Q3 2024 Figs Inc Earnings Call
Thank you for standing by and good afternoon. Thank you for attending today's Big third quarter fiscal 2024 earnings Conference call. My name is Reagan and I'll be your moderator today, all lines will be muted during the presentation portion of this call with an opportunity for questions and answers at the end if you like to ask a question. Please press star one on your telephone.
Pat.
Speaker Change: I'd now like to pass the conference over to our host Tom Shaw Senior Vice President of Investor Relations. Tom You May now proceed.
Tom Shaw: Good afternoon, and thank you for joining us to discuss <unk> third quarter 2024 results, which we released this afternoon.
Tom Shaw: Can be found in our earnings press release and in this shareholder presentation posted to our Investor Relations website at IR Dot <unk> Dot com.
Tom Shaw: Presenting on today's call are Trina spear, our co founder and Chief Executive Officer, and Sara <unk>, Our Chief Financial Officer.
Speaker Change: As a reminder remarks on this call that do not concern past events are forward looking statements.
Speaker Change: These may include predictions expectations or estimates, including about future financial performance market opportunity or business plans.
Speaker Change: Forward looking statements involve risks and uncertainties and actual results could differ materially these and other risks are discussed in our SEC filings, including in the 10-Q, we filed today, which we encourage you to review.
Speaker Change: Do not place undue reliance on forward looking statements, which speak only as of today and which we undertake no obligation to update.
Speaker Change: Finally, we will discuss certain non-GAAP metrics and key performance indicators, which we believe are useful supplemental measures for understanding our business.
Speaker Change: Definitions and reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in the shareholder presentation, we issued today.
Speaker Change: With that I would now like to turn the call over to Trina.
Trina Spear: Thanks, Tom I'll start today with an overview of our third quarter results, where we had a number of impactful brand and product wins balanced by a few areas of opportunity in the quarters ahead. I'll then provide an update on some of the foundational initiatives that we have been focused on implementing this year, which we believe will better support and enhance how and where we deliver our game changing product to our health care professional.
Trina Spear: Finally, I'll highlight how our strong balance sheet and cash flow provided the flexibility to invest in the core return value to shareholders and continue to disrupt the industry.
Trina Spear: At the elements of the quarter, our topline performance was supported by an expansive top of funnel marketing campaign strong pinnacle innovation and positive signs around our core scrubber.
Trina Spear: Are the clear leader in this space and continue to be encouraged by positive trends around frequency and traffic. Additionally, we remain in the early stages of capitalizing across the emerging growth drivers of the business, including international team and community hub.
Trina Spear: Areas, where performance fell short of expectations largely stemmed from our overall footwear positioning and changes to our promotional timing and <unk>.
Trina Spear: We had Q3 specific delays in stock outs and popular style. We also underestimated the impact of removing the category from our Q3 promotion.
Trina Spear: Regarding timing or back to school promotion was shifted later in the calendar. This year, partly due to the timing of our Olympics focus and we believe we lost some of our historical brand spotlight given the crowded promotional backdrop.
Trina Spear: While the impact of these factors were slightly more than expected and are factored into our expectations for Q4. They are all areas in our control and we are taking action from a margin perspective gross margins were better than our outlook driven by the lower footwear next on the expense side, we experienced the outsized impact from the Olympics investment in fulfillment transition costs that we outlined on our last call.
Trina Spear: We also saw some higher than planned ramp up costs at our new fulfillment center and the shipping impact from lower order value.
Trina Spear: Overall adjusted EBITDA margin finished below plan and what we believe will be the trough margin quarter for our business.
Trina Spear: Diving a bit further into the business a key focus for US. This year has been on how we can better combined incredible storytelling of are often human with product newness and innovation.
Trina Spear: Goal here was to become a little less transactional in our marketing and shift to becoming more inspirational to our customers through a top of funnel approach Ah.
Trina Spear: A concept that we are passionate about is the intersection of sports culture in health care, where we bring a distinct point of view that put their unique spotlight on our community. We previously outlined our work to outfit and support 250, plus members of the team USA medical team for the summer Olympic and Paralympic and Paris from late July through early September we became the first brand.
Trina Spear: However, I'll set the health care professionals supporting any countries Olympic athletes with a rallying cry of building bodies that break records.
While the performance of our pinnacle product and a team USA collection was one of the clear standout in the quarter. We continue to believe that the true measure and impact of this investment will be delivered over time.
Trina Spear: We followed the Olympics with an activation around the U S. Open tennis championships in September with the same thoughtful attention to how health care plays a pivotal role in sport, we partnered with the U S open to Chief Medical Officer, and director of Biomedical services to share stories, both on and off the court.
Trina Spear: These campaigns highlight we believe the brand has an opportunity to play a bigger role around sports and culture, and we will look to execute some of these lessons and ideas as we also IR commitment to the 2026 and 2028 Olympic game.
Trina Spear: We are also focused on how things can uniquely own those key moments in the year that are important to the health care community.
Trina Spear: While our timing for this event was not optimal to share. The overall approach to back to school is indicative of how we will execute around these moments. This is more than just the promotional period on the calendar, but rather an opportunity to focus on medical school students and their needs as the next generation of health care professionals.
Trina Spear: Our campaign focused on nine students that embody the future of the industry with over 10% of our current customers in schools. This is a great opportunity to develop powerful brand engagement that can extend over their careers. More recently, we continued our ongoing work around breast cancer awareness.
Trina Spear: Here, we highlight inspiring stories from these three often humans in breast cancer survivors as we strive to fight together against this disease. This is our most integrated BCA approach ever clear messaging authentic partnerships highly relevant timing and impactful product all of which is indicative to how we drive impact across our community on the product side.
Trina Spear: This year has been foundational as we strive to better serve our customers by focusing on reducing friction points from product to distribution.
