a key driver of excitement and we are leveraging our data to fine tune our launch strategy to drive greater frequency.
Turning to non scrubbed, we intend to build upon proven categories, including outerwear footwear and performance under scrubbed with a greater level of technical innovation, we will expand newer categories, such as our fixed pro offering which is a health care office ready collection that provides premium style and functionality as part of our commitment to quality innovation, we are making are some.
With respect to our more nascent growth opportunities, we will start with international expansion.
We believe there's a significant opportunity to grow our brand globally. As we expand into non-English speaking countries, localization in our international markets will be supported by translation across email, social, and our website beginning in the second quarter.
Fly chain, even stronger we are working with existing partners, while developing new partnerships with best in class manufacturers to enhanced design capabilities to improve consistency across fit construction and speed to market.
We are also localizing around regional holidays and in our messaging and channel engagement. To fuel further discovery, we are building out our ambassador network with a focus on highly influential healthcare professionals who will not only stimulate brand awareness, but act as boots on the ground to learn about individual needs and preferences within these communities. I will leave you up to date with what we have done since 2020, by continue our
Ultimately our goal is to create an even higher standard within the health care apparel industry. Today. We believe there is no close second to the quality we deliver.
Importantly, we are committed to delivering growth internationally in a profitable way, just as we have grown the rest of our business.
Importantly, we are committed to delivering growth internationally in a profitable way, just as we have grown the rest of our business. Next, we are expanding our presence to our team's business.
Tomorrow I am confident all of this work will further widen that gap.
Turning to marketing.
We remain focused on developing deeper engagement with our community through our diversified strategy.
For our 10 year anniversary, we kicked off 2023 with our fixed 10 iconic series.
We are seeing a growing number of concierge clinics, med spas, fertility clinics, and other healthcare institutions wanting to elevate their team's uniforms. We can serve these institutions by helping to standardize and professionalize their employee base with figs.
10 weeks tenet, calling it color 10 years effects.
It was very gratifying to see the very positive feedback we received as we brought back our fan favorites.
To support this initiative, we are creating a more robust technology platform to expand our product offering, streamline the ordering experience, and offer additional payment and reporting capabilities. Turning to retail. Based on the overwhelming engagement we saw in our previous market activations and past pop-up shops, we have learned that healthcare professionals really want to experience Figs in person.
Our 360 degree mass campaign, we are not done being the first highlight stakes as always the first brand to create products that redefine everything we know about the health care professionals uniform. Our campaign messaging will always have a fun and unexpected brand voice and as we've raised the stakes on product innovation, we will also important customers about product.
<unk> technical features and use cases to emphasize the value in our premium product as we address the trends we've seen around frequency. We are focused on driving more consistent and personalized engagement within the health care community.
We will test store formats, identify locations where we see the biggest opportunity. Our first location will be a store in Century City in Los Angeles, which is scheduled to open this fall.
True to Figs, this location will provide a customer experience unlike anything our healthcare professionals have seen before. Our stores will serve as community hubs where healthcare professionals can connect and build relationships.
Such we are supplementing our launch campaign with more evergreen strategies to drive higher frequency by speaking to different sub segments of our community.
We will also continue to optimize our existing media channels, while strategically investing in new channels to meet our customers where they are spending time.
Importantly, we will take a measured approach to our retail strategies and how we test store formats and develop store economic targets in site criteria. As we continue to build our business for the future, we are adding talent to our team.
We have been more intentional in our communication aligning our messaging with specific audiences across our diverse set of digital and out of home channel.
We recently hired Steve Berube as our new Chief Operating Officer.
With respect to our more nascent growth opportunities, we will start with international expansion.
He will be responsible for overseeing distribution and logistics in addition to inventory planning and customer experience.
We believe theres, a significant opportunity to grow our brand globally as.
As we expand into non English speaking countries localization in our international markets will be supported by translation across email social and our web site beginning in the second quarter.
Steve brings over 30 years of experience with some of the best brands, including Lululemon and Nike. In his most recent role at Levi's, he helped to scale the company's infrastructure for long-term growth. With Steve joining, Devin DufGago now serves as Chief Business Development Officer.
