Q2 2023 Figs Inc Earnings Call
Good afternoon, ladies and gentlemen, thank you for joining <unk> second quarter fiscal 2023 earnings Conference call. My name is Kate and I will be the moderator for todays 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 art.
Jean Fontana you May proceed afternoon, and thank you for joining today's call to discuss second quarter 2023 results, which we released this afternoon and can be found in our earnings press release and in the stockholder presentation posted on our Investor Relations website at IR Dot where things dot com.
Renting on today's call are Ciena sphere, Chief Executive Officer, and co founder 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. These may include predictions expectations or estimates, including about future financial performance market.
Community or business plan forward looking statements involve risks and uncertainties and actual results could differ materially ease and other risks are discussed in our SEC filings, including in the 10-Q be filed today, which we encourage you to review do not place undue reliance on 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 and key performance indicators, which we believe are useful supplemental measures for understanding our business definitions and reconciliations of these non-GAAP measures to their most comparable GAAP measures are included in our stockholder presentation. We issued today now I would like to turn the call over to Trina sphere, Chief Executive Officer.
Yes.
Thanks, Jean welcome to our second quarter 2023 earnings call. Our strong second quarter results demonstrate the resilience of our business outstanding execution against our strategic priorities and operational excellence we.
We delivered 13% net revenue growth as compared to the second quarter last year, primarily due to the 21% increase interactive customer base as we continue to widen our market leadership position within the health care apparel industry.
We generated strong profitability with Q2, adjusted EBITDA margin of 13, 7% ahead of our 9% to 10% and margin expectation and we delivered free cash flow of 29 million in the second quarter.
In addition inventory is down from peak levels and we are on track to reach our year end target of approximately 25 weeks of supply.
The fundamentals of our business remains strong we operate in a resilient and growing industry. We have the powerful combination of unmatched product innovation and brand authenticity and our business model will yield strong positive cash flow due to the non seasonal replenishment nature of health care uniforms.
Looking ahead, we believe that we are well positioned to deliver long term profitable growth first we have ample room to further build our community and grow share of wallet within the U S. Second we are highly encouraged by the opportunities we see in our international and <unk> businesses and third we are just getting started in retail.
Now I'll dive into our strategic growth pillar.
Beginning with our solutions based product innovation.
We believe that product innovation is one of the largest moats around our business. We have deep knowledge of the health care community, we have the design and technical capabilities to deliver best in class product and we have the trust of the health care community to bring innovation that helps them do their job better each and every day.
Our scrubber business drove over 80% of our net revenues in the second quarter.
Supported by the newness, we continuously bring to market.
And non scrubber, the diversification of our product assortment of proper Larry system contributed to net revenue growth of 25%.
Nearly 40% of our active customers purchased at least one non scrubber item.
Illustrating that are layering system resonates with our community.
Our collaboration with new balance and footwear is a prime example of how we can serve this community in a way that never experienced before.
Our ROE shoe launched in the quarter is engineered for 'twenty, four seven protection support and comfort for your feet.
We also gave a new balanced seventies inspired <unk> seven shoe and upgrade.
Featuring materials and functionality designed specifically for health care professionals.
Both launches drove high sell through rates and sold out in multiple color ways.
Most recently, we made a bold entry into under under scrubbed with underwear for Overachievers.
Making them available in all of our classics colors.
Featuring smooth lines and know a bunch of your writing there not only comfortable but also invisible under our scrubber.
We have a strong pipeline of innovation across fabrication categories and styles that we believe will attract new customers and drive net revenue per active customer as we expand our tam over the long term.
Next I will spend a few minutes on how we're building and connecting with the health care community.
First I'm happy to report that we delivered another incredible nurse's week campaign.
Putting the spotlight on how nurses are the backbone of our society.
We call our nurses are Super Bowl, and we love to celebrate our OSM community.
We also launched our innovate beyond your imagination campaign in early Q2 to highlight product innovation across fixed pro our <unk> fabrication, our hombre scrubbed jumps to which is our first print offering at our new balanced collaborations, including our ROE and our 327 shoot.
These campaigns reflect storytelling, including our innovation lab concept, which showcased how products comes to life, both on shifting off in a fun and unique way. These.
These campaigns rallied our community is we've never seen before with over 2 million views on our own brief react video alone.
The strong response to our marketing as evidenced by the 21% growth we saw in our active customer base in the second quarter compared to Q2 of last year.
Prior to the third highest number of new customers in our company's history leaning into accretive optimization strategy. This is a strong positive indicator for the future growth of our business.
Our highly efficient marketing engine combined with our discipline around first order profitability enables us to maintain marketing spend at 15% of net revenue on an annual basis.