Trina Spear: We have discussed part of the foundation includes the important work, we're doing to standardize our fit.
Trina Spear: A hallmark of fix there have been opportunities to elevate it even further through a consistency and inclusivity. Ultimately it is about trust and this is an area, where we are committed to exceeding expectations going forward.
Over the past few quarters, we have standardized our corporate blocks for all new product and optimize the assortment for all women's and men's sizes, serving every body type globally, while some minor transitions of legacy product are ongoing we are excited to begin actively communicating our fit positioning in January. This will include our work to ensure our customers' shopping experience with streamlined with improved tools to find.
Trina Spear: The right fit and have confidence in their selection.
Trina Spear: Certainly great fit becomes even more important as we look at 2025, we plan to introduce new fabric innovation to serve a broader range of use cases for our community.
Trina Spear: An effort that couldn't have been done without locking down fit blocks this year.
Trina Spear: Serving our customers also means the consistent delivery of our goods as we scale. We successfully completed the transition of our fulfillment center in August and now have 100% of our goods flowing from Arizona. This state of the art highly automated center is designed to increase our flexibility reliability and efficiency as we drive to $1 billion plus business.
Trina Spear: I will discuss the near term financial implications as we ramp this facility, but we expect to have the ability to leverage expenses here over time as we focus on building an efficient global framework, we plan to add a Canadian distribution center in the second half of 2025.
It is our largest international market and we expect this facility will drive quicker localized service and meaningful cost savings from duties and freight importantly, this facility will differ from our work in Arizona and will require an immaterial investment.
Trina Spear: At product execution, we continue to thoughtfully designed and partner to drive a greater range of products that will positively impact our customers' lives. This year, we took a closer look at some of the areas of medicine that our brand has not touched historically, providing opportunities to drive inspirational stories with clinical product.
Trina Spear: Each quarter, we've had a distinct focused across some of the most extreme conditions, starting with Formula One racing in Q1 Wildlife Conservation in Q2, and most recently the team USA medical team capping off the year, we are highlighting the world of high altitude paramedic rescue with Dr. Renata and extending our extreme line of product to service those needs away from the more.
Trina Spear: Ball confines of the indoors.
Trina Spear: Really engaged in go to market expressions are deciding to pay tribute to the industry peak brand interest and ultimately drive engagement across our core business.
Trina Spear: And as alluded to earlier, we are on a journey to broaden the impact of the storytelling is we provide a greater range of product solutions in 2025.
While footwear results had some specific Q3 impact we were incredibly excited to evolve our partnership with new balance during the period, we've been working with the brands in 2018, largely focused on making updates to existing style. The throughput for seven model. However is the first time, we have created a unique silhouette with a brand designed and developed for the needs of health care professionals.
Trina Spear: To address the unique environment and physical demands experience on a ship. The 3447 provides a mid salt to handle 12 hour shifts on their feet extra grip and the outflow that prevents slipping on hospital floors and water resistant materials to protect from contact with a variety of liquids in these environments. The details even extend down to the model number which represents figure.
Trina Spear: On a beeper.
Trina Spear: Overall, we see this as a great example of how things can use collaboration as a tool leveraging existing idea to bring great solutions to our customers.
Trina Spear: As mentioned at the outset, we are early in our journey to find new ways to better serve our global customers.
Trina Spear: It starts with our international opportunity wherever 80% of our global health care professionals reside yet make up only about 15% of our total business today.
Trina Spear: Our reported <unk> growth of 17% was lower than our recent trend reflects an 11 point negative impact from the reclassification of duty subsidies, which will have normalized after the current quarter. Additionally, we are up against an incredibly strong 81% growth rate last year, where we benefited from the full market entries of Mexico, and the Philippines, both of which are already too.
Trina Spear: Our largest global markets.
Trina Spear: Nonetheless international dollars in mixed both reached a new high for our business and we continue to see positive signs across a number of measures, including customer acquisition the performance of men and the traction of our newer markets.
Trina Spear: Overall, we are now in 33 countries with 10 of those enter just this year as we look ahead, we have developed an internal framework to support and prioritize how we approach future market.
Trina Spear: Asia remains one of our most untapped opportunities with current distribution and just the Philippines and Singapore, The Japan market remains a priority highlighted by over 5 million health care professionals in the country are highly concentrated population into consumer who gravitates towards technical products are ongoing groundwork here will support our efforts as we look to open new Asian markets.
Trina Spear: In 2025 and beyond.
Trina Spear: Our teams business as another opportunity to widen the aperture of the brand providing tailored solutions to a range of large organization concierge clinics in international institutions, while we continue to see good traction here. This has been strictly an inbound effort to date, where these customers reach out to us and we set up a solution.
Trina Spear: Shortly our top of funnel actions are planting seeds of growth here as well.
Trina Spear: Conjunction with our Olympics campaign that teams business lead surge during the month of August, but we see bigger opportunities ahead and team I recently had the privilege to be a keynote speaker at the ortho summit in Las Vegas with over 500, orthopedic health care professionals in attendance not only was it humbling to see how our brand has it been elevated within this community, but also how eager these large.
Trina Spear: These are to partner with US. This is an area, where we need to be more proactive and we're building outbound sales team that will be charged with building out new relationship.
Trina Spear: And as we have indicated we see an outsized international teams opportunity ahead, given some of the traditional buying habits and some of these market.
Trina Spear: Looking at our Nathan push into retail we officially opened our second community hub in Philadelphia with an official Grand opening in September as we previously outlined this location quadruples the size of our initial century city location to provide fresh opportunities to engage with customers with one in every six U S. Doctors trained in the city and five health care institutions located near the store we are excited.
Trina Spear: To continue our learnings here and look forward to seeing some of you at the store tour next week, we will continue our test learn and apply and win approach in 2025 and expect to open a few additional locations during the year. Our plan is to explore a range of format and location types that optimally allow us to serve the local communities.