We're also localizing around regional holidays, and in our messaging and channel engagement.
To fuel further discovery, we are building out our ambassador network.
In Devon's new role, she will be responsible for overseeing our international and team businesses as well as developing our retail opportunities.
With a focus on highly influential health care professionals, who will not only stimulate brand awareness, but act as boots on the ground to learn about individual needs and preferences within these communities.
Her strategic thinking, operational experience, and deep understanding of the big community make her the ideal fit to lead the growth of these businesses.
Importantly, we are committed to delivering growth internationally in a profitable way.
As we have grown the rest of our business.
I want to take a moment to discuss our ongoing commitment to support our healthcare professionals. A leading priority and advocacy for 2023 will be advancing our Often Human bill, focused on among other things, providing fair pay, mental health support, workplace safety and training. The bill partnered with the Lorna Breen Foundation.
Next we are expanding our presence there our teams business.
We are seeing a growing number of concierge clinics med spas fertility clinics and other health care institutions wanting to elevate their teams uniform.
We can serve these institutions by helping to standardize and professionalize their employee base with fixed to.
To support this initiative, we are creating a more robust technology platform to expand our product offering streamline the ordering experience and offer additional payment and reporting capabilities.
A leading organization promoting mental health services specifically for health care professionals, and we will be working directly with them to advance our policy goals.
This includes advocating in Washington, D.C., where we aim to spearhead new legislation to further combat these challenges. In closing, throughout the last decade, we have remained committed to helping the global community of healthcare professionals look, feel, and perform at their best.
24-7, 365 days a year. We branded a previously unbranded industry and decommoditized a previously commoditized product.
elevating scrubs and creating premium products for healthcare professionals. Most importantly, we built a community and lifestyle around a profession. We are very proud of what we have accomplished to date.
We have so much opportunity in front of us. We have identified areas in which we can get even better. And we have an action plan in place to be better at the level of innovation we deliver, better at delivering consistent products, better at connecting with our community to keep them coming back and better at operational excellence.
Our strong business models underscored by product innovation, community connection, and advocacy, and there is no closed second. We have the scale and balance to take our business to the next level. As we continue to grow and expand, we remain committed to investing in our business. We have seen tremendous growth over the last four years, and we believe now is the right time to make the investments necessary.
to double our revenue once again. With that, I will turn the call over to Daniella. Good afternoon everyone. We are pleased to have exceeded our expectations in the fourth quarter, although recognize these results are below what we believe is sustainable for our business longer term. As Trina outlined,
We believe that the actions and investments we are making today will set us up to achieve our growth potential in the future. I will begin my discussion with a review of our fourth quarter financial results, followed by our outlook for the first quarter in 2023. Starting with the top line, for the fourth quarter, we will be looking at the
Net revenues grew 12.6% to $144.9 million compared to $128.7 million in Q4 last year due to an increase in orders from new and existing customers.
We were pleased with the strong sales for Black Friday Fiber Monday, with promotional levels better than what we saw in 2020. Active customer growth of 23% was fueled by ongoing initiatives to expand brand awareness globally, which led to the highest number of new customer ads in our company's history. We also continue to see record reactivation rates among lapsed customers.
as we see purchase cycles elongate. For the quarter, AOV across the business was down 1% to $112 due to lower AUR. As Trina noted, we continue to see a year-over-year decrease in purchase frequency in the quarter, and we are taking actions by both increasing intention behind our product innovation.
and refining our strategies focused on existing customers. Gross margin for Q4 was above our expectations at 68.2% compared to 69.9% in Q4 2021. The 170 basis point decline compared to Q4 last year was primarily due to the higher mix of promotions as well as product mix.
and higher ocean freight expense due to the sell-through of previously shipped inventory. This was partially offset by lower air freight utilization. Moving to operating expenses.
Selling expense for Q4 was $37.6 million, representing 26% of net revenues compared to 19.9% in Q4 2021.
This 610 basis point increase was primarily due to higher costs within fulfillment, largely due to warehouse storage necessary to house inventory we pulled forward. To a lesser degree, selling expense was impacted by higher shipping rates and duty subsidies compared to Q4 last year.
