Lululemon meets scrubs…what makes FIGS a compelling brand
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The history…
I’ve been following Figs for several years now, having first heard about the brand during my time in investment banking covering consumer companies. Founded in 2013 by current co-CEOs Heather Hasson and Trina Spear, Figs is a DTC (direct-to-consumer) apparel and lifestyle brand that primarily sells fashionable and functional scrubs to healthcare professionals.
Since its debut in May ’21, the public markets have not been kind — given the rich valuation, deceleration in topline growth and margin pressures. Figs went public at $22 a share and traded as high as $50 before losing around ~80% of its value. Today, (May ’22) the stock is at $9 and change, implying a market cap of ~$1.6 billion.
The industry…
Figs operates in the healthcare apparel industry, a 6% CAGR market worth about ~$12 billion in the US today ($80 billion globally). Healthcare, which makes up nearly 20% of our GDP (cue the eye rolls on how broken our system is), is the fastest growing job sector in the US to the tune of 20%+ per year over the last decade.
The 20+ million healthcare professionals in the US skew on the younger side, which bodes well for the lifetime value of Figs’ core demographic, which they estimate comprises of the following:
In 2022, apparel is generally an unloved sector and for good reason — challenged margins, supply chain complexity and most importantly, its fickle nature. Figs is unique however for several reasons, which I’ll attempt to cover below.
The brand…
Traditional healthcare scrubs aren’t exactly the most fashion forward. Boxy, uncomfortable, and with a one-sized fits all approach, they’re traditionally sold through wholesale distributors via a very impersonal experience.
Figs on the other hand, creates functional, comfortable and reasonably stylish scrubs in what was historically a very sleepy category. I, with absolutely zero ties as a healthcare professional, was ready to hit checkout on a pair of their joggers until my wife called me a fraud and basically forbade me from purchasing them unless I enroll in med school.
Figs markets and sells 98% of its products online, direct-to-consumer. The DTC channel has several advantages:
- Enables the capture of customer data, which allows for purchasing analytics, personalized re-targeting, etc.
- Facilitates quick innovation cycles with the ability to test, iterate and collect feedback rapidly
- Eschews some of the supply chain challenges (lead times, etc.) of the wholesale channel
Important to note is that Figs aren’t for every healthcare professional. They’re relatively expensive for the category and considered a premium product, much like Lululemon leggings are in the athleisure market. The below comparison gives you a good sense for the price differential vs. other competing brands. Yes, consumers are paying for quality and thoughtful design, but they’re also paying for a brand — the story and ethos that come with it.
Figs’ tagline is Awesome Humans, which they describe as “empowering and celebrating every healthcare professional across all disciplines and levels of experience.” It sounds cliche, but it really helps summarize why the brand evokes such a genuine emotional connection and stands for something more than just the product. Figs is building a community, to the tune of 1.9 million active customers today, 60% of which are repeat buyers. Over the last decade Figs has created a premium lifestyle brand with an ethos that resonates with their core consumer in what was traditionally a commoditized category.
The metrics…
While the narrative is great and checks out, perhaps of equal if not more importance are the fundamentals.
Figs has demonstrated incredible topline and customer growth, strong unit level economics (70%+ gross margins) and a path towards enterprise level profitability and free cash flow that is unique to high-growing “startups”, particularly in the current environment. At the same time, the product lends itself well to virality from a marketing standpoint, demonstrated by the efficiency of their marketing spend. Customer acquisition costs have been declining over time despite growing average order values (I recognize there is often some subjectivity with how CAC is calculated — but save that for another day).
The growth levers…
Figs has practically doubled its revenue for each of the last 5 years. Despite deceleration in recent quarters which you’d expect on a much larger revenue base (which sits at ~$500 million-ish today), the growth trajectory remains attractive, ranked in order of my conviction:
- Market share gains: Figs is underpenetrated relative to the size of their addressable market, with just ~4% share. Between industry growth (~6% / year) and continued market share capture from sleepy incumbents, my guess is we’ll see Figs growing in the high-teens, low-twenties in its core category for the foreseeable future
- International growth: International remains a very large white space — $80bn in global healthcare apparel spend vs. $12bn in the US. TBD if the brand resonates the same way it does in domestic markets
- Product extensions: Admittedly I’m less excited by some of these given how commoditized some of the categories are (e.g., socks)
4. Other professional markets: Figs cites 40 million people outside of healthcare in service-based, uniform wearing industries such as food service, hospitality, construction and transportation. Again, TBD if the brand and price point resonate as well in these markets
The (illustrative) math…
Below is my best guess at a simple returns analysis for Figs, which is quite a bit more conservative relative to sell-side estimates:
As is with most financial models, reality will most definitely deviate from the above. This is meant to be a potential framework more than anything. My takeaway is this — at $9 and change / share today, Figs can grow into a $20+ stock under fairly reasonable parameters over the next several years, even with top-line deceleration, which I think is inevitable.
Where I could be wrong…
Investing (and life) is all about humility. Here are some ways I could be wrong about the company:
- Commoditization of the category: Brand affinity could fade and consumers’ willingness to spend a premium for the little gray patch that reads “Figs” may wane
- Competition could take further hold: Competing brands like Jaanuu may gain a greater foothold in the market, eroding market share from Figs
- Operational challenges could further materialize: Longer term supply chain woes, inventory mishaps, input cost and wage labor inflation could erode margins if the brand isn’t able to take price
- Dilution from additional shares: My simple model framework assumes the business is free cash flow positive and the business doesn’t need to issue any additional equity as it scales. Incremental equity in the form of follow-ons or meaningful stock-based comp may dilute existing shareholders
Putting it all together…
$1.6 billion isn’t necessarily cheap for an apparel company doing $500 million of revenue today…but it’s also not that expensive for the undisputed category leader in an attractive end market with a reasonable path to a ~2x.
I can’t tell you whether or not Figs is going to $7, $5 or even $3 over the next 12 to 18 months. If it does, I’ll probably buy more. *Cue cliche Warren Buffett quote about markets being irrational in the short term but reasonable over the long term.*
What I can tell you is Heather and Trina built a bad-ass brand. I’m super excited about the future of Figs, mostly as an investor, and perhaps one day if my wife lets me, even as a consumer…
Thanks for reading! Have feedback? Disagree? I’d love to hear from you. Feel free to slide into my DMs and speak your mind.