Trina Spear: A key role for big this to always find ways to better serve and connect with the health care community to achieve this we believe it is paramount to be agile in our thinking embracing ideas and change that align with the speed of the industry.
Trina Spear: As such today, we are announcing a $25 million minority investment in <unk>, an innovative new company founded and led by fixed cofounder Heather happen.
Trina Spear: <unk> to launch within the next six months <unk> offers a multi disciplinary education platform for health care professionals.
Trina Spear: Like the original inspiration for Biggs outlooks to transform a large fragmented outdated industry through AI technology, and our revolutionary platform, while more details will be announced about <unk>. When its platform launches. We also expect to work with Audi in ways that will enable us to receive a range of benefits across marketing community engagement data and AI we believed.
Trina Spear: This investment gives us a stronger foothold in today's rapidly evolving tech environment, which will significantly expand the ways that we can serve our customers and most importantly improved their experience of being in health care professionals with our strong balance sheet and cash flow generation. We are excited to have the flexibility to drive the core fixed business returned value to fix shareholders through our recently announced share repurchase program.
Trina Spear: And invest in innovative <unk> ventures like odd as we think about the fourth quarter and our positioning for 2025, we will continue to prioritize our efforts through the lens of our customers and how to best serve this incredible health care community our expectations in the near term are tempered as we look to make disciplined decisions across what will likely be a dynamic holiday backdrop.
Trina Spear: Looking ahead the foundation of our business is strong across product storytelling and experience and we are excited with how these initiatives will fuel our growth ambition.
Trina Spear: Before handing the call over I would like to officially welcome both there and Tom to the <unk> team both have incredible background in the branded consumer space and I'm excited to partner with them as we set and execute against our growth agenda and continue our work with the investment community I'll now pass it over to Sarah to discuss the quarter and updated outlook.
Sarah: Thanks, Tina and I appreciate the kind words before discussing the results and our updated outlook I wanted to start with a few observations from my first three months in the role it.
Sarah: It has already been an incredible experience being part of the team and brand that rallies relentlessly behind health care workers.
Sarah: Recently had the opportunity to connect with members of our health care Advisory Board, who collectively provide a powerful voice of what it takes to be a health care professional the challenges they face in their professions and a unique role that we can play as a brand that's touched and inspired by these amazing stories and I'm humbled to play their part in our journey to celebrate and <unk>.
Sarah: <unk> awesome human as they look at the business side. Several items are clear, we must continue to lead with premium product and innovation that both delivers on the high bar, we have set and strive to address unmet needs.
Sarah: <unk> laid out some of the foundational efforts here this year like fit in service.
Sarah: And I am excited to add additional rigor and process around areas like inventory management to refine how and when we invest in breadth and depth of product and color we.
Sarah: We need to grow our brand awareness and bring more new health care professionals into our community. This requires a disciplined approach to how when and where we engage and optimizing the assortment for our customer.
Sarah: And we must evolve to meet the customer across a diverse range of channels, which is why we will remain laser focused building on our work internationally in teams and our community hubs to get it easier the ingredients to both stabilizing our performance returning to topline growth and methodically rebuilding margin.
Sarah: And I look forward to working with all of you on this call as we strive to show progress across these objective.
Sarah: Now onto our third quarter performance net revenues decreased 2% to $142 million below our expectations for 1% growth, primarily given the footwear dynamics and promotional timing at Trina outlined.
Sarah: <unk> decreased 5% to $108 driven by a combination of factors, including lower units per transaction higher discounts and returns and the accounting reclassify weighted to duty subsidies for international customers.
Sarah: On the positive side, we experienced higher year over year purchase frequency for the second straight quarter.
Sarah: Compared to the same period last year active customers for the trailing 12 months period increased 4% to $2 7 million, while net revenues per active customer decreased 3% to $205.
Sarah: Looking at revenues by category scrap were increased to present, representing 84% of net revenues for the period, we saw positive trends in both our core styles and colors.
Sarah: As well strong ongoing receptivity of new limited edition styles.
Sarah: This performance also reflected the impact of a tighter overall assortment from our inventory initiatives, including a reduction in year over year color launches and stock outs of some of our successful first half launches.
Sarah: Non scrubber declined 16%, representing 16% of net revenues our footwear business is a key driver in this decline and missed expectations given the following factors.
Sarah: Our decision to exclude the category from promos versus prior year event.
Sarah: Delay in the expected timing of our new 3447 months and out of stocks in one of our strongest performing retro styles.
Sarah: Now some of these factors will extend to Q4, we remain very confident in our product assortment and brand partnerships.
Sarah: Titus footwear, we are also in the process of reinventing and upgrading select non scrubber lines like our fixed pro which are impacting our results as we phased down our assortment. Additionally, we were comping, a particularly high proportion of non scrubber ourselves during our Q3 promotions last year.
Sarah: Gross margin for Q3 contracted 130 basis points to 67, 1% coming in ahead of expectations for the period the decline in the year over year gross margin rate was driven by higher discounted sales and to a lesser extent product mix shift related to limited edition scrubber.
Sarah: While we continue to see and expect some adverse mix impact we did experience some offset this quarter from the performance dynamics within footwear.
Sarah: Our selling expense for Q3 was $38 6 million, representing 27, 5% of net revenues compared to 22, 6% in Q3 of 2023.
Sarah: The increase in the selling expense rate, primarily reflects higher fulfillment expenses associated with the transition to our new center in Arizona.
Sarah: As a reminder, we expected approximately $13 million of total transition costs. This year across our P&L with the majority recorded in the selling line. These cost materialized relatively in line with the plan, which we expect to be recoverable in 2025.