Marketing expense for Q4 was $21.4 million, representing 14.8% of net revenues compared to 12.9% in Q4 2021. This 190 basis point increase was primarily due to increased investment in brand marketing initiatives, including commercials and our gift bags campaign.
Last year, we saw lower brand spend due to the timing of marketing initiatives. We continue to drive efficiency and spend on both new customer acquisition and retention, maintaining our focus on positive first order contribution margin with marketing spend on an annual basis, roughly consistent at 15% of net revenues.
G&A expense for Q4 was $36.5 million, representing 25.2% of net revenues compared to 24.3% in Q4 2021.
The 90 basis point increase was due to legal fees, accrual for inventory donations, and costs associated with the implementation of Sarbanes-Oxley 404. Last year's inventory accrual was essentially nonexistent due to the high full price sell through and low inventory related to supply chain disruptions.
These higher costs were partially offset by reduced bonuses and lower stock-based compensation expense.
Our net income was $3.4 million, or 2 cents in diluted EPS for the fourth quarter.
Adjusted net income was $8.2 million and deleted EPS as adjusted was $0.05 in Q4. This compares to adjusted net income and diluted EPS as adjusted of $18.6 million and $0.09 per share in Q4 2021 respectively.
Finally, our adjusted EBITDA for Q4 remains strong at $19.8 million for an adjusted EBITDA margin of 13.6% compared to 24.8% in Q4 2021.
Briefly touching on the full year, net revenues were $505.8 million, an increase of 20.6% year over year. Gross margin was 70.1%, a decrease of 170 basis points year over year, primarily due to a higher mix of promotional sales and to a lesser extent, an increase in freight in costs related to elevated ocean freight costs and product mix shift.
Operating expenses were $316.8 million, an increase of 9.1% year over year. As a percentage of net revenues, operating expenses decreased to 62.6% from 69.2% in the prior year period. Adjusted EBITDA margin was 17.2%.
as compared to 25.1% in the same period last year. Touching on our balance sheets, we finished the quarter with cash and cash equivalents of $159.8 million. Inventory totaled $178 million at the end of the fourth quarter. As a reminder, earlier this year, we made the decision to increase weeks of supply of our core styles to ensure we could adequately fulfill customer demand.
We also decided to bring in limited edition colors and styles earlier to support the planned launches. This combined with lower than expected demand for our color launches led to heightened inventory levels.
Breaking down inventory on hand.
Over 60% is in core styles and classic colors, which we saw all year round and remained always in stock, leading to low risk of obsolescence. An additional 15% of our inventory balance is in upcoming styles and colors that we brought in earlier. We will continue to work towards getting inventory aligned with sales growth as the year progresses. However, due to the aforementioned factors, we expect inventory to peak in the first quarter before getting closer to more normal.
A key priority is to maintain healthy inventory levels to optimally manage our working capital and maintain our strong balance sheet. Before turning to our guidance, we would like to provide some of the assumptions incorporated into our outlook. We would like to provide some of the assumptions incorporated into our outlook.
First, we assume that the macro environment remains challenging throughout the remainder of 2023. Second, as we continue to work through inventory, we expect to deploy more promotional strategies as compared to last year. However, with the discipline we have consistently employed in the past. And third, as we discussed, we expect to continue to work through inventory, as compared to
We have a plan in place to drive increased frequency and deepen customer engagement, but the impact of these changes are expected to be more evident in 2024 and beyond. Looking at profitability, we will continue to make investments, including fulfillment enhancement, that will enable us to scale our business for long-term growth. In addition to this, we will be working through certain temporary cost headwinds, in part due to macro and supply chain challenges we faced early last year. Now moving to guidance.
As a result of the factors I just talked about for 2023, we expect net revenues to increase in the mid-single digits. We expect growth in our active customer base to moderate, given the lapping of the strong growth we have seen over the last several years.
We expect frequency rates to continue to be impacted by macro uncertainty and high inflation rates. And we expect AOB to be flat to slightly up for the year after a down Q1. We expect UPT to continue to increase, largely offset by lower AUR, as we expect to see a higher mix of promotional sales as we move through inventory.
