Q1 2023 Figs Inc Earnings Call
Yeah.
Good afternoon, and thank you for joining <unk> first quarter fiscal 2023 earnings call. My name is Kate and I will be the 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 call over to our host Jean Fontana head of Investor Relations Ethics. You May proceed. Thank you for joining today's call.
First quarter.
The results, which were released this afternoon.
In our earnings press release, and the backfill there <unk> very much.
Mike.
I don't want to take that.
Presenting on today's call I see our co founder and Chief Executive Officer, Daniel <unk>, Our Chief Financial Officer.
A reminder, martini call because you might be certain hospitals to support agents in may.
T his predictions expectations or estimates, including about future financial performance market opportunity ambitious plan forward looking statements involve risks and uncertainties and actual results could differ materially.
And other risks are discussed in our SEC.
And the 10-Q.
Filed today.
<unk> you asked me undue reliance on these statements.
She only as of today, we undertake no obligation to update.
Lee will discuss certain non-GAAP metrics and key performance indicators, which we believe are useful supplemental measures understanding our business.
In addition for reconciliations of these non-GAAP measures.
Comparable GAAP measures.
Russell just biotech issued today now voice you turn your call over to Jim <unk>.
Chief Executive Officer.
Thank you and good afternoon, everyone. We are pleased to have you.
First quarter expectations across key financial metrics we.
We delivered profitable growth through disciplined execution of our strategy.
<unk> excuse me, we have bridge inventory level by year end.
While the macro environment remains uncertain.
Five brands and I believe that we will advance our leadership position and to help her narrow industry, while expanding our Tam.
How did you go to the financial highlights from our first quarter net.
Net revenues grew nicely again in.
$40 million as compared to the first quarter last year, we delivered gross margin of 71, 3% and adjusted EBITDA margin of 13, 4% all of which were above our expectation.
Growth was fueled by 22% increase in active customers driven by strong customer loyalty and reflected in record reactivation rates during the quarter as well as new customers.
<unk> revenues were approximately down 1% to $260 due in part to a nearly 2% declining <unk> b and bone frequency versus last year.
These metrics were down year over year. They were ahead of our expectation was.
One macro pressures goodbye now if we continue to advance our initiatives. We believe these metrics will improve.
International continued to deliver strong performance with revenue growth of 45% driven by expanding brand awareness and engagement across our global markets.
I want to thank our team for their unwavering commitment to serving health care professional each and every day.
Also want to thank all of the units for their loyalty.
Continue to support them through our solution based product innovation as well through our efforts around advocacy and giving back.
It's our call at the end of February we continue to build uncle areas.
Proprietary notice that problem engineers, who work with our best selling styles.
Recently launched poetry of jacket exemplify, how we transform customer feedback.
With distinct feature that address the specific needs of health care professionals.
It's also a new jacket has been one of the best performing our pizza and our history.
As we continue to see notable strength in our extended five operating Washington Summit, we are encouraged by both new customer acquisition.
You're eating are finding offering.
The work we've done around that showcases our commitment to serving all health care professionals will continue to rollout of edit sizes across our assortment throughout the year.
Looking at our marketing initiatives in celebration of our 10 year anniversary.
Dave.
Series campaign, giving her health care professionals and she has a choice to grab their favorite adjusting colors.
Right, bringing back our most popular wasn't at all times.
Boy, all health care professionals jumped at the opportunity to purchase these iconic color although unit thing.
Experience them for the first time.
This is a great example of how we create excitement and move their inventory, while maintaining discipline around our discount rate.
Although our recent color launches have not generated the same level of demand at least soft drink.
Got it.
And one of the most effective drivers of customer traffic and excitement.
But international Women's day, we celebrated doctors Patrick.
Patrick Chair of obstetrics and gynecology at Cedars Sinai Hospital. She has got incredible work, even better they didnt cofounded from the fed.
Or for researching women's health is a different day.
You founded and led organization, we were proud to celebrate dawn for Kilpatrick achievement.
Specialty project $250000 towards free medical research.
Commitment to this community has offered a journey of brand strength and remains a key differentiator.
They continue to illustrate that safeguard has industry leading customer loyalty.
At a recent third party brands surveyed ranked highly on grant admit it across several attributes including quality corporate functionality installed.
We also experienced the highest bookkeeping intent I'm responding.
They don't want them to play hard data, indicating that the percentage of customers repurchase takes within one quarter of their initial purchase is two three times higher than for other companies.
Our goal is to continue to deliver the product experience that why is the moat.
It furthers our lead versus everyone else.
To that end I'd like to provide an update on our growth strategies.
As you know we are laser focused on occasion.
Last few years, we've built out of their system and those brands with purpose full functionality and comfort in every product while combining this with our unique cool insight will be enhanced.
Our health care professionals engage with our brands I've been innovation, which is informed by our data and customer feedback.
Recently lost your mind Malacca dollar was designed based on feedback from our customers across their race weekend. We're seeing strong early results and also be docs across social media.
Our three X fabrics, featuring anti static lightweight water. Upon attribute is another example of innovation, resulting from customer requests for bite or we'd all agree that we were.