Sarah: While we remain pleased with our team's execution of this transition and are excited to leverage the facility's capabilities over time, we did incur higher than anticipated post transition expenses as we ramped the operationalization of this facility. Additionally, we experienced higher shipping expenses driven by lower <unk>.
Sarah: During the period.
Sarah: Partially offsetting these pressures results continue to include the accounting reclassification related to duty subsidies for international customers from selling expense to net revenue.
Sarah: Marketing expense for Q3 was $28 5 million, representing 23% of net revenues compared to 13, 4% in the year ago period.
Sarah: The increase in marketing expense as a percentage of net revenues was primarily due to our strategic investment in outfitting the team USA medical team at the Olympic games during the quarter.
Sarah: G&A for Q3 was $35 5 million, representing 25, 3% of net revenues compared to 25, 5% last year the.
Sarah: The decrease in G&A expense rate was primarily related to lower stock based compensation expense, partially offset by a write down of assets at our prior distribution center.
Sarah: Mining these items, our adjusted EBITDA for Q3 was <unk> million dollars with an adjusted EBITDA margin of three 4% compared to 17, 2% in Q3 of 2023.
Sarah: Again, the majority of this year over year margin decline was planned given the outsized impact of the marketing and fulfillment investments.
Sarah: Net loss for the third quarter was $1 7 million or diluted EPS loss of <unk> <unk>.
Sarah: Compared to third quarter 2023, net income of $6 1 million or <unk> <unk> and diluted EPS.
Sarah: On our balance sheet, we finished the third quarter with a record amount of cash cash equivalents and short term investments of $281 7 million along with no debt.
Sarah: Inventory declined 14% year over year to $123 4 million and is down 27% on a two year basis.
Sarah: We have made significant progress reducing year over year inventory over the past five quarters through disciplined buys and a narrower color assortment.
Sarah: This includes work to date on methodically working down the remaining inventory not aligned with our go forward fit parameters.
Sarah: We expect this process will continue into 2025 with negligible impact to the P&L.
Sarah: At the same time, we see opportunities to be more surgical and our buys as we deliver future innovation and optimize breadth and depth across a range of items and colors.
Sarah: On our last call, we announced the authorization of a $50 million share repurchase program. During Q3, we repurchased approximately $7 million worth of shares at an average price of $4 89.
Sarah: Ending the period with approximately $43 million remaining under our authorization.
Sarah: Capital expenditures for the third quarter totaled $4 $2 million with the majority related to the Buildout of our new fulfillment center.
Sarah: And finally, we delivered strong free cash flow of $18 4 million in the third quarter and $37 $1 million year to date.
Sarah: Now turning to our outlook.
Sarah: We are adjusting our full year 2024, net revenue outlook to negative 1% to flat growth compared to 2023 and versus prior guidance of flat to positive 2% growth. The lower range reflects both the performance of Q3 and a more cautious stance on the holiday period, including a more conservative expectation.
Sarah: And for our important Black Friday, cyber Monday event.
Sarah: From a technical standpoint in Q4, we wanted to call out two items as you consider the year over year comparison.
Sarah: We expect a favorable net impact following last year's duty reclassification, including the ongoing baseline impact this year to be offset as we lap a gift card breakage benefit in the year ago period.
Sarah: On the margin side, we expect full year gross margin to be 150 to 170 basis points lower than the prior year narrowing our prior range of down 150 to 200 basis points.
Sarah: We expect our largest drag for the year, we will continue to be mix, primarily given the impact of newness and limited edition styles within scrub were.
Sarah: Given the recent underperformance of non scrubber and particular with lower margin footwear, we do expect a somewhat more muted impact from mix relative to our prior outlook.
Sarah: Similar to Q3, we also expect higher discounts for the year.
Sarah: As we look at the fourth quarter, we continue to expect a relative gross margin improvement from the year to date trend.
Sarah: Embedded in this assumption we are planning for an outsized benefit from duty drawback claims filed for the past two years given our international demand is first shipped to the U S and then to the international customer.
Sarah: This benefit will help offset the ongoing headwinds of sales mix during the period.
Sarah: We are also updating our full year adjusted EBITDA margin to approximately 8% compared to the prior range of 95% to 10%.
Sarah: A portion of this reduction reflects our updated topline view, which will impact the expense rate in each of our SG&A bucket relative to our prior outlook to.
Sarah: To help offset we plan to prudently manage our near term expenses, while ensuring we remain on offense from a strategic investment standpoint.
Sarah: The greatest incremental expense pressure is expected in selling expenses as we continue to absorb higher fulfillment center costs as we ramp operations and planned for lower <unk> again this quarter.
Sarah: Turning to the fourth quarter, we would note the abnormally low selling expense rate comparison from the prior year as we plan this year's rate to be more in range of our recent quarters as well as the Q4 2022 comparison.
Sarah: While we plan to provide our fiscal 2025 outlook on our Q4 call in February I wanted to outline a few high level consideration.
Sarah: The current year has two well documented expense headwinds that will become tailwind. This includes the approximate 13 million transition from our fulfillment center and the outsized level of marketing investment.
Sarah: Supported by these factors, we have conviction and improving our adjusted EBIT margin.
Sarah: Extend will be dictated by our work to stabilize our top line and as we more fully assessed a range of investment opportunities.
Sarah: Additionally, our strong balance sheet provides a range of opportunities to support our core business returned value to shareholders and find disruptive opportunities in the industry.
Sarah: Overall, we are optimistic that our investments in positioning enable us to extend our leadership position in the years ahead and fortify our mission to better serve our customers that serve others with that I will turn it back over to the operator for Q&A operator.
Speaker Change: Thank you so much we will be now moving into a Q&A session. So if you want to ask a question. Please press star followed by one on your telephone keypad.
Speaker Change: You move your question press the Star followed by two again to ask your question Press Star one.