As we discussed in the past, we're making advances in elevating personalization capabilities in marketing as well as our online shopping experience in our mobile app.
We expect these initiatives to drive traffic more efficiently and increase conversion.
Turning to advocacy, which truly set our brand apart.
We furthered our commitment to the health care community with the launch of our first of its kind big advocacy hub and online experience for our community to learn about the most important policy developments affecting them and where they can advocate for real change through things.
The launch of our advocacy hub was supported by a multi page AD in the near time, highlighting the challenges being experienced by health care workers and how are often humans bill would help solve them.
Our advocacy hub is truly unique and enables us to leverage our $2 5 million active customers to create one of the largest bases of grassroots advocacy advocates that we know of we could not be prouder to be leading this effort.
Turning to international International net revenue increased 52% compared to the second quarter last year, demonstrating our ability to build our brand outside of the U S.
We are encouraged by the success of our localization strategies, such as our Canadian Investor events.
As we deepen our presence in the 13 international markets. We previously entered we also recognize that there's a growing demand for big across a number of other countries that we don't serve today.
In response to the strong organic traffic trends, we found our site, we made things available in Mexico, the Philippines, and Saudi Arabia during the second quarter.
Results have far exceeded our expectations, even before investing any marketing dollars to support these countries.
We are excited to advocate our marketing engine to fuel further growth in these markets. We will also leverage our demand insights to determine additional countries that may provide meaningful growth opportunities for our brands.
We have only scratched the surface on building, our international presence and plan to strike the appropriate balance of top line growth and profitability as we do so.
Moving onto our team.
Which is where we sell directly to hospitals and health care institutions.
<unk> is growing fast and tracking to approximately a mid single digit percentage of net revenues, notably this growth has come almost entirely from inbound requests.
Our teams business continues to see demand across universities private practices staffing agencies in hospital departments as well as concierge clinics, which is an area of focus for us that I'll briefly touch on.
People no longer want a one size fits all approach to their call. They want the kinds of smaller more individualized concepts that are popping up across all areas of healthcare that focus on prevention and proactive measures, whether its veterinary care dental our physical therapy or aesthetic people are demanding more accessible regular and specialized care and its Chuck.
<unk> the landscape of health care.
Justice Health care is branching out becoming more specialized localized in consumer is so too is the experience of the health care professionals, just like lay people are demanding more from their provider providers are demanding more from their partners big is their ultimate partner and helping make them look good feel good and perform at their best at brand.
Their businesses are logo is a symbol of professionalism style and technology and supporting their endeavors to pave the future of health care.
So that and we are on track to launch an updated version of our teams technology bought for later this year that will support the growth of this business.
That form enhancements are focused on expanding our product assortments, our teams customers and proving the administrator experience and expanding payment capabilities.
Given the significant tailwind created by the evolution of health care, we are developing a more robust strategic plan to accelerate growth and team.
Next I will provide an update on our retail strategy.
Along with continued progress towards opening our first permanent store in century City. This fall. We've also signed historically for 4000 square foot location on Walnut Street in Philadelphia, which we planned to open in the first half of next year. The store located within two miles of five health care institutions will have a dedicated space to host events for our health care community.
Philadelphia is an ideal choice for a second location has a leading market for health care education, where one in every six doctors in the U S has been trained and.
It was the fourth highest number of healthcare professionals in the U S and is one of our most underpenetrated market.
We are excited to be media or community, where they are and delivering a meaningful experience in environment like they've never seen before.
In conclusion, we are pleased with our second quarter results and how we continue to build our big community of health care professionals, we have assembled a best in class executive team has a proven ability to not only advance our strategic priorities, but also to remain nimble as we continue to navigate an uncertain environment.
We believe that our sustained competitive advantages unmatched product innovation brand authenticity and scale position us well to meet our long term objectives with that I'll turn the call over to Daniel to discuss our financials and our outlook.
Good afternoon, everyone, we delivered second quarter results above expectations.
Strong net revenue growth slowed down to profitability and we generated healthy free cash flow.
In addition, we made progress toward our goal of normalizing inventory back to prior year levels.
Overall, we are encouraged by the resilience of our business given the macro headwinds.
We remain focused on what we can control by executing on our long term strategies, while maintaining disciplined expense management.
I'll begin with a detailed discussion of our second quarter financial results followed by our updated outlook.
Beginning with the second quarter net revenues grew 13% to $138 1 million compared to $122 2 million in Q2 last year, reflecting an increase in orders and higher <unk> we.
We delivered active customer growth of 21%, reflecting our third highest quarter of new customer additions driven by both the U S and international markets. We are also seeing success in our initiatives to drive reactivation rates with an increasing number of customers returning to the brand after amongst 12.