Keep in mind AOV increased 18% since 2020, so we are coming up against meaningful growth. Gross margin for the year is expected to be similar to our Q4 2022 gross margin rate as we move through inventory and navigate what we anticipate will be a more promotional environment.
The second and fourth quarters are expected to see more pressure due to the timing of promotional events around Nurses Week and Holiday. In addition, despite tailwinds and inbound freight costing we are seeing, we are factoring in higher ocean freight expense due to the sell-through of previously shipped inventory.
Turning to selling expense, we expect some pressure as a result of incremental storage facility costs to house additional inventory. We are assuming greater impact in each of the first and second quarter of approximately 250 basis points and 180 basis points respectively, with a smaller impact in Q3. We plan to invest in our fulfillment capabilities and our
to increase reliability, flexibility, and efficiency, as well as improve order delivery times as we scale our business for growth. In addition, these investments will enable us to gain leverage within selling expense over time. The costs associated with the implementation and execution of this initiative are currently expected to range between $16 and $18 million, with about half falling into 2023.
mostly in Q4, and half in the first quarter of next year. We are in the process of finalizing our project plan and will provide any updates to expected costs and timing once we have completed our plan. We expect marketing expense to be approximately 15% of net revenues, with fluctuations from Q4 due to timing of events.
GNA is expected to be leveraged for the full year, in part due to investments in software, personnel, and resources associated with growing our international and teams' businesses, as well as in product innovation. We also expect an increase in stock-based compensation and our cruel for future inventory donations, partially offset by lower legal expenses and professional fees.
As a result, adjusted EBITDA margin for the full year 2023 is expected to be between 11 and 12 percent. This reflects approximately 300 basis points of cost headwind from the storage of excess inventory and fulfillment enhancements. To the extent that our projections for the fulfillment project changes, we will adjust our outlook accordingly. In terms of Q1 2023 outlook, we expect net revenue growth to be in the low single digits.
We expect new customer growth will be partially offset by the continued softening of frequency trends, as well as a decrease in AOV.
Last year's AOD of $116 reflected an elevated mix of non-scrubware, associated with one of our largest New Balance shoe launches, as well as supply chain disruptions, causing out of stocks on our CoreScrubs product.
In addition, promotions are planned higher in 2023 versus 2022, given the macro environment and our efforts to move through inventory. We expect growth margin to decrease in Q1 due to the proportion of promotions and product mix, as well as higher ocean freight expense due to the sell-through of previously shipped inventory. We expect these headlines to be partially offset by lower air freight utilization year over year. Looking at operating expenses.
We discussed selling expense earlier. Moving to G&A, we expect more deleveraging than in other quarters due to the increase in stock-based compensation costs being more heavily weighted in the first half of the year, an increase in our accrual for inventory donations, and the continuation of stocks implementation costs. As a result, we expect first quarter adjusted EBITDA margin to be between 9 and 10%. In conclusion, our growth outlook for 2023 is not representative of the growth we believe we can achieve longer term.
To ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using your speaker phone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from the line.
you know very much on ball between how do we think about the path back to you know that twenty type margin that i think we're talking long term that's still still the right margin and then i guess just on a may get a near term basis uh...
When do you feel like the ocean freight flips to a good guy based on how the inventories are capitalized on the balance sheet today?
Thanks, Michael. So for your first question on EBITDALE margin, based on what we see today, we believe we have the opportunity to drive EBITDALE margin expansion beyond 2023. In 2023, we're seeing some margin pressure from a few factors.
About 300 basis points from excess storage fees combined with fulfillment enhancement costs. Secondly, in 2023 we're going to be impacted by higher promotions, a couple hundred basis points when we flow that through the P&L. So just adding those back gets us to high teens in 2023. Looking to the future as we reaccelerate growth, we do expect G&A to leverage from where it is today.
We're really focused on setting the right expectations for the go forward. If we deliver high teams adjusted to the top, we are still very profitable. We do believe we have a pass back to 20%, but our goal is to ensure we're making the right decisions for the long-term health of the business, and we're going to continue to do that.
