FIGS, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; unaudited. Comparisons are with the corresponding 2020 periods unless noted.
Business context and performance
FIGS is a direct-to-consumer healthcare apparel and lifestyle company, selling primarily through its website and mobile app. Scrubs represented most sales. Management reported approximately 1.6 million active customers at June 30, up 79.2% from approximately 0.9 million a year earlier.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $101.1m | $64.1m | $188.2m | $96.1m |
| Gross profit | $74.2m | $45.2m | $136.5m | $69.5m |
| Gross margin | 73.3% | 70.5% | 72.5% | 72.3% |
| Operating income (loss) | $(32.1)m | $16.6m | $(16.0)m | $20.6m |
| Net income (loss) | $(40.5)m | $14.2m | $(29.1)m | $18.3m |
| Diluted EPS | $(0.26) | $0.09 | $(0.19) | $0.12 |
- Revenue grew 57.6% in Q2 and 95.8% for the first half. Management attributed growth to customer acquisition and retention, increased digital traffic, and higher average order value: $103 versus $88 in Q2; $101 versus $89 for the first half.
- Q2 gross margin rose 2.8 percentage points, with management citing a shift toward higher-margin scrubwear and lower use of air freight. First-half margin improved 0.2 points; product mix benefits were partly offset by higher air-freight costs.
- Operating expenses increased sharply: Q2 G&A was $71.5m versus $7.0m, including $56.0m of stock-based compensation; first-half G&A was $89.9m versus $13.2m, including $61.0m of stock-based compensation. The filing cites IPO-related equity compensation and increased investment in personnel.
- Adjusted EBITDA, a non-GAAP measure, was $26.8m in Q2 (26.5% margin) versus $17.3m (27.0%); for the first half it was $51.1m (27.2%) versus $21.9m (22.8%). It excludes, among other items, stock compensation, taxes and specified dispute expenses; it should not be viewed as a substitute for GAAP results.
- Income tax expense was $8.5m in Q2 and $13.0m for the first half despite pretax losses. The company cited nondeductible stock compensation and other discrete items; reported effective tax rates were negative.
Cash, liquidity and capital
- Cash and cash equivalents were $164.0m at June 30, up from $58.1m at year-end 2020. Current assets were $243.5m and current liabilities $46.9m. Inventory increased to $62.4m from $49.7m.
- First-half operating cash flow was $32.7m versus $24.3m; free cash flow, as defined by the company, was $31.7m versus $23.2m. Capital expenditures were $1.0m. Management attributed cash used in working capital principally to higher inventory and an IPO-related receivable.
- The June IPO generated $95.1m in net proceeds for the company from issuance of 4.6 million shares at $22 per share. A selling stockholder also sold shares; that sale did not generate proceeds for FIGS.
- No borrowings were outstanding on the $50m revolving credit facility; $3.2m of letters of credit were outstanding and $46.8m was available. The facility matures in December 2025. Total liabilities were $50.5m; the company also disclosed $21.2m of inventory purchase obligations and $18.7m of future minimum operating lease payments.
Changes, outlook and risks
- GAAP profitability reversed: FIGS reported net losses in Q2 and the first half, compared with profits in both prior-year periods. The company attributes much of the expense increase to IPO-related stock-based compensation, including $32.8m of expense from accelerated vesting of certain options.
- Management said cash and cash equivalents plus positive operating cash flows should fund working capital and capital expenditures for at least the next 12 months. The filing provides no numerical revenue or earnings guidance.
- Management said COVID-19 increased demand and brand awareness, but the durability of those trends is uncertain. Supplier, manufacturer and ocean-freight delays—particularly affecting Vietnam—could require more costly air freight and disrupt product availability.
- Other stated risks include rapid growth and profitability not being sustainable, customer and brand retention, inventory forecasting, dependence on a limited supplier base, competition, shipping and fulfillment disruptions, and expansion into international markets.
- FIGS disclosed litigation with Strategic Partners, Inc. The company recorded no accrual for potential liability and said it would defend the claims. On August 10, 2021, after quarter-end, a court dismissed certain claims, while false-advertising claims remained pending.
- The company has dual-class shares: Class B shares carry 20 votes each versus one vote for Class A. The filing says co-founders and Tulco together held 78.3% of voting power. FIGS also identified itself as a controlled company and relies on certain NYSE governance exemptions.
- Disclosure controls and procedures were assessed as effective at the reasonable-assurance level as of June 30, 2021; no material change in internal control over financial reporting was reported during the quarter.
Investor verification priorities
- Review the reconciliation of Adjusted EBITDA to GAAP net loss, especially the scale and timing of IPO-related stock compensation and excluded dispute expenses.
- Assess whether customer growth, average order value and gross-margin gains persist, and whether freight and supply constraints or inventory growth pressure margins and cash flow.
- Monitor the Strategic Partners litigation, including remaining false-advertising claims, potential costs and any future change to the company’s no-accrual position.
- Confirm use of IPO proceeds, liquidity and credit-facility availability, and obligations for inventory purchases and leases.
- Consider voting-control and governance implications of the dual-class structure and controlled-company exemptions.