<unk> increased five 5% to $115 compared to $109 in Q2 'twenty two.
<unk> was led by an increase in AUR attributable to product mix and growth in <unk>, which continue to benefit from the expansion of our layering system.
<unk> growth also reflects a higher mix of team sales.
Gross margin for Q2 was above our expectations at 69, 5% compared to 76% in Q2 2022.
The 110 basis point decrease compared to Q2 last year was primarily due to product mix and to a lesser extent higher duties and a higher mix of promotional sales.
This was partially offset by the benefit of our airfreight utilization and reduced ocean freight rates.
Moving to operating expenses.
Selling expense for Q2 was $33 7 million, representing 24, 4% of net revenues compared to 21, 9% in Q2 2022.
250 basis point increase was largely due to higher cost within fulfillment, including a 210 basis point impact from incremental warehouse storage.
To a lesser degree the increase in selling expense reflects international duty subsidy that we put in place in the middle of the third quarter last year.
Marketing expense for Q2 was $20 9 million, representing 15, 1% of net revenues compared to 17% in Q2 2022.
The decrease in marketing expense as a percentage of net revenues reflects the shift to multiple smaller ambassador events in 2023 versus a large single retreat. We held in Q2 2022.
Our shift to numerous smaller events allows us to connect with the community and a more meaningful way better enables us to engage with both existing new and potential ambassadors and creates continuity as we flow these events throughout the year.
Another reason for the decrease in marketing investment as a percentage of net revenues is that brand marketing investments were more concentrated in Q2 last year versus this year.
Our focus on driving digital marketing efficiencies enabled us to maintain a healthy return on AD spend while driving strong new customer acquisition.
G&A expense for Q2 was $34 8 million, representing 25, 2% of net revenues compared to 23, 9% in Q2 2022.
The increase was due to higher salaries bonuses and stock based compensation as we continue to invest in people.
Our net income was $4 6 million or <unk> and diluted EPS for the second quarter net.
Net income was $4 9 million and diluted EPS was <unk> <unk> in Q2 2022.
For comparison purposes, adjusted net income for Q2, 2022 was $6 3 million and adjusted diluted EPS was <unk> <unk>.
Finally, our adjusted EBITDA for Q2 was $18 9 million for an adjusted EBITDA margin of 13, 7% compared to 17, 6% in Q2 2022.
Turning to our balance sheet at the end of Q2 cash cash equivalents and short term investments totaled $185 3 million compared to $170 million in the second quarter of last year.
Inventory totaled $167 8 million at the end of the second quarter, reflecting progress in getting inventory back to normalized levels, while maintaining discipline around promotional activity to protect the long term health of our brand.
Consistent with past quarters, roughly 50% of inventory on hand was more.
Of the remaining inventory, we are seeing a smaller mix from future product launches as planned due to lower receipts as such we expect inventory to decrease more meaningfully in the third quarter than we saw in Q2.
Lastly, we delivered positive cash flow from operations of $29 4 million for the second quarter and continue to expect cash flow to be positive for the remainder of the year.
Turning next to our outlook, we are maintaining our net revenue outlook and are raising our adjusted EBITDA margin expectations for the full year of 2023.
Overall, we remain pleased with the performance of our business, which reflects better than expected results in the first half of the year.
Consistent with the factors, we discussed last quarter, our guidance assumes a challenging macro environment in the back half of the year as well as tougher comparison, new customer growth as.
As we manage through the challenging environment, we remain focused on driving profitability and strong free cash flow, while continuing to make investments in our business to drive long term growth.
Starting with our outlook for the third quarter as we stated on our prior earnings call. We expect this to be the most pressured quarter of the year in terms of year over year net revenue growth due to the timing shift in our product launch and marketing calendars into Q3 last year associated with supply chain challenges.
Our product launches and marketing campaigns are back to a more typical cadence in 2023. In addition, we plan to maintain discipline around our promotional cadence as we prioritize delivering healthy sales growth as a result of these factors, we expect sales to be flat to up low single digits following 25% growth in the third quarter of last year.
We expect Q3 gross margin to be approximately 69%. This is slightly below our long term expectation of 70% plus while we are seeing lower freight rates versus Q3 last year, we continue to sell through product purchased at higher ocean freight rates in the prior year.
Looking at operating expenses.
We expect to leverage selling expense in Q3, primarily as a result of lower storage fees as compared to last year as we move through excess inventory for.
For G&A, we continue to expect deleverage year over year due to higher stock based compensation salaries and bonuses as we continue to invest in people. In addition, our G&A for Q3 last year reflected a 190 basis point benefit due to a change in our accrual methodology for charitable donation.