And I would just add, we really want to grow our business in a healthy way, like we always have. We've really focused on growth, not for growth's sake, but for doing it in a disciplined and profitable way, and that's never going to change. So our goal right now is investing strategically to support our scale in resources, in people, in technology, systems, really to make us stronger for the future. We have no debt. We have a really strong balance sheet. We have a really strong balance sheet.
So we are excited to make these investments and plant the seed today so that we can bear fruit in the future. And just circling back to your question on Ocean Freight. So in 2023, NetNet Freight is likely to be neutral to a slight tailwind as we continue to self-reveal previously-priced inventory at higher ocean spray rates and that's going to be offset.
by less usage of air freight. Looking into 2024, we should start to see a benefit, a tailwind from the ocean freight as well.
looking into 2024, we should start to see a benefit, a tailwind from the ocean plate as well. Okay, thanks a lot guys.
Thank you. Our next question comes from the line of Ed Yeroma with Piper Sandler. Your mind is open. Hey, good afternoon guys. Thanks for taking the questions. I guess first a short-term question. Do you think that the lack of or the dampened interest in something new color drops has been a function of...
Just the colors being off or is it more symbolic of maybe some saturation within your core customers' closet for the core scrub? And then I guess you've outlined a number of investments you're making on innovation. How much of the innovative product is kind of baked into this year's guide and kind of how should we think about how that layers in both this year and next? Thank you. Thanks, Ed.
I think as it relates to our color drops, we saw extraordinary demand in our colors over the last few years and we really responded to that kind of meeting our customers where they are. I think our healthcare professionals have evolved in our shifting and we are evolving with them as we're leaning out of color and leaning more into technical features and functionality that's tied to youth cases.
And in many ways, we're getting back to our roots of providing essential foundational pieces that healthcare professionals need in their job to perform. And that's where we're focused. But there is gonna be a bit of a transition as we move, as we right size the business and the launch and the kind of right size that our launch cadence. So right now, we're being mindful of our inventory balance.
in our commitment to providing our customers with fresh, innovative and exciting products. And what you're going to see this year is new, awesome products, of course, but with more, you know, shallower buys on that front. And something that's distinct about our business is that we're able to kind of launch this unit, but tie it back, tie it back to our course growth, and also seamlessly layer it with what's in our inventory today. And that is a weak thing about SAID. So, you know, this year we're not exactly focused on expanding our equipment. We're tapering back, we're simplifying, and bringing in short, that moment of unit.
that will drive revenue across multiple categories. And so, as we get to 2024 and more of an ideal state where we can hit the ground running, we'll really focus on this foundational year.
in multiple categories. As we get to 2024 and more of an ideal state where we can hit the ground running, we'll really focus on this foundational year. Thank you.
Thank you. Our next question comes from the line of Lauren Shank with Morgan Stanley . Your line is open. Great. I wanted to ask one on in Missouri, up a hundred and seven percent year of year. I guess we sort of saw a slowing demand trend in the fourth quarter and we knew that.
things were getting a little bit tougher from a macro perspective. So maybe why weren't you a little bit more aggressive in cutting back orders for the back half of the year? And why not now be a little bit more aggressive on promotions in order to clear through that? Thank you. So in hindsight, we recognize that there are things we could have done differently. First, we did start to build inventory levels to avoid air freight with longer lead time. And second, as visibility and supply chain started to get a bit more nebulous, we built more inventory. And that coupled with a lower sales outlook, it created an inventory build, especially around our color launches. And this was coming off a year.
a really elevated demand for color. So it is a priority for us to get our inventory levels back in line from here. As a reminder, 60% of our inventory is in core, so we are able to reduce future purchase orders to right size. And we are going to move through the remainder at a higher promotional rate, but still reflecting the discipline that we always do to protect the brand over the long term. So going forward, we've put processes in place to increase flexibility and be more disciplined around our inventory buys and needs.