Speaker Change: As a reminder, if you are using a speakerphone. Please remember to pick up your handset before asking a question.
Speaker Change: Also the preliminary questions from one question and one follow up question. We will now briefly pause as questions are being registered.
Speaker Change: Okay.
Speaker Change: Our first question comes from Dana Telsey of Telsey group.
Speaker Change: Your line is now open.
Hi, Good afternoon, good afternoon, everyone, Hi, Trina and nice to meet you Sarah.
Speaker Change: Do you think about deep.
Speaker Change: <unk>.
Speaker Change: The issues that happened this quarter and basically for 2024, given the transition year.
Eddie.
Speaker Change: Continue into 'twenty, five whether some parts of our operations and what enhancements and improvements.
Speaker Change: Yeah.
Speaker Change: The initiatives in 2024 become tailwind from 'twenty five and then I just have a follow up.
Speaker Change: Thanks, Dana great to hear from you.
Speaker Change: Think as it relates to the things that are working.
Speaker Change: And where we're focused first on products right, we're exceeding our customer expectations by delivering consistent innovation, we talked about how we've refined our fit in the second quarter.
Speaker Change: We're going to continue to have that roll out through the rest of the year going into 2025. This.
Speaker Change: This year, we had a full standardization of our fifth improving.
Speaker Change: Our fit tools and we're launching that campaign next year.
Speaker Change: As it relates to marketing side and campaigns were coupling this innovation with top of funnel marketing.
Speaker Change: And really bringing together, a storytelling product and timing to optimally align for our health care professionals and.
Speaker Change: And continuing to celebrate our OSM humans, and finally, we're investing in our future and investing in our growth levers.
International continues to grow and scale. Our teams visits is a huge area of focus.
Speaker Change: We build out our outbound sales strategy there.
Speaker Change: Community hubs now have we have to we're going to be opening a number of community hubs next year as well and so I do think.
Speaker Change: A number of things that we've been building will pay off in 2025 and beyond.
Speaker Change: Got it and then when you think about the potential for tariffs going forward.
Speaker Change: How much of your merchandise is imported.
Speaker Change: We imported from overseas, how much from China, and how do you think a potential offsets there.
Speaker Change: Yeah. So from a tariff perspective, our finished goods are not coming from China.
Speaker Change: Yeah.
Speaker Change: Given the political environment.
Speaker Change: We've operated in different environments over the last now 12 years and.
Speaker Change: Also have operated under Trump administration in the past and so.
Speaker Change: We're going to continue to be nimble across our supply chain.
Speaker Change: No.
Speaker Change: Are you aware of what's happening and you know and continue to optimize across all of our suppliers to bring in the highest quality goods to meet the needs of our health care professionals.
Speaker Change: Thank you.
Speaker Change: Yeah.
Yeah.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Rick Patel of Raymond James.
Rick Your line is now open.
Speaker Change: This is Josh.
Speaker Change: Just filling in for Rick I was hoping to dig in a bit on the U S numbers.
Speaker Change: So I was wondering if you could provide more color on like any net.
Speaker Change: Net customer adds in the U S.
Speaker Change: Trying to give us.
Speaker Change: Bigger picture on how the U S customers transacting like if youre seeing any pullback in spend I know you attributed the decline to.
Speaker Change: Two footwear components. So I was wondering if the footwear component was largely in the U S. R. It also impacted international as well.
Speaker Change: Sure Yeah. So the decline in our U S business in Q3 was due to those specific issues that are fully within our control, but we talked about so footwear inventory positioning sorry, footwear inventory and pricing and the timing of our back to school promotion.
Speaker Change: Wanted to give some context here. We're also one quarter removed from growth in our U S business. So I think that's important to note.
Speaker Change: And we're very focused on.
Speaker Change: Looking at the U S business and really focusing on what's in our control and the inputs are what's in our control.
Speaker Change: If we do if we continue to execute.
Speaker Change: As we know we will the output the outputs will follow over time and so.
Speaker Change: That's really.
Speaker Change: The reason for the Q3.
Speaker Change: The Q3 decline as it relates to the U S.
Speaker Change: Thanks, so much.
Speaker Change: Thank you.
Speaker Change: Thank you.
Our next question comes from Bob <unk> of Guggenheim Bob.
Speaker Change: Your line is now open.
Speaker Change: Hi, good afternoon.
Speaker Change: Two questions I think.
Speaker Change: The first one is just the branding brand awareness levels from the marketing campaigns do you have any data around sort of some of the progress that you've made.
Speaker Change: With that campaign.
Speaker Change: In terms of either.
Speaker Change: <unk> brand awareness on aid et cetera, and then just.
The second question is just on the.
Speaker Change: The pressure.
Speaker Change: Could you just detail a bit more around.
Speaker Change: What's driving it and how can you start to grow.
Speaker Change: Again, okay.
Speaker Change: Looking for.
Speaker Change: Sure. Thanks, Bob.
Speaker Change: I can speak to the Olympics campaign, and our brand awareness and then I'll pass it over to Sarah to talk about Adobe. So as it relates to the Olympics. This was the biggest boldest campaign, we've ever done in our history and it exceeded our expectations. This was a win for the brand.
Speaker Change: I wanted to just say you know this wasn't a short term play we've talked about this in the past the goal behind the campaign is to drive long term brand awareness and brand love that will pay dividends over the long run we saw.
Speaker Change: Incredible data points that point to that over 1 billion earned media impressions, we had really strong increases in brand search and site traffic. Our teams leads surge during the period and so.
Speaker Change: Really feel good about that.
Speaker Change: The Olympics campaign or the product that we launched during during the Olympics campaign sold out really quickly. It was actually one of the big lessons. There was that we should have bought more.
Speaker Change: There was a lot more demand than we planned on.