As such we expect G&A dollar expense to be similar to that of Q2.
As a result of these factors, we expect third quarter adjusted EBITDA margin to be between 13 and 14%.
Turning to full year guidance for the full year, we continue to expect net revenues to grow between five five and seven 5%.
We believe this reflects resilience and our brand given we are lapping 21% growth in 2022 and 60% growth in 2021.
Turning to gross margin, we are passing through the better than expected Q2 performance and now expect the gross margin rate to be about 69% for the year.
In regard to selling expense in Q4, we expect deleverage Judy initial implement implementation costs of approximately $2 million for our fulfillment project.
As a reminder, we estimate costs associated with the implementation and execution of this project to be between 16 and $18 million, we expect to incur the bulk of these nonrecurring costs in 2024.
Based on the outperformance in the second quarter, we now expect adjusted EBITDA margin for the full year 2023 to be between 12, five and 13, 5%.
We expect capital expenditures of between 24% and $26 million for the full year 2023.
This reflects approximately $20 million and fulfillment costs with the remainder being related to software investments in our retail store build out.
In conclusion, the progress we are making across our strategic priorities and our strong market share position within the health care apparel industry positions us to capitalize on the significant growth opportunities that are still ahead.
Such we will continue to invest in these long term strategies, leveraging our strong balance sheet and healthy free cash flow.
Furthermore, we remain confident in our ability to return to a high teens adjusted EBITDA margin as we move beyond fulfillment investments and transitory costs.
With that I will turn it over to the operator to kick off our Q&A session operator.
Thank you.
We will now begin the question and answer session. If you would like to ask a question. Please press star followed by a one if for any reason you would like to remove that question. Please press star followed by a too high.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
To ask a question. Please press star followed by a one the first question will be from the line of Jeremy <unk> with Piper Sandler. Your line is now open.
Hey, good afternoon. Thanks for taking the questions I guess first just on some of the innovation I know you mentioned a couple of things you launched you mentioned the sell out of the rollout I'm curious if you can give us some insight into how the.
Understood before and made some new lab coats.
And then second.
Obviously, some nice gross margin outperformance there, maybe just help us unpack a little bit how the.
The impact of lower freight rates, what kind of flow through the gross margin line over time, and how we should think about promos relates a bit to the back half of the year. Thank you.
Thanks, Ed.
Great to have you on.
So we saw a lot of great product innovation in the quarter as you know a fixed pro is an area that we're really focused on it's becoming even more important as we see the evolution of the health care industry as we discussed on the call a concierge medicine.
Meaningful opportunity for us to expand our presence.
We believe clinics are going to enable individuals to play a greater role in their health care health care is everywhere and people are owning their health care more and more so we're going to continue to invest in fixed trial. When you saw that with our high collar lab coat are high waisted wildlife scrub Trouser, which both received excellent response, but in addition to our existing.
Categories, We're also building new ones and so.
In our goal to completely redefine the experience of being a health care professional we are adding new categories that have never existed and so you saw that with our launch of our under under scribes underwear for over achievers.
We're pleased with the early read early feedback on our under our describes but it's another example of where we are increasing our share of wallet by addressing all the needs of our health care professionals from head to toe with our complete lighting system.
And to your question on the gross margin outperformance, we're really pleased with the results that we saw in the quarter, we delivered better than expected gross margin due to ocean freight as you mentioned, but also product mix and also lower airfreight utilization than we anticipated.
We are expecting that ocean freight benefit to have less of an impact in the second half as were materially bringing down the number of receipts that we're bringing in but we do expect to see that opportunity in ocean freight looking into 2024 and beyond.
With the lower rates that we're getting today.
In respect to your question on promotional cadence, we're planning to keep a similar promotional cadence year over year in the back half.
Given our inventory composition is 50% core classic.
Always on our site always in stock year round and the remaining balance is also a uniform that season lesson never goes out of style.
We don't feel that we need to change our promotional cadence to move through our inventory balance and so we're really focused on protecting the brand over the long term and that's what we're going to continue to do so we're not anticipating any changes to our promotional cadence in the back half of the year.
Great. Thank you.
Thank you.
The next question will be from the line of Dana Telsey with Telsey Group. Your line is now open.
Yeah.
Hi, good afternoon, everyone. The inventory increase was down more than expected. It's nice to see the reduction progress can you expand on what youre looking for in the third and fourth quarters. When we move on and I have one follow up to that thank you.
Thanks Dana.
Getting our inventory into a more normalized position is a big priority for us and as you saw in the second quarter likely.