We'll continue to build our solution based offerings utilizing fabrication, which remain almost entirely from recycled upcycled material.
Our Statesboro office ready collection addresses the demand gap left by traditional apparel company that don't meet the specific needs of health care professional.
We plan to add several new silhouettes and fabrics aren't big Pro line, which is yet. Another example of how we're expanding on him.
Innovation like free apps, and statesboro, rather than we had categories for what we're able to learn and iterate to build out in Washington.
Well, we continue to expect our horsepower represent a high percentage of our overall sales. We are excited about the potential to drive significantly higher net revenue per active customer I addressing a greater portion of health care professionals needs with expanded offerings.
Importantly, our ability to drive revenue nonstop illustrates that health care professionals have been shocked at all to address their lifestyle you beyond the strikes.
Yeah, I'll speak to our marketing strategy.
Crawford Communications Gamble, youre being more intentional and restore it to emphasize our product attribute.
Brand building that showcase our leadership in product innovation, and our relentless support of the health care community.
We're not going to be the first campaign highlights our product attribute this theme was introduced for our launch of the continent jacket and more aligned with future product launches throughout the year.
Our stream of product innovations create a flywheel effect in our business right now as a vital health care professionals go to work each day rang a latest stage they generate new customers and as our base gets bigger and we expect this flywheel effect to multiply.
This is how we have made great efficiency in marketing spend that enables us to invest in new ways to reach our community probably delivering them work has just indicated the market communication around volume destination. He said top of mind amongst the health care community with Evergreen Murphy approach is showing early success in driving stronger traffic on non launch date.
What's enabling that are enabling us to maintain a highly efficient marketing spend our voucher program as an important driver of this organic growth.
We've employed a world localized strategy to better leverage our growing network of influential in Barcelona, I hosting frequent events across North America for the second quarter, the banks won't get a nurse's week event at beyond meat fish, and Toronto and Friday in San Francisco.
Turning to personalization, we are encouraged by the signs we're seeing as our database is growing and we have expanded our calls off rate. We're building on our personalization side that you can more effectively tailoring our communications to every single health care professionals based on their individual needs and wants.
Lastly, we're driving rents and our early thank goodness.
Internationally, we're already seeing the benefits of localization strategies and we're rolling out translations for certain non English speaking countries starting this month.
Continue to build upon our early learnings and well grow our local doctor networks within each market.
Importantly, we're maintaining our investment discipline as we build our presence across the region.
With almost 120 million healthcare professionals outside of the United States, we are extremely energized by the opportunity in front of us.
With this team we remain on track to launch an updated version of our technology platform as we look to elevate our customer experience and expand our available assortment.
Today. This is a small portion of our revenue.
Making sure we need to get a methodical approach to growing this business over time.
This is a significant opportunity that we barely have skincare.
Turning to retail we are on track to open our first store this fall.
We've got a a retail stores will provide a great opportunity for health care professionals connect and experience our products and to engage with each other throughout community.
Operationally, we are committed to making investments that will support long term profitable growth.
We are making progress on our facility enhancement project, which we expect to drive greater flexibility reliability and speed to market across our distribution channel Danielle I will provide an update on that probably would be down sharply.
Also continuously working to diversify our supply chain and the basketball city vouchers.
Always prided ourselves on the strength of our supply chain and we're excited to build the next level of capability as you work with amazing partners that help us bring our vision to life.
In closing we continue to expect growth in 2023 be moderated by a challenging and uncertain macro environment. While we continue to see that the health care industry has greater resilience than other industry. Our health care professionals that are not meeting the higher inflation. We continue to focus on building a stronger loyalty and he actually with our customers So what I need.
Headwinds aside the future, we're well positioned to deliver accelerated growth.
In the meantime, we're managing our business prudently, enabling us to deliver continued profitability.
Overall, we plan to continue to disrupt the landscape of the health care apparel industry and expand our Tam by helping health care professionals do their jobs better.
Yeah, the look and feel great arch it off Jeff had yourself.
We see tremendous opportunity globally, and believe that our product innovation combined with the power of our brands will fuel further market share gains.
We have scale profitability.
And a strong balance sheet with no debt.
We expect to generate free cash flow to support our sustainable long term profitable growth for years to come with that I'll turn the call over to Daniel.
Good afternoon, everyone. We are pleased to deliver better than expected results for the first quarter with strong flow through of top line outperformance, we are making progress against our initiatives, while exercising discipline around expense management.
First to deliver positive free cash flow for the remainder of the year.
We'll begin with a review of our first quarter financial results followed by our outlook.
Beginning with first quarter net revenue grew nine 2% to $122 million compared to $110 1 million in Q1 last year, reflecting an increase in orders, partially offset by modestly lower <unk> well.
Frequency trends in E O V were down year over year, it was better than expected.
Growth in active customers remains robust increasing 22% as we welcome new health care professionals to the state's brand globally. In addition, we continue to see more of our customers who have not purchases in the last year come back to the brand after amongst fault.
Turning to AMD, Besides a decline of one 7% to $114.