Speaker Change: As it relates to.
Speaker Change: Looking at some of the work that we did pre and post.
Speaker Change: The campaign for those who saw our commercial.
Speaker Change: It takes hard to build bodies that break records.
Speaker Change: The purchase intent increased notably.
Speaker Change: Really do feel like.
Big win.
Speaker Change: Definitely lessons in terms of buying behind big moments.
Speaker Change: And.
Speaker Change: Really ensuring that we gain those benefits and capitalize on the benefit of top of funnel marketing over time.
Speaker Change: And then I'll take the piece on <unk>. So <unk> was down there is a few dynamics at play there one of them is the reclassification of the duty subsidies and we will annualize that in Q4 and that shouldn't be an impact into 2025. Another portion of it is the higher discounts and then Dana.
Speaker Change: NAMIC within that is the higher discounts are driven partially by our team's business.
Speaker Change: So that has a higher discount rate, but that's more than made up for in expense for it to be an accretive business. So as that portion of our business increases we will continue to have that impact and then the other piece is really just on keeping our inventory clean so when we need to work down in certain pockets of inventory that gets <unk>.
Speaker Change: <unk> items will use the section of our website for Austin today gone Tomorrow, and that's just a normal part of our business.
Speaker Change: So I think those are the main dynamics on <unk>.
Speaker Change: Thank you very much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from.
Speaker Change: Brooke Roach.
Speaker Change: Goldman Sachs Brook. Your line is now open.
Speaker Change: Good afternoon, and thank you for taking our question Trina you mentioned the different engagement with the back to school promotion versus your initial expectation.
Speaker Change: Sarah you mentioned, some higher discounts as well can.
Speaker Change: Can you talk a little bit about the customer price elasticity of demand that you're currently seeing and your promotional plans for holiday 'twenty four and how you think about that into 2025. Thank you.
Speaker Change: Yeah.
Speaker Change: Sure as it relates to the thanks for the question as it relates to the price elasticity.
Speaker Change: We are seeing.
Speaker Change: Some inconsistency that we saw.
Speaker Change: Third quarter, we're being cautious as we go into the fourth quarter as we look at the promotional calendar I do think we're actually seeing a lot of.
Speaker Change: Positives as it relates to non promotional days, we're seeing engagement there that people are willing to come in and buy figs full price and we saw that during the Olympics and we saw that post Olympics and so that's really great to see I think.
Speaker Change: We are just being cautious as we look at the rest of the year.
Speaker Change: And the other key thing here is that we talked about in the past brokers repeat frequency our customers are coming back to us.
Speaker Change: More.
Speaker Change: We're starting to see more wins on repeat and we saw that in the third quarter.
Speaker Change: We continue to see that.
Speaker Change: Going into the fourth so.
Speaker Change: Do you feel like that's a great indication of things to come but are being cautious just given the environment and given.
Speaker Change: What we saw in the third quarter.
Speaker Change: Great and then if I could just ask a follow up for Sarah. Thank you. So much for providing some of those initial 2025 Guardrails you mentioned that the extent of improvement of adjusted EBITDA margin will be dictated by investment opportunities and stabilizing the top line can you provide a little bit more commentary around how you are.
Speaker Change: King about the range of outcomes, there and what the key investment priorities might be as you look into next year that could offset some of those recapture wins.
Speaker Change: Yes, definitely so I think we've outlined in some of our remarks, where our opportunity is and that's really around continuing to have premium product and innovation I think theres opportunities to elevate our go to market strategy and we're going to continue to invest into.
Speaker Change: Reaching our customer.
Speaker Change: New and diverse ways of connecting with them. So I think those would be the areas that we continue to invest into to stabilize the business and returned to growth.
Speaker Change: We're not giving out.
Speaker Change: 25 guidance at this point, we'll give that out closer in February, but yes, I think that the key components that we've talked about is that the marketing expense should normalize as well as the $13 million in transitory costs should go away and then we're going to continue to work on setting up for 2025 and with greater.
Speaker Change: We have a large number of opportunities ahead of us and the rate at which we invest and those will impact how we set up for 2025.
Speaker Change: Great. Thanks, so much I'll pass it on.
Rob: Thanks, Rob.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Brian Nagel of Oppenheimer.
Speaker Change: Brian Your line is now open.
Brian Nagel: Hi, good afternoon.
Speaker Change: So I have a couple of questions just to understand better.
Speaker Change: Third quarter results.
Speaker Change: First off with respect to.
Speaker Change: No sorry.
Speaker Change: Eight inch.
Speaker Change: <unk>.
Speaker Change: Specific.
Speaker Change: We're in touch upon upon sales growth.
Speaker Change: In the third quarter.
Speaker Change: Should we interpret that to.
Speaker Change: To some extent out of stock issue.
Speaker Change: Or was it was it something else and then my second question.
Speaker Change: On expenses.
Speaker Change: So it sounds like.
Speaker Change: With the new facilities now running at a higher expense than you initially thought so I guess I would call.
Speaker Change: And how should we think about that expense going forward and are there any type of like one time events in there. Thank you.
Speaker Change: Okay.
Speaker Change: Yeah, great. So in terms of footwear, there were several dynamics that were happening.
Speaker Change: We did exclude footwear from our promotional event this year and we were up against quite a bit of footwear in our sample sale last year.
Speaker Change: We were also delayed the launch of our 3447, so that impacted performance and then we were out of stock in a key style that we're looking to get back into stock in quickly. So those are some of the dynamics that impacted footwear in Q3.
Speaker Change: And then your next question what was the question.
Speaker Change: Expense.
Speaker Change: Jason's question cardboard.
Speaker Change: Yes, great.
Speaker Change: And so outside of the transition costs, we did see some higher.
Speaker Change: Post transition costs and.