Like we said, we did bring that down out of the first quarter really represented a peak and we're going to expect to see it sequentially decline from here. So we are going to see even a bigger reduction in the third quarter as we really bring down our receipts in the back half of the year I think it's important to note that we're still going to be delivering a lot of new.
Next to the customer, we're still bringing new product and innovation, it's just going to be in shallower biased and because of that we feel really confident in our ability to get to 25 weeks of supply by year end and bring that inventory down to a much more normalized place.
Thank you and then just following up on the drivers why did you see it sounds it seems like the layering system, whether it's with shoes without a where you're gaining more you call. It cleaner more obviously with.
The mind share of the wallet share of the off to work on and off working on work in terms of what they're doing what what are you seeing and how do you see the health of the consumer moving forward. Thank you.
Yeah, I mean I think from.
The health of the consumer we saw it was great to see our new customer growth up 21% and to your point around <unk>.
Continuing to show strength, which is great to see and that is being driven by tier point non scribes and the expansion of our layering system.
Really interesting metric that.
It is encouraging is that 40% of our active customers have bought at least one non scrub item and so you know.
Not just described company anymore, we really are on our way to becoming an iconic lifestyle brand for the health care community and beyond and so.
We're excited to continue to deliver innovation across the layering system continue to solve problems for our community on shift off shift and all the activities that theyre doing throughout their day.
Thank you.
Thank you.
The next question will be from the line of Brian Nagel with Oppenheimer. Your line is now open.
Hi, good afternoon.
A question for Brian .
So the question I have with respect to EBITDA margins should we saw very nice progress during the quarter.
It sounds like a lot of these headwinds or challenges that we've been discussing over the last few quarters, maybe you're getting a better handle on that good yellow you referred in your comments you reiterated appointed to get back about EBITDA margin and adjusted EBITDA margin in the high teens. So how should we think about the tightening of the trajectory.
What do you see a place here and how long before you see those those are historical EBITDA margins again.
Thanks, Brian as you said you continue to believe we will get to a high teens adjusted EBITDA margin I think it's helpful to look at the different components. So first we think that gross margin of 70% on an annualized basis is achievable as we expand our layering system, we're leaning into <unk>.
<unk> innovation really beyond the scope of what we've done in the past, but and as part of this we're going to likely see some fluctuation in margin across categories, but we're going to continue to drive efficiencies in the core to really invest in this new innovation over the long term, we do expect 2024 to be burdened with.
The Donlin project cost, but we're expecting to move past that in 2025 and the near term we may see as higher cost per order as we invest behind customer experience, but we're going to leverage that scale also is our sales accelerate we believe we can leverage G&A and continue to remain really efficient in our marketing spend.
As we have been I.
I think just taking a step back we're really excited about what we're seeing as our business evolves, we're getting a lot of traction in our layering system, we're growing our customer base and we're in early stages of international and teams and just starting retail.
So our discipline around balancing growth and profitability has really enabled us to maintain a strong balance sheet to push these levers to drive future growth and we're in a super unique position.
To capture the opportunities across global health care, and we believe that we can drive these growth levers over the next several years, while ultimately also achieving a high teens adjusted EBITDA.
Okay.
Okay.
And then the follow up bigger picture perspective.
On the health of your consumer again going back to some of the commentary over the past couple of quarters. It would seem as though there were pressures external pressures on your consumer. So as you look at your consumer Gal you didn't react to innovation colors.
Do you think youre seeing that an overall healthier considerable sausage.
You know I think you are seeing.
Like I said, the new customer growth is really great to see but we also are seeing that our customers are taking a bit more time between purchases on average and.
They're saying, we still love figs, we still love the brand.
To be stretching our dollar a bit more in this macro environment, but when we do come we're spending more and thats, how thats, what youre seeing in <unk>.
And so.
That's kind of how we're thinking about it and we're really focused on is what we can control driving intentional product innovation tailoring, our marketing message with specific creative that's aligning to our customers and continuing to build out our community.
And so we're encouraged by.
Our ability to continue to execute across our strategic priorities.
I appreciate all color. Thank you.
Thank you.
The 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 Trina, perhaps if I could follow up on Brian's question regarding customer engagement, you've mentioned that customer frequency trends are still lagging.
Lagging a bit I was wondering if you could comment have you seen any stabilization in that customer frequency this quarter specifically.
As you launch new innovations into the marketplace are you seeing any change or uptick in reactivation rates on that.
And I guess I can start and then Danielle if you want to take on I think what we're focused on is and youre seeing it in our marketing efficiency, we're really have shifted our marketing to be more focused on all the areas of figs, how we help our health care professionals and their jobs and shifted a bit away from Merck.