Compares to $116 in Q1, 2000, and retail which benefited from an elevated extra non scrubber associated with one of the largest shoe launches as well as supply chain disruptions, causing our stocks in our core search product and.
In addition, a higher mix of sales were derived from promotion again in line with our expectations given the macro environment.
Gross margin for Q1 was above our expectations at 71, 3% compared to 71, 2% in Q1 2022.
The 10 basis point increase compared to Q1 last year was primarily due to lower airfreight utilization, partially offset by the higher mix of promotions and higher duties.
Turning to operating expenses.
Selling expense for Q1 was $31 2 million, representing 25, 9% of net revenues compared to 20% in Q1 'twenty Nikhil.
590 basis point increase was largely due to higher cost of interest on it including a 290 basis point impact from incremental warehouse storage and associated labor necessary to house inventory pull forward.
To a lesser degree the increase in selling expense look like Judy subsidies that we put in place in the third quarter of last year for international sales.
Marketing expense for Q1 was $17 1 million, representing 14, 2% of net revenues compared to 14% in Q1 2022.
Our marketing initiatives enabled us to maintain a healthy return on AD spend all driving strong new customer acquisition.
G&A expense for Q1 was $34 2 million, representing 28, 4% of net revenues compared to 24, 7% in Q1 2022.
The increase was due to the change in accrual methodology, we discussed in our Q3 2022 calls related to charitable donation.
An increase in stock based compensation and the increase in professional fees, including public company costs, such as those associated with the implementation of Sarbanes Oxley World War.
Our net income was $1 9 million or one cent per diluted EPS for the first quarter.
Adjusted net income was $2 5 million and adjusted diluted EPS was one time in Q1.
Compares to adjusted net income and adjusted diluted EPS of $10 5 million and five cents per share in Q1, 'twenty CTO respectively.
Finally, our adjusted EBITDA for Q1 was $16 1 million for an adjusted EBITDA margin of 13, 4% compared to 22, 7% in Q1 'twenty feature.
Turning to our balance sheet.
Our strong cash position, finishing the quarter with $156 million in cash and cash equivalents.
Inventory totaled 180 at the end of the first quarter.
Have you seen it last call, we expect inventory to peak in Q1 and declined sequentially through the remainder of 2023.
Looking at inventory on hand, approximately 55% is comprised of always in stock season, with four styles and classic colors and therefore, it doesn't have significant obsolescence risks and additional 20% of our inventory balances and upcoming styles and colors.
We're making good progress towards getting inventory to 25 weeks of supply by year end, while maintaining discipline around promotional activity to protect the long term health of our brands.
Moving to our outlook.
It was the factors, we discussed last quarter, our guidance assumptions incorporate a challenging macro environment through the remainder of 2023.
We expect these headwinds to continue to attack frequency trends and results in a higher mix of promotional sales.
As we manage through these temporary headwinds we remain profitable and we'll continue to make investments in our business to drive healthy long term growth.
For the second quarter, we expect net revenue growth to be between eight and 10%.
We expect kitchen, <unk> gross margin to be slightly below 68% due to a higher mix of promotional sales associated with our annual they're supposed to goodbye and product mix related to new launches. We expect these headwinds to be partially offset by lower airfreight utilization year over year.
Looking at operating expenses due to higher labor utilization than we previously anticipated. We now expect the warehouse storage fees and associated costs to impact selling expense by approximately 220 basis points in the second quarter.
G&A, we continue to expect deleverage year over year.
And stock based compensation and personnel related costs.
The result of these factors, we expect second quarter, adjusted EBITDA margin should be between nine and 10%.
For the full year, we expect net revenues to increase between five and 7.5%.
As we look at the second half of the year, we expect tougher compares for two reasons.
First we are anticipating a difficult macro environment and second we will be lapping the very strong new customer adds last year.
We expect Q3 to be the most challenging times of year over year net revenue growth due to the shift in timing of our product launch and marketing calendars.
We now expect gross margin for the year to be closer to 69% that'd be pass through the better than expected Q1 results.
Gross margin to improve sequentially in the back half due to timing of promotional calendars and product launches.
Turning to selling expense as it relates to our fulfillment projects you are providing an update on the timing of this initiative the estimated costs associated with the implementation and execution of this project remain between 16 and $18 million.
However, we now expect from credit both of these costs in 2024.
Located at this timing shift we plan to extend it to storage facilities through the end of 2023.
As a result, we now expect selling expense pressure from excess storage and associated costs. In addition to initial fulfillment costs combined to be approximately 250 basis points for the full year of 2023 versus our previous expectation of 300 basis points.
G&A is still expected to deleverage for the full year in part due to investments associated with growing our international <unk> businesses product innovation and an increase in stock based compensation as well as our accrual for future inventory donation.
As a reminder, our G&A for Q3 last year reflected a 190 basis point benefit due to a change due to a change in our accrual methodology for charitable donation.
As a result of these factors and based on our Q1 outperformance. We now expect adjusted EBIDTA margin for the full year of 2023 to be between 12 and 13%.
We expect capital expenditures of between 24, and 26 million for the full year of 2023.
