FIGS, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. FIGS is a direct-to-consumer healthcare apparel and lifestyle company; sales are primarily through its digital platforms. Financial statements are unaudited. Unless noted otherwise, amounts are in U.S. dollars.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $128.6m | $102.7m | $360.9m | $290.9m |
| Gross profit / margin | $90.8m / 70.6% | $74.7m / 72.7% | $255.6m / 70.8% | $211.2m / 72.6% |
| Operating income (loss) | $11.2m | $10.6m | $34.4m | ($5.5m) |
| Net income (loss) | $4.0m | $7.0m | $17.8m | ($22.2m) |
| Adjusted EBITDA | $21.0m | $22.2m | $67.5m | $73.3m |
| Adjusted EBITDA margin | 16.4% | 21.6% | 18.7% | 25.2% |
- Growth and customer metrics: Revenue grew 25.2% in Q3 and 24.1% year to date. Active customers increased 23.6% to approximately 2.2 million. Average order value rose to $112 from $102 in both comparison periods. Management attributed revenue growth to more orders and, year to date, higher AOV.
- Margins and expenses: Gross margin fell 2.1 percentage points in Q3 and 1.8 points year to date, primarily from greater use of air freight and elevated freight rates; promotions and product mix also affected Q3. Q3 selling expense rose 60.1%, including higher fulfillment, storage and shipping costs. Nine-month GAAP profit improved substantially versus a 2021 loss, while stock-based compensation expense declined to $26.3m from $68.3m.
- Cash flow: Nine-month operating cash flow was negative $39.9m versus positive $52.5m; free cash flow was negative $44.1m versus positive $50.5m. Management cited working-capital movements, particularly increased inventory purchases, as the main driver. Capital expenditures were $4.3m.
- Liquidity and debt: Cash and cash equivalents were $155.6m, down from $195.4m at December 31, 2021. Inventory rose to $168.1m from $86.1m. FIGS had no borrowings under its $100m revolving facility and reported $95.6m available, with $4.4m of letters of credit outstanding. The filing reports $19.9m of operating lease liabilities at September 30.
Material changes and management commentary
- Management said Q3 sales softened amid inflationary pressure on consumer spending and came in below its expectations. It expects macroeconomic pressures to affect near-term results, but provided no specific numerical guidance in the supplied filing text.
- Inventory receipts exceeded expectations as ocean transit times improved while sales were weaker than expected. Management plans to coordinate shipments, adjust launch timing, manage future purchases and use promotions. Higher inventory also increased storage costs; inventory purchase obligations were $61.3m at quarter-end.
- Supply-chain conditions showed some improvement during Q3, including freight rates, transit times, reliability and capacity, but management expected elevated ocean and air freight costs and related challenges to continue. FIGS used more expensive air freight to mitigate delays.
- On August 9, the company granted Executive Chair Heather Hasson equity awards with aggregate grant-date fair value of $24.9m, comprising RSUs and options. Vesting runs through December 2024, subject to continued service. Q3 stock-based compensation was $9.0m, compared with $7.3m a year earlier.
- The company adopted lease accounting guidance in January 2022, recognizing operating lease assets and liabilities; management said adoption did not materially affect earnings or cash flows. Q3 effective tax rate was 65.8%, primarily reflecting nondeductible stock compensation and tax-deduction shortfalls.
Risks, contingencies and other notable items
- Key risks include weaker consumer spending, inflation or recession, freight and supply-chain disruption, inventory forecasting and markdown exposure, reliance on a concentrated supplier base, competition, and dependence on the FIGS brand and customer retention.
- Inventory is concentrated in core scrubwear, which management says is less seasonal and less exposed to obsolescence; nevertheless, elevated stock can increase storage costs and lead to markdowns or write-downs.
- Inventory purchase obligations were $61.3m. The company had recorded a $1.6m estimate for contingent remote-seller sales tax liability.
- Legal developments reported after quarter-end: on November 3, a jury returned a verdict fully in FIGS’ favor in the Strategic Partners false-advertising case, subject to potential post-trial motions and appeals. On November 1, a court dismissed the Miracle Ventures amended complaint, allowing a limited opportunity to replead one claim. A putative securities class action was filed November 1 concerning alleged statements about air freight, supply chain, repeat customers and outlook. FIGS disputes the claims; it recorded no accrual for the identified legal actions.
- The company reported effective disclosure controls as of September 30 and no material change in internal control over financial reporting during the quarter. It also noted its controlled-company dual-class structure; Class B shares carry 20 votes per share versus one vote for Class A.
Important facts for investors to verify
- Whether sales trends, customer growth and AOV hold up as inflation and consumer spending pressures continue.
- Whether inventory levels and the $61.3m of purchase obligations can be managed without significant markdowns, write-downs or further storage expense.
- How freight costs and fulfillment expenses affect gross margin and operating profitability in subsequent quarters.
- Whether working-capital investment reverses and operating cash flow and free cash flow recover.
- The future recognition and dilution effects of equity awards, including the $24.9m Hasson grant, and the effect of stock compensation on earnings and taxes.
- Developments in the securities and other litigation, including any changes to the company’s no-accrual assessment.