FIGS, Inc. — Q2 2022 Form 10-Q Summary
Business and period: FIGS is a direct-to-consumer healthcare apparel and lifestyle company, selling primarily through digital channels. This unaudited report covers the quarter and six months ended June 30, 2022; comparisons are to the same 2021 periods unless noted. Amounts below are in millions of dollars except per-share and operating metrics.
Financial and operating performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $122.2 | $101.1 | $232.3 | $188.2 |
| Gross profit / margin | $86.3 / 70.6% | $74.2 / 73.3% | $164.8 / 70.9% | $136.5 / 72.5% |
| Operating income (loss) | $9.5 | $(32.1) | $23.2 | $(16.0) |
| Net income (loss) | $4.9 | $(40.5) | $13.8 | $(29.1) |
| Diluted EPS | $0.03 | $(0.26) | $0.07 | $(0.19) |
| Adjusted EBITDA / margin | $21.5 / 17.6% | $26.8 / 26.5% | $46.5 / 20.0% | $51.1 / 27.2% |
- Revenue grew 20.9% in Q2 and 23.5% in the first half. Management attributed growth to orders from customer retention and new-customer acquisition; first-half growth also reflected higher average order value (AOV).
- Active customers reached approximately 2.047 million, up 26.2% from 1.622 million a year earlier. AOV was $109 in Q2 versus $103, and $112 in the first half versus $101.
- Scrubwear generated $103.9 million of Q2 revenue; non-scrubwear/lifestyle revenue was $18.4 million. U.S. revenue was $112.8 million and rest-of-world revenue was $9.4 million.
- Gross margin fell 270 basis points in Q2 and 160 basis points in the first half. The filing cites elevated ocean and air freight costs, greater use of air freight, and product mix.
- Operating income turned positive, but the comparison is substantially affected by prior-year IPO-related stock-based compensation: G&A stock-based compensation was $8.8 million in Q2 2022 versus $56.0 million in Q2 2021, and $17.3 million versus $61.0 million for the first half. Adjusted EBITDA, which excludes stock-based compensation and certain other items, declined year over year.
- Operating cash flow was $(26.5) million for the first half versus $32.7 million in 2021; free cash flow was $(28.3) million versus $31.7 million. Management attributed the operating cash flow change primarily to inventory purchases and timing of payments against payables and accrued expenses. Inventory was $127.6 million at June 30, 2022, compared with $86.1 million at December 31, 2021.
- Cash and cash equivalents were $170.2 million at June 30, 2022, down from $195.4 million at year-end 2021. There were no revolver borrowings; $4.4 million of letters of credit left $95.6 million available under the $100 million Bank of America facility, maturing in 2026. The company reported no funded debt outstanding.
- Total assets were $353.6 million and stockholders’ equity was $278.1 million at June 30, 2022. Current assets were $315.9 million and current liabilities $58.0 million.
Material changes and unusual items
- Lease accounting adoption on January 1, 2022 added approximately $12.9 million of right-of-use assets and $16.5 million of lease liabilities to the balance sheet; management said adoption did not materially affect results or cash flows. June 30 operating lease liabilities totaled $20.3 million.
- Q2 investing cash flows included a $0.5 million purchase of held-to-maturity securities in a privately held company, classified as a Level 3 fair-value investment.
- The company reported $67.4 million of inventory purchase obligations at June 30, 2022.
- Income tax expense was $4.7 million in Q2 and $9.5 million for the first half; effective tax rates were 49.0% and 40.9%, respectively. The filing cites state taxes and officer excess-compensation limitations among the reasons rates differ from the statutory rate.
Outlook, commentary, and risks
- The filing provides no specific revenue, earnings, or margin guidance. Management said it expects unpredictable ocean transit times, elevated freight rates, and other supply-chain challenges to continue at least through the end of 2022, and expects to continue using air freight until ocean transit times become more predictable.
- Management reported higher-than-expected inventory receipts due largely to freight-time volatility, adding storage costs. It also said trends softened amid inflation and shifts in consumer spending, while describing the replenishment-driven healthcare apparel business as relatively resilient.
- Key risks include supply-chain and freight disruption, concentrated suppliers and manufacturing partners, inventory forecasting and obsolescence, inflation and consumer spending, competition, brand and customer retention, and dependence on third-party shipping and fulfillment. Management noted that more than 85% of production uses its core scrubwear fabric and that core styles and colors are in demand year-round.
- Two legal matters remain unresolved: litigation involving Strategic Partners, Inc., with trial scheduled for October 2022, and a Miracle Ventures action with a motion to dismiss pending. The company disputes the claims and recorded no accrual for potential liability; outcomes remain uncertain.
- Management concluded disclosure controls and procedures were effective at the reasonable-assurance level as of June 30, 2022; it reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether elevated freight costs and air-freight use persist, and how they affect gross margin after the company’s stated expectation of continued challenges through 2022.
- Whether inventory levels, purchase commitments, storage costs, and cash conversion improve; reconcile the inventory build with negative first-half operating cash flow.
- Whether customer growth, repeat purchasing, AOV, and non-scrubwear expansion remain sufficient to sustain revenue growth as consumer spending trends soften.
- How much reported profitability depends on stock-based compensation and other Adjusted EBITDA exclusions; compare GAAP earnings with the company’s non-GAAP measures.
- Developments and potential financial effects of the Strategic Partners and Miracle Ventures litigation, for which no potential-loss accrual was recorded.
- Liquidity and covenant status of the secured revolving facility, and whether management’s stated expectation that available cash and borrowing capacity will cover at least the next 12 months remains supportable.