So far approximately $20 million.
But some of the projects with the remainder being related to the software investment and a retail store build out.
We remain a clear leader in health care apparel with significant growth opportunities in front of us.
Our strong balance sheet and ability to generate healthy free cash flow positions us well to invest in our future growth.
Near term, we remain focused on managing our business prudently through macro and cost headwinds we.
We believe we have a line of sight for trying to high teens EBITDA margin as we move past some transitory called fulfillment investments and as we rightsize our inventory.
I will turn it over to the operator to kick off our Q&A session operator.
Thank you.
Our question and answer session will now begin.
If you would like to queue up for a question. Please press star followed by one on your telephone keypad.
Our first question will be from the line of AD Uremic with Piper Sandler Your line is now open.
Hey, good afternoon. Thanks for taking the question I guess first thanks for the update on inventory and when you kind of expect to get to alignment I guess, just maybe looking at some of the promos you ran in the first quarter. How would you gauge your success in kind of closing out the inventory you wanted to close out and as we think about the promotional cadence going forward are there you know how should we think about this.
Tape of that kind of promotional curve as you went through that excess inventory and then as a follow up I know you guys had some really interesting in the base in the quarter. Your lunch read scrub jacket, maybe just any more color on the performance of.
Some of the new Skus launched and kind of how you see that unfolding for the balance of the year. Thank you.
Okay.
Thanks, Ann I'll I'll start with your inventory question. So as it relates to the success of our promotions in the first quarter and what that curve looks like for the remainder of the year you know our inventory was as expected at the end of the first quarter and really getting our inventory into a more normalized position is a really big priority for us.
And we do have initiatives in place to get to 25 weeks of supply by year end I think just as a reminder, we're a uniform business you know our product sees unless it doesn't go out of style, 55% of our product is in core styles and classic colors, which are always in stock always available on our site and so we're confident we'll move through the product.
A reasonable sell through rates and disciplined promotional levels were really focused on.
Balancing protecting the brand for the long term, but the pace with the right pace to move through our inventory balance and so I'd say, John we're going to continue to really keep a similar promotional cadence that we have to the prior year. We did that in the first quarter, we're planning to do that into the second quarter as well, but we are being mindful of mix shift that we're seeing into somebody's more promotional times.
And looking at our inventory balance we have initiatives that we're doing to really work through the balance outside of promotions.
First have you seen shipping times normalized we'd been able to shorten our lead times, which has really enabled us to be more flexible with our inventory planning, we're updating our purchasing to buy more shallow in the future and we're bringing back previous launches of limited edition inventory in ways that feel really new and exciting to the consumer like you saw on the fixed time iconic series.
And with that I'll turn it over to Trina thinks they know and thanks for the question.
So in terms of the read and page jacket. Those were great additions are their cargo ascribe jackets, a pockets Ah yeah.
It's actually one of our most technical scrub jacket that we've launched them and we had a number of other product introductions throughout this year that are super excited about and really resonated well with our community.
To the point about innovation I really want to reinforce how we think about it our biggest product innovation is first and foremost about solving real problems for health care professionals, and we do that with premium products.
Sometimes this isn't just as simple as updating pockets like what you saw with the scrub jackets, adding zippers changing our waistbands.
Two classic silhouettes.
On one hand on the other end, it's building completely new businesses and Youre seeing that right now with our fixed pro line, you're seeing that with our pre X fabrication and youre going to see more going forward on all of these fronts and this all comes back to listening to our customers and creating products that enable them to perform at their best and everything we do.
<unk> is designed with intention and every product we make becomes part of our layering system, which coordinates across our product lines across our color ways and our accessories and it's one of the reasons that almost 70% of our revenue is from repeat customers and.
And to Daniel's point, when we think about our inventory levels, they're not impacted by the amount of newness and innovation that we're able to deliver to our customers new our new launches and keep our customers engage with our brand whether they're purchasing the product that we just launched like you saw with the reading of the page jacket or whether they are coming back.
To buy their favorites are core or other products that have existed on our site.
And so as we think about innovation that's happening in fixed every single day 24, seven 365 days a year.
And it's driven by solving real problems and the most creative comfortable and functional way possible and that's why we're where we are and that's this is a huge differentiator for us.
Thanks, so much.
Thank you.
Our next question will be from the line of Alex Sow with Bank of America. Your line is now open.
Hi, Thanks for taking my question can you. Please elaborate on the quarter to date trends that you've seen and also how L V conversion and customer purchasing purchasing frequency have trended since the end of the quarter.
So our Q2 guidance is not necessarily reflective of our growth rate quarter to date, but really it's an expectation of the quarter's performance in aggregate given our main event of the quarter. Our nurse's week is actually kicking off today, we still have a lot of vol.
Liam in front of us and we're cognizant of that in the guide. So we're not speaking specifically to two trends intra quarter today.
Yeah.
Got it. Thank you and then just really quickly can you talk a little bit more about the team's business percent of mix and any progress in signing up more customers like what percent of the assortment is currently available versus you know what you want to make available through that program just any quantification around that would be really helpful.
