FIGS: Leading Disruptive Growth In The Healthcare Apparel Market

Trina Spear, Co-Founder & CEO of FIGS, speaks with John Kernan, Retail & Consumer Brands Analyst at our 7th Annual Future of the Consumer Conference.

On this episode, they discuss FIGS rapid growth from $55MM in sales in 2018 to $506MM in 2022. They also speak about how FIGS has disrupted the medical apparel market with a direct-to-consumer business model and community-based activation which has enabled superior margins and return on invested capital.

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Transcript

Speaker 1:

Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.

John Kernan:

I’m John Kernan, Cowen’s retail and consumer brands analyst. I’m joined today with the co-founder and CEO of FIGS, Trina Spear.

Trina Spear:

Thank you so much, John. Thanks for having me.

John Kernan:

Since 2019, FIGS has nearly quintupled its business. Can you talk to how FIGS has disrupted the medical apparel business and what you see as your biggest growth offer change?

Trina Spear:

Sure. I think it all started with product. Before FIGS, healthcare apparel/scrubs were outdated. They were boxy, ill-fitting, not something that you or I would want to wear to work. Really focused on building a better product that was comfortable and well-fitted and designed and really functional. We spent a lot of time on pockets so healthcare professionals can hold all the things that they need to go to work.

Then, the second piece was distribution. Prior to FIGS, healthcare apparel was sold through retailers. There are 5,000 across the country. It was a pretty awful experience. I mean, you would walk in. There would be a rack of black, a rack of navy. They were sold next to bedpans and knee braces. It was just an awful experience. What we aimed to do was really build a direct-to-consumer business model, create a relationship with our community, make it easy and seamless. You push a couple of buttons. You get your scrubs. You get to work.

John Kernan:

Your active customer metric: 22% in Q1. You now have 2.4 million active customers. Can you talk to the future of customer acquisition, also your retention trends?

Trina Spear:

Sure. I mean, I think what you’re seeing is that we continue to bring more and more healthcare professionals into the FIGS family. Our last three quarters were our strongest customer acquisition quarters ever. We hope to continue to see that trend. It all goes back to building a better product that people want. In terms of repeat frequency, we naturally have a replenishment dynamic. Healthcare professionals need four to six sets of scrubs a year. They’re coming back for our Catarina top and our Zamora pants in navy every few months so they can go to work and look good and feel good and perform at their best. We’ve seen the repeat frequency trends come down a bit. But over time, we look to really be increasing that repeat frequencies through a number of initiatives over time.

John Kernan:

TAM, total addressable market. You’ve talked about how product innovation and entering new markets has expanded your TAM and given you a leadership position in the healthcare apparel sector. What do you think is FIGS’ market share potential within this expanded TAM?

Trina Spear:

Yeah. I mean, I think what we say… I think you’ve heard me say it, John, is lazy companies sell into TAM, and innovative companies create TAM. We really are focused on creating TAM. We’re doing that through all of the different categories outside of scrubs. This market was a $12 billion market in the US, $79 billion globally. But we really think about how we’ve completely changed even the definition of what scrubs are. But prior to FIGS, it was in a V-neck top and a drawstring pair of pants. We brought innovative styles and silhouettes and totally different functionality. One of our best-selling pants is a jogger, the Zamora pant. And so really just bringing different innovation to the market. Then, outside of scrubs, from our outerwear, our under scrubs, our compression socks, our footwear, what are you wearing to work, at work, from work, on shift, and off shift head to toe? It’s really a full layering system that our healthcare professionals are coming to FIGS to engage with so they can really go to work and do their jobs.

John Kernan:

Can you talk to your potential in working with large-scale institutions and hospitals?

Trina Spear:

This is our team’s business. We’ve talked a bit about this. But it’s a really exciting opportunity. We’re in the early, early stages. What we’re seeing is that healthcare institutions, concierge, clinics, medical offices are coming to FIGS and saying, “Can you help us professionalize and standardize our team?” and so looking to partner with FIGS in a bigger way to outfit their whole staff. If you want to buy hundreds/thousands of sets of scrubs, you can come to us, and we make it super easy. We’re actually in the process of building out our team’s platform to make it even simpler to get the full assortment: embroider your logo, get your team’s names on your scrubs, on your lab coats. It’s a pretty awesome part of our business that we’re very much in the early stages of, but we’re super excited about.

John Kernan:

Trina, can you talk to your core consumer? Who are they? How are they faring in the current macro environment? What’s the outlook for healthcare employment?

Trina Spear:

Sure. We serve all healthcare professionals, from doctors to dentists to nurses to surgeons to students, medical students, nursing students, et cetera. Our customers have definitely been impacted by the macro environment. Inflation, in particular, has had them spread their dollars a bit more. But we really do feel like it’s a really resilient customer. It’s a really resilient industry and very much recession-resistant as well. Over the long run, we feel really confident healthcare jobs are the fastest-growing growing job segment. As we move forward, our goal is to continue to serve this broad and growing group of awesome humans. We call them awesome humans, so the best people we know. We’re going to continue to show up with incredible products and continue to connect with them.

John Kernan:

Awesome. Maybe we can think from a competition standpoint in the category… A lot of people have noticed your success, and they want a piece of the category now. Talk to the competitive environment.

Trina Spear:

Yeah. I mean, I think there’s really two parts to the competitive landscape. It’s the old-school incumbents that we’ve disrupted. Those are the companies that are really licenses of other companies. They’re selling through retailers that are then selling to the healthcare professional. We call that the anti-moat. They’re stuck in the strip mall, haven’t actually figured out a way to build a direct relationship with the community.