Purely around launches the other thing that we're doing is we've upped our game from accretive standpoint, They say cash is king and we do believe that here, but also creative is clean and so really diving into and doubling down on creative and accretive is our superpower. So we're continuing to progress on a lot of what we've talked about in terms of creative.
Aligning with channel aligning with audience and finally, we've made a lot of strides on conversion rate optimization with the launch of <unk>, which has been a really great way for new customers to choose the exact copy exact pant that they need to go and do their job and so those are some of the areas that we're focused on not all.
Only from a new customer standpoint, but also from getting customers to come back and continuously engage with the brand and just building on like Trina said Brook. We did we saw frequency trends come in as expected and I think as we've spoken to there is pressure on the consumer today, but we're really focused on the things that we can do to.
Drive to drive the business forward.
In terms of reactivation it was.
One of the strongest numbers of resurrected customers in the second quarter, and we think that's really being driven by the strategies that we're doing to communicate directly with them. We're utilizing our personalization strategies to really segment and speak to this cohort of customers and were really meeting them, where they are through different social channels, where they're engaging.
And really targeted messaging and I think what's important to notice that we see many of them are still on our MLS and communication channels and so they're still really engage with the brand and we're finding the right messaging to bring them back.
If I could just ask one quick follow up.
Are you increasingly get some momentum behind the teams business I was wondering if you could.
Contemplate how you are thinking about the composition of U S marketplace dollar growth over the course of the next couple of years, what proportion of that growth do you envision coming from individual customers that are coming to your website and purchasing just for them versus the composition of customers that are coming for a team.
<unk> order driving the dollar growth in your business for 2020 for 2025 and beyond.
Okay.
So as we discussed teams is about mid single digits of our business today, but it's growing very quickly. So as we look over the next five years, we do expect that teams business to be a larger proportion of our sales over time.
As Trina spoke to we've been.
Doing a lot to engage with concierge clinics, where we see that they are focused on professionalizing and standardizing their workforce and really focusing on how we can improve our platform experience to better serve them. So we're seeing really strong growth today, which we're really encouraged by and we do expect that to ultimately be a bigger portion of our business.
Over the long term.
Okay.
Thank you. The next question will be from the line of John Kernan with TD Cowen. Your line is now open.
Yes.
Yeah.
Oh.
Yeah.
Sure.
Uh huh.
Yeah.
Sure.
Yeah.
Sure.
Yes, Thank you John .
So looking at selling specifically.
Looking at 2023, we are lapping higher storage fees and driving leverage in the second half.
We expect to see storage expense sequentially decline in the third and fourth quarter and the fourth quarter. We did speak to that that is going to be more than offset by some of the initial investments that we're making in our fulfillment project.
Right now, we expect those costs to be approximately $2 million in the quarter.
We continue to expect that the fulfillment enhancement project to approximate $16 million to $18 million in totality with the bulk of those costs expected to occur in 2024, and so we are expecting to continue to see pressure in that line item next year and overall, we've quantified about 250 basis points of pressure in <unk>.
In 2023 related to those transitory cost within fulfillment, but looking into 2025 and we're past the implementation expenses, we will expect to see selling normalized I think within G&A.
As we discussed we're continuing to invest in our people and I think over the long term, we have a lot of opportunity to leverage G&A from here, but we want to make sure we're making the smart investments to drive growth over the long term and we're going to utilize our strong balance sheet and our free cash flow generation to me.
Sure that were making.
Those right investments that are ultimately going to enable us to scale and grow.
Thank you.
Next question will be from the line of <unk> Patel with Raymond James Your line is now open.
Thank you and good afternoon, everyone I'm, hoping.
You can provide some color on new customer adds just any insight on the contribution of U S versus overseas customers and then second on the team's business about mid single digit percentage of revenue I'm, assuming that's all scrubs, but hoping you can touch on the opportunity for non scrubber within teams as well.
So within the new customer acquisition I think it's really important to note that it was driven by both domestic and international So we're continuing to see a lot of growth in our international business. We spoke to the localization strategies that we're doing in our existing markets are helping to drive growth, but also opening.
New markets like Mexico, Saudi Arabia in the Philippines, which has been a really bright spot in the second quarter domestically.
We're really focused on.
Personalizing, our messaging so that we're match.
Matching the channel to the content to the end consumer and we've seen a lot of success there.
And the second question just.
Okay, Yes, non scrubber within teams I think for us a part.
Part of what we're excited about in terms of upgrading our platform. It is to be able to widen our assortment to our teams and really let them purchase not only just our scribes, but also our polices and our best and our compressor compression socs in our shoes and everything that we offer so that's really exciting I think the other thing that is really exciting about team does that.