Sure you know our teams business is smaller today, but there's a massive opportunity in front of us a.
15% of health care professionals receive scruggs received their uniforms from their institution and so we're really excited about this opportunity and we're on track in terms of upgrading our platform.
And then to incorporate more availability across our assortments.
You know, it's going to enable more types of institutions to participate and be a part of the fixed brand from.
From hospitals to schools to med spas, the concierge clinics private practice.
So we couldn't be more excited about our chance talk warm everything that we're doing to help standardize and professionalize them you know medical teams across across the U S and across the world.
Thank you.
Thank you.
Our next question will be from the line of John Kernan with TD Cohen.
Your line is now open.
Yeah.
Excellent. Thanks for taking my question and congrats on Oshkosh corner.
Daniela can you talk to the path back to that high teens.
Adjusted EBITDA margin previously it was in the twenties, obviously theres been a lot of changes.
Question is that original target came out but you are giving is pretty specific.
Specific detail on some of the ex selling expenses related to inventory and fulfillment costs. I was wondering how are we thinking that we should think about the sequencing of that path back to the.
So high teens adjusted EBITDA margin.
Definitely so based on what we see today, we believe we have significant opportunity to drive EBITDA margin expansion over the longer term and so in 2023 as we spoke about we're seeing crusher from a few factors first we're seeing transitory gross margin pressure.
Sure a couple of hundred basis points due to the combination of promo mix and also freight related to sell through of inventory that we purchased last year.
Secondly, we're seeing approximately 250 basis points of selling pressure, mostly from excess storage fees moving to 2024, we do have the bulk of the 16 to 18 million and incremental costs related to the fulfillment enhancement project, but excess storage fees are going to largely go away. So net net we will see.
Some more pressure on that in 2024 versus 2023.
All that being said our core businesses high margin replenishment, driven highly profitable and cash generative in a normalized state. There's a lot of short term impacts that are creating pressure, but the fundamentals of our business remain strong and over the longer term, we continue to expect gross margin to.
Approximate 70%, we're gonna aimed to keep marketing expense at around 15% of net sales selling is going to normalize in 2025 and beyond and looking further into the future. We do expect as we accelerate growth that G&A is also going to be able to leverage from where we are today. So ultimately our goal is really to.
Ensure that we're making the right decisions for the long term, while sustaining our strong profitability profile today, and we feel really confident in our ability to do so.
Excellent that's helpful and maybe train that you could talk to customer acquisition and retention costs.
You know what you said you plan on keeping marketing expenses relatively.
Flat as a percent of sales, but I'm just curious in terms of near term marketing trends it looks like.
We're gonna expense per active customer ticked down a little bit from where it was.
And year over year. So just curious what youre seeing from a marketing spend in an acquisition or retention perspective. Thanks.
Yeah, I mean, I think it's been really encouraging we've seen our customer acquisition trends over the last number of quarters and it's incredibly strong I think the similar the same dynamics that we've always talked about remain to be true how do we acquire customers. It's mainly word of mouth right every fixed.
Customers are walking Billboard acquiring that next customer for us that's a trend that drives our efficiency to the levels that you've seen you know over the last number of years.
And that's why you know over 60% of our traffic is organic and the second thing that we have that many don't is the replenishment nature of our business and so almost 70% of our customers are repeat that we're not you know acquiring for the first time and so those two dynamics really drive what we.
Would call a paradigm shifts right flipping that paradigm onto pad, where as we grow as we scale, we can become more and more efficient now if we wanted to drive that you know are way down we could but our goal is to keep that Danielle. It's point, our marketing is around 15% as a percent of sales, which are the direct to consumer or almost 100.
Digital company.
Many havent been able to pull that off so we are proud of our ability to keep acquiring customers at such a.
Sufficient level and do it while bringing more and more health care professionals into the fixed family.
Got it thank you.
Yeah.
Yeah.
Thank you.
Our next question will be from the line of Brooke Roach with Goldman Sachs. Your line is now open.
Good afternoon, and thank you for taking our question tree and I was wondering if you could start by talking about the drivers of the record reactivation rates that you saw in the quarter what was it that brought those customers back to the brands now and are they engaging in any specific types of new innovation or promotional or.
Activity that they didn't in the past.
Yeah, but I think it is a function of.
Our repeat frequency has been extended a bit and so youre seeing that show up where customers are spending a little bit more time between purchase and it's not that they're leaving things right. They are just spending a little bit more time before they come back and shop again, I mean, I do think it's a function of a few things it's definitely a function of our innovation.
Products every single week and our customers are coming back it's driving traffic, it's driving high if it's driving excitement and bringing our health care professionals back to engage with us a bit on the promotion side, we're seeing more customers engaged on that level, just given the environment and given what's happening from an.
<unk> perspective, but we feel really good as you know macro pressures subside over the long run that.
Given how much bigger are bases given how much our customers are requiring the position that we're gonna be in as we you know as a macro normalizes over time, we've never been in a stronger position and it's really exciting to see and you see it in the customer acquisition you see it in the reactivation and you see it as well.