Speaker Change: Some of that is really around learnings that we have on labor allocation as well as some inefficiencies in our returns processing. So we think that those are things that we are within our control that we can continue to go after another piece of the higher expense is also due to lower <unk>, that's putting pressure on our costs.
Speaker Change: Our unit on shipping.
Speaker Change: Those are the two dynamics there.
Speaker Change: So sorry, just a follow up on that first one.
Speaker Change: Good luck.
Speaker Change: But if you look at absolutely could you say.
Speaker Change: Can you talk a good work for the company would have been here.
Speaker Change: Where the kind of breakout for workers.
Speaker Change: Uh huh.
Speaker Change: Yes, we don't give footwear specific guidance and we were down year over year, and footwear and that is causing a lot of the decline in year over year for non scrubber.
Speaker Change: We do believe that with the <unk>.
Speaker Change: If we didn't have the misses in footwear in the promo we would have met our expectations for the quarter.
Speaker Change: Okay. That's helpful. I appreciate it thank you.
Speaker Change: [laughter].
Speaker Change: Thank you.
Speaker Change: Our next question comes from Lorraine Hutchinson of Bank of America.
Lorraine Hutchinson: Good afternoon.
Lorraine Hutchinson: Oh. Thanks, Good afternoon, you called out higher marketing as an outsized pressure on 2024, as we look to 'twenty five and beyond.
Speaker Change: <unk> level, a percentage of sales that we should think about as a more normalized marketing spend.
Speaker Change: Yeah, I think we'll be able to come back with more details on specific levels of marketing for 2025, when we share our outlook in our next call.
Speaker Change: Think of it that we've had pretty outsized in that we will return likely to normalized levels with some refinement based on where we see opportunity to invest in the business and continue to stabilize top line.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question comes from Matt Koranda of Roth capital.
Speaker Change: Matt Your line is now open.
Speaker Change: Okay.
Speaker Change: Hey, guys.
Speaker Change: Just curious about the.
Speaker Change: So it is built into the fourth quarter sales outlook is that related to footwear still being out of stock is that mix and promotions in terms of the donlin assumption and then what do we need to see to kind of get that will be based upon the merger.
Speaker Change: Yeah. So as we think about the Q4 guidance. Unfortunately Q3 did.
Speaker Change: Performed below our expectations, though we are taking a cautious stance on the holiday period our.
Speaker Change: Our guidance does reflect the footwear trends that we will expect to see into Q4 and it is also reflecting the inconsistent promotion from Q3.
Speaker Change: Connected to that Black Friday is a really big portion of our business in the quarter. So we do think it's prudent to be cautious.
Speaker Change: And all of those footwear trends are incorporated into our outlook for Q4.
Speaker Change: Okay, and then just on.
Speaker Change: The brand campaign that you ramp around the Olympics and chemistry and it may be.
Speaker Change: Get your take on how long that takes to translate into demand like what's the length of time as a rule of thumb that we should think about between sort of awareness and that brand building exercise that you're done the turns to engagement on the conversion.
Speaker Change: Any thoughts there.
Speaker Change: Yes, I think we've seen a lot of what I think we've seen a lot of that play out we see that in our search is up there is similar number of searches for figs that they are prescribed is really showing that we own the category. Our traffic is up I talked about our team's leads being up.
Speaker Change: Our email subscriber list is up.
Speaker Change: All of those dynamics and what I would call leading indicators are up year over year.
Speaker Change: And we look to see.
Speaker Change: The outputs of those of all of that work play out over time, and it's somebody will say top of funnel campaigns.
Speaker Change: Return results over six months in many cases, they return results over a year's right. The credibility of having this partnership being the first company ever to outfit team USA medical team, so really big deal in.
Speaker Change: Many many organizations have come to US now, saying, we want to work with you we want to partner with us. So I think this is it.
Speaker Change: <unk>.
Speaker Change: Incredible.
Speaker Change: Formalization of.
Speaker Change: Really who we are as a brand how we show up in the World, who we're going to work with in the future and I think it will it will accrue benefit and value over the very very long term plus we also are outfitting team USA vertical team for 2026 Winter Olympics in Milan 2028 in L. A in our backyard, which we're super excited about so.
Speaker Change: I think.
Speaker Change: Top of funnel marketing combined with product innovation.
Speaker Change: Is our strategy and it's the right strategy.
Speaker Change: It will help us win over the long run.
Speaker Change: Okay I appreciate it guys. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Nathan further of Morgan Stanley.
Speaker Change: Nathan Your line is now open.
Speaker Change: Hey, everyone. Thanks for the question first off given the performance of the Olympic marketing campaign.
Speaker Change: Or are you thinking about balancing between some of these bigger brand building events going forward and more kind of your traditional bread and butter market.
Speaker Change: And then as we think about the marketing cadence over the next few years does that mean this could be a little bit lumpier as you move through some of these larger campaigns and then more of a normalized level.
Speaker Change: Okay.
Speaker Change: I think over.
Speaker Change: We're going to continue to be opportunistic right I think having this type of campaign is an anomaly. We don't look too there is nothing well that being said 2026 2028, we're going to be looking to.
Speaker Change: Also those partnerships are intact with the contract we have with team USA, but.
Speaker Change: Marketing is about the full funnel right, bringing customers to learn about the brand and have awareness of figs at the top of funnel to consider the brand mid funnel to bottom of the funnel, where they're converting and so.
Speaker Change: Full funnel marketing has always been our approach as it is why we've been successful over the last 12 years and why we've been profitable and we've always been disciplined in.
Speaker Change: And our spend in how we acquire customers, we're going to continue to be disciplined and strategic in our spend but also be opportunistic where we see exciting.
Speaker Change: Opportunities in front of us.