If you come to fix and you're buying scribes for everyone on staff right everyone. Within your clinic, everyone. Within the organization. We also give the individual the ability to come back to us and by all the other elements of their uniform directly with us even if it's not part of the teams account.
There's a lot of synergies between our.
E Commerce business and our teams visits and it's exciting to see even when non scrubber isn't a direct teams purchase we're able to capture that through our E comm business.
Yeah.
And then a question on promotions it looks like the second quarter was less promotional versus last year is that a function of nurses week as being very strong or does that reflect the consumers being more active during non promotional periods.
So we continue to follow a similar promotional cadence in the second quarter year over year.
And I think what we saw is that still a little bit of mix shift to these more promotional times, but it wasn't.
It was to a lesser extent that we saw in the first quarter. Our nurse's week event was a strong performer as customers really engaged with our messaging, how we're supporting nurses and giving back to them.
But I would say not not a ton of change on the promotional cadence and what we're seeing from our customer behavior.
Thank you.
Next question will be from the line of Alex <unk> with Bank of America. Your line is now open.
Hi, Thanks for taking our questions I'm curious about the consumer purchasing patterns on return rates can you just talk about how merchandise return rates have trended this quarter and if no changes in that metric have impacted shipping and fulfillment costs.
So we haven't seen a ton of movement on return rates, we did see a little bit of an uptick, but it's mostly driven by product mix as customers are continuing to engage in our newer styles in newer categories and so we see a slightly higher return rate to start but that comes down over time as customers become.
More familiar with those products and we have more repeat customers purchasing them. So I wouldn't say, it's really a time to note on return rates and didn't have a large impact on the quarter.
Got it do you ever give the percentage or a range for that right.
It's not something that we give on a regular basis, but our return rate is one of the lowest in e-commerce and so it's something that really it's a big benefit for us and something that ultimately helps us to drive that really strong profitability that you see.
Got it I have a quick second one just on your sales guidance for the full year that was maintained kind of despite this quarter's beat and the great new customer acquisition numbers Youre seeing.
How are you kind of thinking about the components that drive sales for the rest of the year than like is it <unk> or order frequency or something else you're incrementally more cautious about or are you just being conservative.
Yeah.
So our guidance in the second half reflects a couple of factors as.
As you may recall.
We had very strong new customer growth in the back half of 2022, and so while we're continuing to grow new customer we are expecting the growth here to moderate from the first half of the year. We do really think that our ability to continue to grow new customers on top of some really challenging comps.
Speaks to just how underpenetrated, we are and how much market opportunity. There is ahead of us as it relates to our Q3 outlook specifically, we did have a timing shift in our product and marketing launch calendar.
Q3 of last year. So the Q3 compare is just tough.
In 2023, the cadence is more typical.
Of what we would expect to see.
It's important to note that we as we've discussed we remain really committed to disciplined promos. So we're not buying sales of promo of them, we're really growing in a sustainable way and in addition, we are incorporating the sustained.
Inflationary pressures that we've seen and Thats really kind of the difference between what we're seeing in the second half versus the first half performance.
Okay.
Thank you. The next question will be from the lineup, Matt Koranda with Roth <unk>. Your line is now open.
Hi, everyone. Thanks for taking the questions.
Understanding that the cadence of promotions is not changing for you guys.
But I did notice that <unk> wasn't on the site in recent weeks I'm. Just wondering if there is any significant change we should note in terms of the promotional strategy that you have just if maybe you are clearing.
<unk> in different channels or how we should be thinking about sort of.
The strategy towards promotions in the back half of the year.
Yeah, I mean I think.
<unk> was literally often today gone tomorrow, and it's gone which is exciting I think we're really.
Want to ensure that when we launched products you come and you engage with our products. We have promos at specific times throughout the year and we're being really disciplined around how we.
Offer promotions to our community.
And that is the plan.
Okay.
Okay got it.
And then on teams. It's interesting you had noted even without really playing much offense here at a mid single digit percentage of revenue.
So we should be thinking about.
A strategy that you have to play more offense there in terms of either hiring an external sales force or we're just marketing more aggressively towards the right decision makers on that front to just growth on the <unk> program.
Yes, I think given the growth rate growth, we've seen and how health care is changing and evolving in front of us.
Executing a strategy to proactively drive growth in the future and the cheese business, it's starting with the upgrade of our team platform and making that more scalable, we're creating a dedicated customer experience team that is providing a more.
More.
Close knit white glove experience, we're developing our plan around a more robust outbound strategy and that relates to the marketing as well as sales and so there's a lot that we're doing investing behind this business and we're really excited about what it can be in the future.
Thank you.