You've seen as the the frequency is normalizing as well.
Great and then maybe a question for Daniel Daniel You mentioned airfreight recapture as a driver of some of the outperformance in gross margin in the quarter can you quantify the benefit that airfreight was Q1and then perhaps help us understand what airfreight quantification is embedded within the update at 69.
Per cent gross margin guide for the year. Thank you.
Yeah. So as expected we are anticipating to see better airfreight utilization year over year. It was one of them.
The benefits year over year from the first quarter. It was also came in better than we expected and so continuing to drive lower airfreight utilization as a reminder.
We're not bringing in really much product at all inbound via airfreight today, but what we are doing is selling through them product that was air freighted in 2022, that's already in our balance so inclusive in our gross margin guide of just below 69% for the full year we've incorporated.
<unk> continued benefit that we expect to see from lower airfreight utilization over time.
Yeah.
Great. Thanks, I'll pass it on.
Thank you.
Our next question will be from the line of Matt Koranda with Roth M. Can your line is now open.
Yeah.
Hey, guys. Good afternoon, thanks for taking my questions.
Just maybe wanted to see if I could get it re engagement from a different angle.
Maybe could you quantify or maybe just qualitatively discuss how big is the pool of.
Lapsed the active users that you have to pull from.
What does that mean for marketing efficiency on a go forward basis.
Okay.
So.
It's definitely been.
What we've been saying is trina spoke to before as a record number of reactivation and so we have people in our customer base, who am I just kind of those frequency trying to expand it as we see a little bit of an increase in days between purchase they are waiting longer and we see them coming back in March 13th 14th 15th are definitely on the marketing side.
We're targeting those customers through our personalization strategies and focused on providing them with messaging and content to drive them back to the site and so it is definitely an opportunity for us in the future to continue to drive more of those reactivation is overtime.
Okay, Great and then just one more on the inventory if I could you mentioned 25 weeks is still the goal towards the end of the year. Just curious if you could maybe kind of level set us on what you expect in terms of cadence to get there or is it just a steady drop through the rest of the year or are there going to be chunkier periods around some of the promotions roadmap.
As weak.
Or whatnot, just kind of level set us there.
Yeah.
So as we discussed the first quarter was a peak in terms of inventory and we do expect it to decline from here.
<unk> are pretty kind of just sequential decline there isn't a ton of lumpiness and we've planned kind of our future purchases to get to the 25 weeks of supply by yearend, but there isn't a lot of choppiness to speak to before them.
Okay, Great I'll leave it there thank you.
Yeah.
Yeah.
Thank you.
Our next question will be from the line of Bob <unk> with Guggenheim. Your line is now open.
Hi, just two questions from me. The first one is are you seeing any change in competitive pressures.
Hmm.
And then the second question that I have is can.
Can you just elaborate little bit weren't international takeaways, what you've learned so far as the growth that you're seeing.
Thanks.
Alright, Thanks, Bob So as we think about competition if competition didn't exist, we wouldn't be doing our jobs.
Favorite lines, but competition is healthy right, if a sign that youre doing something worth copying and I really believe that but I also believe there's only one spot for first place in big plans to remain in that seat for decades to come.
Are we evolving to stay ahead, how do we plan on remaining as the number one brand in the health care apparel space first and foremost product integrity and innovation.
We are light years ahead of our competition in terms of our development research innovation and production, we have been working with our health care professionals for 10 years on fit style functionality and we have the manufacturing partners. So that we can stay agile increase extraordinary.
Secondly, and this point is it is something that I'm passionate about we have the scale. We are 10 times larger than our closest competitor and our marketing budget alone is bigger than the revenue.
Third we're profitable and what this means is that we have resources to continuously get better faster smarter across all areas of our business.
And finally, we have brand love intangible brand love.
I've mentioned this on calls but this is what we built for 10 years it can't be replicated in a day by any competitor our relationship with our community is deep and our brand trust is unmatched.
We're the only brand in the health care apparel space that has tapped into what it means to be a human and health care.
As it relates to international I think you saw the growth in the quarter, we feel really great about our progress in the markets that we're in and then we're going to continue to localize across markets.
And youre seeing that as we talked about translations are actually coming this month for non English speaking countries and that's something that we're super excited about but localization isn't just about translation. It's also about how we communicate with our health care professionals and around the world and in a way in which they want to communicate and engage and so this is a big priority for us and we're just.
Getting started and we talk about penetration, we have 10% market share in the U S with a fraction of that internationally and so we have a huge runway ahead of us and we're excited to keep connecting with the 118 million healthcare professionals outside of the U S.
Thank you.
Thank you.
Our next question will be from the line of Dana Telsey with Telsey Advisory Group. Your line is now open.
Good afternoon, and nice to see the progress I should think about the supply chain I think either Daniela Karina, where you had mentioned it in the diversifying the supply chain how far along are you what the what will mean go forward whether in terms of how you manage inventory with a cost and then with the fulfillment enhancement.
Program, what should we be looking for as guideposts, along the way that will lead to improved margins. Thank you.
Yeah.