Speaker Change: Okay, Great. That's helpful. And then I want to talk a bit about the sample sales late in the quarter. I know you had originally planned for one of the nearest and hear what you were seeing in the business that drove that and then connected to the sale how should we think about the magnitude of excess inventory, you're carrying if any especially given if it changes.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Yeah. So in terms of the sample shall we let off last quarter identified that our promo cadence in Q3 would be similar and so that did include.
Speaker Change: Our sample sales similar to what we did last year in <unk>.
Speaker Change: Given that this has been our back to school promo.
Speaker Change: We did have the sample sale and extended that too.
Speaker Change: Try and offset some of that we did end up still falling short.
Speaker Change: And so those are some of the dynamics on the sample sale piece there.
Speaker Change: Operator can we take the next question please.
Speaker Change: Of course.
Speaker Change: Our next question comes from John Kiernan of JD Cowen John Your line is now open.
Speaker Change: Alright, Thanks for taking my question.
Speaker Change: Sure you got more time to walk through the numbers I know theres been a lot more a lot of investments last several years.
Speaker Change: Selling and fulfillment expenses.
Speaker Change: That carryover into fiscal 'twenty, what types of insurance and you expect to see.
Speaker Change: Some of these investments thank you.
Speaker Change: Yes, so we would have in investing into our new fulfillment center. This year and that's absolutely what was needed in order to be able to give ourselves the flexibility to scale in the future to continue to provide our customers with great reliability and so we're set up from that perspective.
Speaker Change: Into next year I think we will continue to look at expanding out those logistics network to better serve our customers. So we will be looking for Canadian distribution Center next year that will provide great value to our Canadian customers.
That won't have the same level of investment that we've done this year, because we won't be.
Speaker Change: B using a third party provider so you won't be seeing.
Speaker Change: The degree of transition cost like you did with the facility that we operate in Arizona.
Speaker Change: Got it.
Follow up is just on marketing I think the dollars were up 2%.
Speaker Change: Year over year, how does that how do we think about the fourth quarter the holiday season.
Speaker Change: The right long term rate.
Speaker Change: Marketing as a percentage of sales.
Speaker Change: Yeah. So we will give more detail specifically around marketing for 2025, as we share our results in.
Our expectations on our February call for 2025.
Speaker Change: The outsized investment on the year was really all in Q3.
Speaker Change: So we are expecting a more normalized level of marketing in the quarter for Q4, and then going into 2025, as well and keeping in mind that we're going to continue to look at what opportunities are available for us to continue to drive top line, we can share more about that in our next call when we share more details on 2025.
Speaker Change: Got it looking forward to seeing everybody in Philadelphia.
Speaker Change: Great great. Thanks, Sean.
Speaker Change: Thank you.
Speaker Change: Our last question comes from Ashley <unk> of Keybanc capital markets.
Speaker Change: Your line is now open.
Speaker Change: Great. Thanks, so much so first I just wanted to zoom out and focus a little more broadly international probably one of the bigger long term drivers going forward. So just how are you thinking about the markets that you're most focused on brand building and awareness going there just curious to hear about the new launches and some of those maybe ones that could be focused around <unk>.
Speaker Change: Tier b to B.
Speaker Change: Sure. Thanks, so much for the question.
Speaker Change: International continues to grow and scale, we're now in 33 markets.
Speaker Change: Canada was our first and with by far and away our largest international market.
Speaker Change: Australia, and UK, where two of our other early entries in there they remained relatively large.
Speaker Change: As we mentioned, Mexico, and the Philippines, Steven Merkt quickly and continue to do great and then we're really focused on building out Asia right now, we're only in the Philippines and Singapore.
Speaker Change: Japan is a clear focus for us given some of the things, we outlined 5 million plus health care professionals highly concentrated and aging population and a high focus on technical product and ocean and.
Speaker Change: And so really that we think is a really well.
Or help us springboard into other Asian markets.
Speaker Change: Going forward, we believe we can leverage our work as we look at opportunities in South Korea.
Speaker Change: Kong and in other countries over time, so we're really excited to share more about.
Speaker Change: Much more to do as we continue to localized market by market from a product standpoint from a storytelling standpoint language currency et cetera, but really excited to continue to bring <unk> to health care professionals around the world.
Speaker Change: Okay got it and then just quickly wanted to circle just back a little bit on marketing not so much on the cadence of rate, but just curious following the success of the Olympics campaign, but love to hear your thoughts on how that shaping gulfport marketing campaigns and the strategy around that I think you mentioned being more inspiring.
Speaker Change: And less transactional.
Speaker Change: Yeah, I mean I think it's.
It's about telling stories about telling stories about our OSM humans, so I'll, telling stories about our product.
Speaker Change: And we're going to continue to do that there is so many more story to tell and so I really do think.
Speaker Change: We have the right strategy in place.
Speaker Change: Curling top of funnel big brand campaigns.
Speaker Change: At the same time as our.
Speaker Change: Day to day business coupling launches and what are we launching as it relates to product and telling those stories.
Speaker Change: <unk>.
Speaker Change: Partnering with the most incredible health care professionals in our community and telling their stories and so.
Speaker Change: All of that is.
Speaker Change: It's really exciting and seeing the Olympics and the success of the Olympics campaign is shaping how we think about broadening the <unk> around our marketing and how we connect and <unk>.
Speaker Change: Communicate with our community.
Speaker Change: Got you I appreciate the color and see you next week in Philly.
Speaker Change: Great. Thanks, Thanks Ashley.
Speaker Change #100: Thank you that will conclude our Q&A session. So I will pass it back over to Trina for any further remarks.
Trina Spear: Thank you all for joining our third quarter call, we'll see you hopefully until the next week.
Trina Spear: Okay.
Speaker Change #101: Thank you that concludes today's call. Thank you for your participation you may now disconnect your line.
Speaker Change #101: Okay.