You know, we're going to return to a more normalized inventory position by the end of this year. Can I just follow up? I mean, when you say normalized inventory, where would you affect inventory to be growing your year of year? I'd end the year. Thanks. So our ideal state is around 16 to 20 weeks of supply, and we're expecting at the end of the year to be around 25 weeks of supply. Okay. Thank you. Thank you. Our next question comes from a line of Brian Nagel with Oppenheimer.
now weaker sales growth. And then the second question on that is, is there a few elaborate further on the trend in frequency? Has it bottomed as it continues to get worse?
So we're assuming that the macro remains challenged in 2023 with the potential to get worse from where we are today. So we're incorporating that into our assumptions around frequency trends, and we're taking steps Let's keep learning from the data and get it rolling. Thanks a lot for loving the talk.
We are taking steps through our marketing strategies to drive higher engagement through personalized messaging by tailoring our content to our channel to our customer. However, we are still early in these initiatives, and just given the uncertain macro environment, we're remaining cautious about what we bake into the guide.
We do expect AOB to be slightly up for the full year. Again, AOB increased 18% from 2020, and so we've seen a lot of growth here. We have the opportunity to drive AOB higher over the long term, and we're continuing to see UPT increase.
but we're recognizing that in 2023 there is going to be pressure from higher promotions, and that's weighing on AUR in the short term. We're also lacking 20% growth in active customers, so we're being prudent in our growth outlook.
So Danielle, we talked a bit about, you know, in response to some of the questions in your prepare comments. You talked about promotions and the others to clear the inventory. How is your consumer reacting to your promotions? Does that help to improve the dynamic?
So, Danielle, we talked a bit about in response to some of the questions in your prepared comments, you talked about promotions and you obviously clear the inventory. How is your consumer reacting to your promotions? Does that help to improve the dynamic, the underlying sales demand?
I think we're continuing to be really just a plus in our promotional strategies. And so while I think just given the macro environment, we are seeing more of a reaction to our promotion. We're really focused on protecting the long term of the brand. And so could fail the higher if we leave into promotion for potentially, but we're really focused on doing this the right way over the long term. Here's a Brick Kristin Wissler.
I think we're continuing to be really disciplined in our promotional strategies. And so while I think just given the macroenvironment, we are seeing more of a reaction to our promotion. We're really focused on protecting the long term of the brand. And so could fail the higher if we lean into promotion for potentially, but we're really focused on doing this the right way over the long term. Okay, thanks.
Thank you. Our next question comes from a line of Brooke Roach with Goldman Sachs. Your line is now open. Good afternoon and thank you so much for taking our question. Trina, I was hoping that you could elaborate a little bit more on the growth of the team's business that you're seeing today. And then maybe for Danielle, as you contemplate the Metingle-Degit Growth Outlook for the year, can you contextualize the growth contribution that you expect between international, the teams' business and the non-scrubs' business relative to your core scrub business that sold to individual customers? Thank you. Thanks, Brooke. I think that teams' opportunities are incredibly exciting or not we've discussed a bit, but as we move forward, this is an area that is about 15%
easy as possible to order hundreds of thousands of sets of scrubs for your team and make the process super easy as it relates to embroidery. Putting your logo, putting your name so that you can show the world who you are and what you do, which is a big part of why people choose big. So super excited about teams is really early days.
And the other piece I'll just mention is, you know, we launched 3xL to 6xL, so our extended offering really gives us an ability to partner with some of the largest institutions who said, you know, we have a number of people within our institution that can't wear a thing today. So, you know, I think we're one of few companies that, you know, if we can't outfit 10, 15, 20 people will lose, you know, a million dollar if not more in terms of contracts. So, this is a big opportunity. We're really excited about it.
There's a one-out that we're focused on today to drive that higher in the future.
more intentional product innovation which we discussed, you know, the impact will likely be more so in 2024 and beyond. But also...
marketing strategies and really focusing on retention, focusing on evergreen messaging, and really setting the stage for accelerated growth in 2024. Great, thank you. And if I could just ask one more, as you contemplate that answer, I was wondering if you could help us understand what needs to happen, whether that's a change in the macro.
other sins, we're focused on what's in our control. And we're focused on what we can do from a product standpoint, from a messaging standpoint, from an advocacy standpoint. Our health care professionals have been through a lot over the last few years as they led us through this pandemic. And they're dealing with the same macro issues as well.
and their behaviors are evolving. And I think we're in a really interesting spot, just given the scale, given all this information and data that we have on our healthcare professionals to understand them in a really unique way. And so we're utilizing that information and evolving with them to reaccelerate as we move forward in 24 and beyond. And it comes down to these three areas in addition to others. Like the health of the American WT.
innovation of products, messaging and really being segmented in our messaging, personalizing for people's needs, and advocacy, showing up for them and having their backs. Thank you. Our next question comes from the line of Lorraine Hutchinson with Bank of America. Your line is now open.