Then, there are companies that have come after FIGS. Saw our success and have tried to copy what we do. To this day, our next closest competitor is one 10th our size. Our marketing budget is larger than their revenue. We see that they’re trying to play in this space where they’re saying, “Oh, we’re like FIGS but cheaper.” I don’t think that necessarily works. People want quality. They remember quality. They don’t remember price. What we’re seeing is that they’re all competing with themselves down here at a lower price point. We are continuing to be the leader in the space, continuing to premiumize the industry, and continue to drive scale and drive more and more healthcare professionals to join the FIGS family.

John Kernan:

Shifting gears just a little bit, can you discuss why being a direct consumer-led business has enabled you to earn superior margins and return on invested capital?

Trina Spear:

Sure. I mean, I think being a direct-to-consumer business for the healthcare professional is really important. It wasn’t a nice-to-have. We’re not selling jewelry or dresses. We’re selling scrubs. We’re selling a uniform. Having a business where at any point in time… You’re on the night shift. You’re at work. You’re running around a hospital, seeing patients. You could order your uniform and get what you need to go to work, was really important. Direct-to-consumer to us have to have not a nice to have.

Then, it did ensure that we could have the margin profile that we have. We have structurally advantaged gross margins because we’re direct-to-consumer. We have a margin profile where we’re able to invest in marketing. We’re able to invest in community connection. We’re able to invest in infrastructure to continue to scale and grow. That’s really important. I think only by being a digitally native direct-to-consumer brand can you build that level of relationship to continue to innovate because you’re getting so much information from your customer and continue to connect.

John Kernan:

What brand activations and community events are you most excited about? FIGS has, I think, built a lot of loyalty through these events. Can you talk to what’s in store and what you’re most excited about?

Trina Spear:

Yeah. I think you know what we’ve seen from our pop-up shops… We had one in Melrose in la. We had one in New York in SOHO on Crosby Street. We’ve had activations in Houston and Seattle and Chicago, and Philly. What we’ve seen is that people want to experience FIGS in person. They want to touch and feel and experience and try on our products and learn more about the brand in person. We’re really excited about… We’re going to be continuing to do events throughout this year. It’s also why we’re going to be rolling out our retail strategy. We have our first retail store, which we call Community Hubs, coming this fall in Century City in Los Angeles. It’s a great way to not only engage our community with our products but also to have them connect with each other. I think that’s one of the unique things about FIGS is that we’ve actually connected this community to each other. Our retail Community Hubs will be a great place for our healthcare professionals to connect.

John Kernan:

Got it. Speaking outside of Southern California, we’ve had a huge impact. Santa Monica-based Century City store coming international. Can you talk to the runway of growth and international expansion? What is the competitive set look like? How do you build awareness, and what investments do you need to make?

Trina Spear:

Yeah. We’ve been primarily a US brand. That being said, in a very short period of time, almost 10% or over 10% now of our revenue is coming from international. We really were focused on English-speaking countries with Canada, UK, Australia. We launched those a few years ago. Then, last year, we launched another 10 countries. It’s early days. International’s growing fast, 45% growth last quarter. We’re continuing to see that healthcare professionals around the world… There are 115 million healthcare professionals outside the US, that they want a better product. They want a better experience. Prior to FIGS, healthcare professionals, whether you’re living in Istanbul, Paris, or Kentucky… You had an awful experience. We’re looking to change that.

John Kernan:

Again, shifting to the financials. Efforts right now are there to rightsize your inventory position. Working capital metrics are going to improve through fiscal ’23. How should we think about your capital allocation plans on a multi-year basis? Obviously, you’re going to keep investing in the brand and growth. What does CapEx look like to support growth, and what do investments look like to support growth?

Trina Spear:

Yeah. I mean, I think what you’ve seen from us is that we’ve been really disciplined and focused on not growth for growth’s sake. We’ve been growing in a profitable and sustainable way. We’re going to continue to do that. I think we’re being really thoughtful and disciplined around where we invest. Investment for return on investment is how we think about it. Invest, don’t spend.

We’re focused on building out our infrastructure and ensuring that we have the infrastructure in place to scale, to scale to north of a billion in sales and beyond. Having infrastructure that supports that growth is super important. We’re a capital-light business. You’re going to continue to see that. But we are investing in fulfillment so that we can create a better experience for our customers: get our packages to our customers in a more seamless way and faster. That’s what you’ll see going forward, but continuing to be disciplined, continuing to drive both growth and profitability at the same time.

John Kernan:

Final question, just on that theme of growth and profitability, maybe talk to FIGS’ margin structure going forward, the balance between gross margin and OpEx going forward, how you think about your overall EBITDA and EBIT and operating margin structure.

Trina Spear:

I think we’ve been able to maintain a really healthy gross margin of around 70%. That’s been consistent over the years. We look to have that be consistent in the future. What we do… It’s through innovating but innovating in a really strategic way, where we are innovating but also getting leverage from our core.

80% of our sales is 14 core styles. We’re able to get incredible leverage from continuing to scale that part of our business while innovating with new categories where the minimums might, to a certain extent, have a lower margin. But we’re able to offset that with the core. From a bottom-line perspective, we are continuing to have a really structurally advantaged financial profile.

The differences from when we were doing over 20% EBITDA margin and where we are today are by and large transitory: air freight tied to us when we were in a bit of a different supply chain environment, storage tied to us carrying more inventory than we expected to at this point. But it can get back to high teens. Then, beyond that going forward, we see a path to north of that. That’s where we’re focused. That’s what we’re going to do to get back to where we were.

John Kernan:

Amazing. Congrats on all the success, and thanks for joining us.

Trina Spear:

Thank you so much, John.

Speaker 1:

Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.

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