The next question will be from the line of Adrienne <unk> with Barclays. Your line is now open.
Great. Thank you very much just three quick question Daniela you talked about kind of starting to see the capitalized average unit costs come down as you move through the inventory can you also talk about sort of when you might have renegotiated some of these big contracts <unk> contracts and whether that's an added potential benefit in the back half life.
Second question is.
I believe you said that teams was mixing up average unit retail and possibly margins. So can you talk about kind of the content of what they're buying there.
How that's driving that.
Our piece of it and then lastly, either China or Daniela can you talk about the fulfillment upgrades. So what what what are the goals. After you make this appointment upgrades is it capacity productivity reduce cost or all of the three thank you very much.
Thanks, Adrian on your first question. So we have seen ocean freight rates come down considerably and we have.
Walked in those rates that are much much more beneficial place than we've been over the past couple of years as.
As we discussed we're not anticipating a ton of benefit from that in the back half of the year because.
We've really materially lowered the amount of inbound receipts that were bringing in as we work to bring our inventory down to that target of 25 weeks of supply.
And so those inbound receipts at those lower ocean freight rates are just going to have a smaller impact on overall gross margin, but we do expect that to be a benefit looking into 2024 and beyond.
On the team side.
We have mentioned that teams as a driver of <unk>.
And really that's through higher units per transaction as these teams orders are.
Bulk orders for hospitals and institutions looking to outfit their workforce.
Cause of that they have a really interesting margin profile and so teams, while slightly lower gross margin because we're offering discounts for those bulk purchases if you will.
Look down the P&L, it's actually a really strong contribution margin profile stronger than our core business, because we're getting efficiencies and outbound shipping on those larger orders and we're really efficient marketing as it's been entirely inbound today and so it's a really great tailwind that we're seeing as we continue to grow this team this business.
As we continue to shift more and do it it has a strong return on our financials as well.
For fulfillment.
Yeah.
So for the fulfillment project.
Really what we've spoken about as we're looking to.
Set.
Set the groundwork for our distribution network and this is going to enable us to scale provide a better customer experience and ensure that we're getting our packages to our customers and the time that they.
They want them and doing that with a really heightened level of customer experience and so that's where we're really focused with the fulfillment enhancement initiative, it's about efficiency speed and ultimately providing a better experience for our customers.
Thank you.
The next question will be from the line of Bob <unk> with <unk>. Your line is now open.
Hi.
Couple of questions for me. The first one is just in the <unk>.
Back half of the year do you see as you guys do some new color launches.
Is there any risk to those type of launches you've had some challenges for the last few quarters on some of the colors. So I'm just curious if you're taking any significant risk there and then the second question I have is just on the new countries.
<unk> had some countries that youre, a little bit more established in.
Is there any major.
Discrepancies around.
What youre selling in some of the countries you've been in for a couple of years now versus some of the newer ones.
Concern for just interested in how the response has been in terms of mix for the reception of the brand.
The newer countries versus some of the other countries.
Yeah in terms of our product innovation and product launches I think what we're really doing here is we're continuing to bring product that solves problems for our health care professionals and whether that product comes in our classic colors or in our new colors.
Our goal is to bring products that people love and so we're going to continue to do that I think we have been really encouraged by what we've seen in non launch days and how we've driven our business through <unk>.
Day in and day out interacting and engaging with our community and having them come even when we're not launching products and I think our evergreen always on marketing is supporting that.
And as it relates to international sorry, Bob I, just want to make sure I got your question right on that.
I guess just on the international side some of the countries you've been in for a little bit longer timeframe. Now are you seeing much difference in the reception and the receptivity of the brand versus some of the newer ones that youre, just entering and just testing it.
No I think we've seen very similar behavior across.
Newer countries as well as ones like Canada, and Australia and UK.
Have we mentioned it earlier, but it's been really exciting what we're seeing with Mexico, Philippines in Saudi Arabia. These are countries, where we just saw the demand we opened up the market. We haven't spent any money on marketing and so that's been really exciting but in terms of what they're engaging with what they are whether it's our scribes really.
Really to come to fix for our Scrubs to start as you gain trust and as you get to know US better you are buying our fleece as youre buying our vast you're buying are under scribes and so that's been great to see and so we don't see a lot of difference between our.
Longer standing countries in our newer ones between product mix.
Thank you.
Thank you.
That concludes today's Q&A session I will now pass the call back over to Trina for closing remarks.
Thank you so much everyone for joining us.
Our second quarter call and we look forward to seeing you on the next one.
That concludes.
Today's conference call. Thank you for your participation you may now disconnect your lines.
Thanks, so much everyone for joining us on our second quarter.