Thanks, Dana as it relates to the supply chain, we're really taking advantage of this opportunity.
To lay the foundation with new supply partners, and where are we focused we're really focused.
First and foremost an innovation right. That's our lifeblood. We're also really focused on flexibility on scale consistency and reliability and we.
We are in the process of diversifying further not just around country, but also around how.
How we can make the best product across our layering system and deepening our partnerships with the supplier.
The buyers that we already have and building new partnerships around the world as it relates to the fulfillment project, we are on our way too.
In terms of this initiative and I think Daniel I don't know if you have any other points.
I think for the fulfillment enhancement initiative, it's really going to enable us to drive flexibility and reliability and ultimately improve the customer experience.
So we're going to set the foundation for us for future distribution expansion as we think about potential distribution centers in the east coast or internationally in the future and so over the long run it's going to enable to drive efficiency and scale, but there's also a lot of benefits as it relates to the experience that we're providing.
Our customers and we'll be sure to update you along the way as we get deeper into that project.
Just one last thing on the Nam scrubbed, where the.
Rate of growth there versus the past anything to note on non scrubbed and the lifestyle product and looking at that this quarter and go forward. Thank you.
Yeah, I mean, I think our view around our non <unk> business is that they're all tied together.
We have a really holistic and intentional view around the entire layering system.
It's meant to actually to be layered so our categories arent really competing with one another they are really complementing each other so they add value by being part of someone's uniform. So really as you think about the uniform of thought I know, we'd break it out scrubbed and non scribes, but it's all supporting each other so if you're wearing things youre most likely not just.
Wearing a set of Fig scribes Youre also aware under scrubber, you're bringing our best or our jacket and our hope over time is that you're wearing the full layering system on chip off shaft head to toe and so you might see some of these categories fluctuate in growth.
But our goal is that the remaining a healthy percentage of the total and that's the intention and that's what you're seeing.
The only other thing I would add is that as much as we're known.
We're known for our scribes right and I think we're getting known over time, especially with our repeat customers are cutting back on their second or third or fourth purchase for these other.
But these other pieces are first time customers, 85% of them are buying or buying just described so that's kind of why you're seeing that growth rate in the quarter, but also just as a reminder, dana at last year.
In Q1 2022, we saw.
And I'm normally high kind of non scrubber percentage is we were out of stock on some of our core scrubber products and we also had a really strong new balance launch so theres, a little bit of year over year comps going on as well.
Thank you.
Thank you.
Our next question will be from the line of Rick Patel with Raymond James Your line is now open.
Thank you good afternoon, and congrats on the strong execution.
Can you talk about replenishment trends I believe at the time around the IPO. It was around 90 days, but its about a month longer now.
Guidance assumes that this trend stabilize or does it reflect frequency continues to stretch longer.
So I think to Scott's frequency continues to be a bit pressured by the macro environment, but that days between purchases has stabilized from the last quarter I think it's important to note that a portion of kind of the increase that we've been seeing here.
Is that we are reactivating more customers and as customers extend their purchase lifecycle.
And.
That metric that higher reactivation.
That has customers coming back after 12 months and that's just inherently going to drive this metric up I think from here, there's a lot of opportunity for us to drive frequency higher over the longer term as we've discussed we're really focusing on product innovation and expanding our layering system, we're taking steps to our marketing strategy is to drive higher engagement.
Through personalized messaging through tailored communication.
As well as really amplifying product education and value.
So we're still early in these initiatives. So we're not factoring in a lot of upside into our guide from here, but a lot of opportunity for us to improve this over the long term.
Can you also talk about the outlook for <unk>, but what's the right way to think about the puts and takes as we consider the mix of business versus your.
Your expectations for consumer behavior during promotional times.
But for a O V I V.
And I think spoke about we expect it to be kind of flat for the remainder of the next three quarters and I think what's really great is we're continuing to see higher <unk> and we're continuing to drive that metric higher as customers.
Expand and purchase more into our layering system.
However that is going to be pressured in the near term by a lower AUR as we are seeing that higher promotional mix, but over the long term. It gives us confidence in our ability to continue to drive <unk> and ultimately it will be up from here in the future.
Thanks very much.
Thank you.
Our next question will be from the line of Brian Nagel with Oppenheimer. Your line is now open.
Sure.
Hi, good afternoon.
Gross Nu X progress.
My first question right.
My first question, just a bit of a follow up but with regard to shipping costs.
So the gross margin of dry bulk win in Q1, but maybe update your gross margin guidance for the year, but as always we're getting now.
Shipping disruptions Huawei and how should we think about the ultimate sort of say benefits to fix if either you know mentioned before Danielle with less reliance upon airport, but then also just lower shipping costs.
'twenty three.
Some commentary beyond 'twenty three.
Yeah.
Yeah.
And so as we've discussed we are seeing lower inbound rates for both ocean and air and we're also driving better air utilization.
In 2023, we're continuing to sell through inventory.
Inventory that was largely brought in in 2022 at higher Ocean and air freight rates and so net net we're seeing a benefit and airfreight utilization year over year, that's still being offset a bit by.