Hi, it's Alice Chao on for learning Hutchinson. Thanks for taking our question. Can you elaborate a little bit more on the higher promotions you're going to plan in 2023? What types of promotions can we expect? Will it be more days of promotion, through site-wide percentage-offs or categories that are on sale?
And then I have one quick help follow up. Yeah, so it's not necessarily that we're going to do a greater number of promotions or even at a higher discount rate. But what we are seeing is that in this macro environment, we are seeing customers react more to our promotional times. And so while...
Our schedule and our cadence may look similar. A lot of this is just a mixed shift in our consumer base. Outside of that, we are moving through inventory by having more evergreen promotional strategies, like our awesome today, on tomorrow, which has been really effective in helping us tailor to different customer segments and really meet the consumer where they are. Thank you. And then I have a quick follow up on the mid-kingled-to-tailed-skyde components. It sounds like between all the customer metrics, you think AOLV can be the area of opportunity for...
maybe growth to accelerate higher than that. Was there anything else? So we're expecting AOB to be flat to slightly up over the course of the year. We're also expecting to continue to grow our active customer base. We're just being mindful that we're coming off of 20% growth in 2022, but that's still an area that we expect to grow over 2023.
And that will be offset by lower frequency rates. Our next question comes from the line of Dana Telsey with Telsey Group. Your line is a weapon. Hi, good afternoon, everyone. As you think about the investment spend that you're doing, and obviously the hiring of Steve Baroubae,
Given the growth of the business that you are looking for go forward, what enhancements to operations or processes are you looking for that you are making that we should see whether it's better inventory management, or how you are thinking about expenses or marketing? How do you think about?
that dynamic as we go through 23 into 24. Thank you. Susan- Thanks Dana. First off, we are really excited about bringing on Steve Berube. He has 30 years of distribution and logistics experience, and is really here to help us build out our infrastructure.
He's been a strong leader at some of the best brands in the world, Nike, Lululemon, and Levi's. So we're really excited about having him on board. We're looking forward to making the investments required to scale to a billion dollars plus in net revenue. As it relates to enhancements, this is related to our fulfillment network and helping that out.
We're bringing on different technology and systems to help us automate our processes and work more efficiently. And we, although we are making these investments, as you know, Dana works super focused on building in a disciplined way and being very mindful of our expenses and managing our expenses in a deliberate and sustainable way. And you mentioned inventory management as you know, this is a focus. Getting back to a more ideal state is a focus of ours and we look to do that by the end of this year.
Thank you. Thank you. Our next question comes from the line of Bob Durbal with Guggenheim. I do apologize. God disconnected. It can be just a moment. Your line is out.
I think in terms of the market, it continues to be what we've discussed in the past. I think from a competitive standpoint, we've seen a number of copycats. That's to be expected given
When you have a successful business, people do come after you, and they try to copy you. But where we are is that there's one original. It's Figs, and we are focused on delivering product innovation and continuing to connect with our community. But from a TAM perspective, we're really focused on continuing to create the market as the original, continuing to bring and expand the categories that we're in, and enter new categories.
to really enhance the layering system that we have today. Okay, thanks. And I guess just on the international markets, when you look at some of the early markets that you're in, are those markets for behaving as North American market when you first started the business? I guess when you look at what you're seeing there versus the last ten years, is what I know if you could give us a few insights into really what you're seeing some of those early days of these, you know, the other international markets that you're expanding into. Thanks. Yeah, and some of our kind of leaders.
Our next question comes from the line of John Kerman with Cowan. Your line is now open.
