FIGS, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparative period is Q1 2022. FIGS designs and sells healthcare apparel and lifestyle products, primarily through its U.S.-focused direct-to-consumer digital platform.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net revenue | $120.2 million | $110.1 million | +9.2% |
| Gross profit / gross margin | $85.7 million / 71.3% | $78.4 million / 71.2% | Margin +0.1 percentage points |
| Operating expenses | $82.4 million | $64.7 million | +27.4% |
| Operating income / margin | $3.3 million / 2.7% | $13.7 million / 12.5% | Down substantially |
| Net income / diluted EPS | $1.9 million / $0.01 | $8.9 million / $0.05 | Net income down 78.5% |
| Adjusted EBITDA / margin (non-GAAP) | $16.1 million / 13.4% | $25.0 million / 22.7% | Down from prior year |
| Operating cash flow / free cash flow | $(2.9) million / $(3.7) million | $(8.0) million / $(8.4) million | Cash use improved |
Cash and cash equivalents were $155.9 million at March 31, down from $159.8 million at year-end. Current assets were $349.6 million and current liabilities $52.8 million. No revolving-credit borrowings were outstanding; $95.6 million was available under the $100 million facility after $4.4 million of letters of credit. The facility matures in September 2026 and is secured by substantially all company assets. Operating lease liabilities totaled $18.4 million, current and non-current combined.
Inventory was $180.4 million, up from $178.0 million at December 31, 2022. Inventory purchase obligations were $33.8 million. The filing reports no material change in contractual obligations from the 2022 Form 10-K.
Material changes and management commentary
- Revenue growth was attributed mainly to more orders from new and existing customers, partly offset by lower average order value (AOV: $114 versus $116). Active customers grew 21.8% to approximately 2.39 million, while trailing-12-month revenue per active customer fell to $216 from $226.
- Scrubwear generated $97.9 million of revenue and non-scrubwear $22.4 million. U.S. revenue was $107.7 million; rest-of-world revenue was $12.6 million.
- Gross margin edged higher, principally reflecting less air freight, partly offset by a higher promotional-sales mix. Management said ocean freight rates and transit times had improved to near pre-pandemic levels and air freight was used less than in the prior-year quarter.
- Operating expenses rose faster than revenue. Selling expense increased 41.3%, including higher fulfillment and inventory storage costs and, to a lesser extent, international duty subsidies. Marketing expense increased 10.7%, reflecting greater digital and social-media investment. General and administrative expense rose 25.5%, including increased stock-based compensation and professional/public-company costs.
- Management said elevated inventory followed faster ocean transit times, earlier decisions to increase supply during transit-time volatility, and sales below expectations in 2022. Its response includes adjusting future purchases, reintroducing prior limited-edition styles and colors, and selectively using promotions. Management believes core scrubwear inventory has relatively low obsolescence and seasonality risk.
- Management attributed moderation in purchase-frequency trends partly to inflationary pressure on consumer spending and expects current macroeconomic pressures to affect near-term results. It believes the replenishment-driven scrubwear business is comparatively resilient. The filing gives no quantified financial guidance for 2023.
Risks, contingencies, and unusual items
- A putative securities class action remains pending against FIGS and certain officers, directors, stockholders, and IPO underwriters. The April 10, 2023 amended complaint alleges misleading statements about demand forecasting, supply chain, inventory, air freight use, and costs; damages sought are unspecified. FIGS says it will defend the case and has not accrued a potential liability.
- A separate lawsuit brought by Strategic Partners, Inc. was settled on February 22, 2023, with dismissal of all claims with prejudice and no payments or other substantive obligations between the parties. A former-stockholder action was dismissed with prejudice on May 4, 2023, after quarter-end.
- The company recorded a $1.6 million estimate for contingent remote-seller sales taxes. The Q1 effective tax rate was 56.3%, versus 35.3% a year earlier, primarily reflecting state taxes and officer excess-compensation limitations.
- Stock-based compensation expense was $10.8 million, compared with $8.5 million in Q1 2022. Adjusted EBITDA excludes stock compensation and certain dispute-related expenses, among other items; it is a non-GAAP measure and should not be viewed as a substitute for GAAP results.
- Key disclosed risks include demand and inventory forecasting, inflation and consumer spending, supplier concentration and overseas sourcing, fulfillment and shipping disruptions, competition, cybersecurity and privacy, and the company’s dual-class voting structure and controlled-company status.
Most important facts for investors to verify
- Whether revenue growth and active-customer growth can continue while AOV and revenue per active customer remain below prior-year levels.
- Whether elevated inventory can be reduced without heavier discounting, margin deterioration, or material write-downs.
- Whether fulfillment, storage, and other operating costs moderate enough to support a recovery in operating and net margins.
- Whether operating cash flow turns positive and cash levels remain adequate as inventory and purchase commitments are managed.
- Developments in the securities class action, the $1.6 million sales-tax contingency, and any related financial-statement accruals or disclosures.
- That disclosure controls were reported effective at March 31, 2023; management reported no material change in internal control over financial reporting during the quarter.