Higher ocean freight rates, but as we look at.
Further into the future looking into 2024, we do think there's a couple of hundred basis points of gross.
Gross margin pressure both from freight, but also promo mix that we'll be able to recapture over the long term.
That's very helpful. Sorry about the background noise due to Europe and the second question I got a follow up with regard to the better.
The board.
Gauge what you've seen recently.
Is that more as youre looking at this hybrid.
I guess, maybe if you wanted if you could help size how.
How big of a shift as the spin we have been also.
Is it do you think it's more time.
Tied to timing or are you seeing this court.
Respond well some of these new products, you're watching on the innovation side.
Yeah.
Yeah, I think you know as you think about what's happening with the environment more broadly for consumers and then I'll talk a bit about what's happening within our community that are both impacting health care professionals. So as you know and economists are telling us the macro environment continues to be challenged consumers have.
Their stimulus checks and they move through their savings layoffs are happening across industries.
Consumers aren't save mode and inflation is creating additional pressure those factors are impacting our health care professionals, but on the other end there are dynamics within the health care environment that gives us a lot of confidence and you know about our communities buying behavior and what.
What we're seeing is that the health care community has re energized and they're getting back to work.
Since 2020, our customer has been fighting a global pandemic, that's taken a meaningful toll on them in the Covid fog is lifting and we're entering a new era of medicine.
We're talking to a healthcare administration hospital Ceos every day and there has been an uptick in hiring and wages in staffing levels and zooming out over the long run.
There's going to be it continue to be an incredible need for health care professionals.
They are the fastest growing job segment, and they're an incredibly attractive customer base.
Due to a number of factors, including stable incomes.
The wages as we've discussed there are jobs are incredibly purposeful and as discussed at the stable and growing industry. So that's kind of the zooming out the bigger picture and then to your point you know everything that we do from a product standpoint from a marketing standpoint, that's kind of layering on top of how the.
The environment is evolving over time.
Thank you I appreciate it.
Thank you.
Our next question will be from the line of Noah is that skin with Keybanc capital markets. Your line is now open.
Yeah.
Hi, This is chomping a docker on for Noah just a quick one for me could you expand more on the upcoming virtual presence any updates around that first store that's opening through Q and I guess, how are you thinking about an omnichannel approach to the longer term and maybe evaluating any other potential future locations.
Yeah.
Thanks for the question.
We are we are on track to opening our first permanent store. This fall as we've seen with our pop ups and Activations that we've had in the past our health care professionals are obsessed with bags and love Experian guys experiencing us in person they want to feel and touch and experience our products they want to learn more about our brand.
Why we have five hour lines around the block with any physical activation or pop up that we've done and so we're really excited we're really excited that.
That you know we're opening our store and we have a plan to open more in the future. We'll give you more details on all of that going forward. But this is this is the future right. The fact that we only have one channel today.
With over half a billion in that revenue layer on top of our DTC channel International layer on top teams layer on top retail there is so much opportunity in front of us.
Thank you.
Thank you.
Our next question will be from the line of Adrianne, yet with Barclays. Your line is now open.
Thank you very much just two quick questions I guess the first one is on extended sizing I'm wondering if you can share with us kind of visibility on how much. It has aided in new customer acquisition and then Daniela. My question is really on modeling the 16 to 18 million fulfillment in 2024.
It was gonna be spread pretty equally over four Q1 Q2, we expect now that the <unk> 'twenty 'twenty four and then I guess the $2 50 of excess storage fees should we just assume that that is negated kind of a wash between moving.
The total expense into 2024 offset by the 250 excess storage this year. Thanks, so much.
Right.
Sure as it relates to extended sizing this.
With a long time coming we're super excited to bring <unk> to our health care professionals, we're seeing 5% of new customers engaging.
In our extended sizing and we've only really incorporated a few styles. So we're really excited to bring it across our assortment.
And continue to give our health care community not just a few of our core styles, but all of them. In addition to the full layering system. That's really the goal and we're going to do that over time, but.
But you know they exist for everybody and everybody and that was our campaign and it is a we are the most inclusive brand in the world or we aim to be because that's that's what this brand is all about is for all health care professionals, and all often humans where effects.
Now as it relates to your question is on the settlement enhancement initiatives. So we are now expecting to incur the bulk of the cost of the $16 million to $18 million in incremental expenses in 2024.
And that will be spread mostly in the first half with some trickling into the third quarter as well.
And the 250 basis points basically from them the move of the fulfillment enhancement project into 2024, we are seeing 50 basis points benefit in 2023, the differential between the 300 basis points of incremental expense, we spoke about in our past call in there too.
<unk> hundred 50 basis points, we're now seeing in excess storage and fulfillment expenses.
Oh.
Thank you.
There are currently no additional questions registered in the queue. At this time, so I will now pass the call to Trina for closing remarks.
Thank you so much. Thank you all for joining US we look forward to updating you on our next call and hope you have a great night.
Yeah.
That concludes the fix first quarter fiscal 2023 earnings call. Thank you for your participation you may now disconnect your lines.
Thank you for your participation you may now disconnect your lines.