Good afternoon. This is Chris as we were using it on for John . Just one question for us. Just from a cash flow perspective, kind of what the efforts you're making to write size, your inventory position this year. You know, there's the assumption that working capital metrics should improve at some point. Different.
How are you thinking about your cash flow generation in 2023 versus your CapEx needs? Thank you. Following the first quarter, we do expect to generate cash for the remainder of the year. And this is largely a function of reduced inventory buys and also sell through of our current inventory.
Thank you. Thank you. Our next question comes from a line of Rick Patel with Raymond James. Your line is on open.
Thank you. Good afternoon, everyone. Question on what's embedded in the first quarter guidance. Just given the magnitude of upside in the fourth quarter relative to your guidance for that quarter, can you speak to what you might be seeing in the first couple of months of the year that would drive a low single-digit revenue increase? I'm just curious to what extent we should think about macro uncertainty versus...
an element of conservatism. Yeah, and so the first quarter guidance is not necessarily reflective of our growth rate quarter to date, but it's an expectation of our quarter in aggregate. The biggest driver of the deceleration from Q4 is AOB. And so we're expecting AOB to be down more than it was in the first quarter for a couple factors.
mainly lacking the higher penetration of non-scrubs in Q1 of last year that generally carries a higher AUR and UPT. We're lacking a really strong New Balance shoe launch, which boosted AOV through higher AUR. And also, as a reminder, last year we were out of stock on some of our core scrub wear due to supply chain challenges, which boosted our non-scrub wear proportion. Frequency trends expected to remain challenged, similar to what we're seeing in Q4.
in part due to macro, but that's what's incorporated into our first quarter assumption.
Can you also provide color on the new customer ads? Like, did the new customers coming into buy fakes have a similar profile as the ones you acquired during the height of the pandemic? I'm just curious if you're seeing changes in terms of demographics or geographic region as we think about where the new customers are coming from. I'm not seeing. Um.
A lot of changes in terms of demographics or geography. We are continuing to add a lot of new customers to the FIGsfold, which is great to see. We've spoken about recent cohorts just having a little bit of different purchasing trends where they're elongating their purchase cycles and buying more when they do come back. But other than that, they look really similar to other customer cohorts.
in terms of demographics or geography, we are continuing to add a lot of new customers to the FIGsfold, which is great to see. We've spoken about recent cohorts just having a little bit of different purchasing trends where they're elongating their purchase cycles and buying more when they do come back, but other than that, they look really similar to other customer cohorts. Thanks very much.
Thank you. Our last question comes from the line of Noah Daskin with Keybank Capital Markets. Your line is open. Hi, thanks for taking my question. Forgive me if I missed her, but I think you mentioned there's an L.A. store slated to open in the fall. If you could just provide any color on how you're thinking about a potential, you know, on the channel approach to the business with kind of a physical footprint or just how you think about and on the channel approach to the business, presently, would be helpful. Thank you.
Thank you so much for the question. We love talking about this. We've had activations in the past. We've had our pop-up shops. What we've learned from these experiences is that healthcare professionals, they want to experience DIGS in person. They want to touch and feel our products. They want to speak with us about the technical functionality that we provide. We're very excited about our first store. It's going to be in Century City this fall. We're going to be really moving forward on the retail opportunity.
and identifying, you know, store-court, evaluating store formats, identifying the right locations, being really measured about how we expand from a retail perspective. But this is really exciting. And this is going to be the first of many. So, you know, that's from a retail perspective. As it relates to the other channels, you know, we talked a bit about teams as well. Between teams, international retail, these three growth lovers, they really are going to be serving each other. You know, there's not one channel in a vacuum. So, as it relates to the omnichannel and as we report and have...
more channels beyond digital. You know, word of mouth is going to continue to be driven not just by what we're doing digitally, but also what we're going to be doing offline. There's no one channel operates in the vacuum. They're all going to be serving each other, and so we're excited to have these different parts of our business and have them be working in tandem to support the growth long term. Thank you. There are no additional questions waiting at this time, so I'll pass the conference back over to Katrina Spears for closing remarks.
Thank you all for joining us, and we look forward to speaking to you again soon.