FIGS, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. FIGS is a direct-to-consumer healthcare apparel and lifestyle company, selling primarily through its digital platforms and primarily in the United States.
Financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $138.1m | $122.2m | $258.4m | $232.3m |
| Gross profit | $96.0m | $86.3m | $181.7m | $164.8m |
| Gross margin | 69.5% | 70.6% | 70.3% | 70.9% |
| Operating expenses | $89.5m | $76.9m | $171.8m | $141.6m |
| Operating income | $6.6m | $9.5m | $9.9m | $23.2m |
| Net income | $4.6m | $4.9m | $6.5m | $13.8m |
| Adjusted EBITDA (non-GAAP) | $18.9m | $21.5m | $35.0m | $46.5m |
Q2 revenue grew 13.0% year over year; first-half revenue grew 11.2%. Growth was attributed to more orders from new and existing customers and higher average order value. Scrubwear generated $115.2m of Q2 revenue and non-scrubwear $22.9m. International revenue was $14.3m, versus $9.4m a year earlier.
Q2 diluted EPS was $0.02, versus $0.03; first-half diluted EPS was $0.04, versus $0.07. Q2 net margin was 3.4%, down from 4.1%; first-half net margin was 2.5%, down from 5.9%. Q2 Adjusted EBITDA margin was 13.7%, versus 17.6%; first-half margin was 13.5%, versus 20.0%.
Cash flow, liquidity and obligations
- Six-month operating cash flow was $26.5m, compared with cash used of $26.5m in 2022. Free cash flow, a non-GAAP measure, was $24.9m, compared with negative $28.3m.
- Cash and cash equivalents were $146.7m at June 30, 2023, down from $159.8m at year-end 2022. Short-term investments were $38.6m; the company purchased $38.3m of available-for-sale securities during the half-year. No credit losses were recorded on these securities.
- No borrowings were outstanding under the $100m revolving credit facility; $95.6m was available after $4.4m of letters of credit. The facility matures in September 2026.
- Inventory was $167.8m, down from $178.0m at year-end. Accounts payable was $11.9m and total liabilities were $74.1m. Inventory purchase obligations were $33.1m.
- New operating leases signed in Q2 have expected initial terms of five to seven years and are expected to generate $47.8m of lease costs over their lives.
Changes, outlook and risks
- Margins and profitability weakened despite revenue growth. Q2 gross margin fell 1.1 percentage points, primarily from product mix, higher duties and promotional sales; lower freight costs and less air freight partly offset these pressures. First-half gross margin declined 0.6 points.
- Operating expenses increased 16.3% in Q2 and 21.4% in the first half. Higher selling costs, including inventory storage, and increased general and administrative spending, including people-related and stock-based compensation costs, contributed to the increase. Stock-based compensation was $11.5m in Q2 and $22.3m for the half-year.
- Management reported improved freight rates and transit times and less air-freight use than in the prior-year quarter, but elevated inventory continued to increase storage costs. The company is adjusting future purchases, reintroducing some limited-edition styles and colors, and selectively using promotions to address inventory.
- Management said customer purchase-frequency trends moderated, which it attributed largely to inflationary pressure on consumer spending, and expects macroeconomic pressures to affect near-term results. Active customers increased 21% year over year to approximately 2.5m, while trailing-12-month revenue per active customer fell to $215 from $227. Average order value rose to $115 from $109 in Q2.
- The filing provides no numerical full-year revenue or earnings guidance. Management notes that healthcare apparel is generally not seasonal, but historically Q4 has represented a higher share of revenue and selling and marketing expense.
- A putative securities class action and related stockholder derivative cases remain pending; the company intends to defend them. Management said potential loss was not probable or reasonably estimable and recorded no accrual. The Miracle Ventures litigation concluded in the company’s favor on May 4, 2023.
- Other material risks highlighted include demand and inventory forecasting, excess inventory and markdowns, inflation and freight or labor costs, supplier concentration and overseas sourcing, competition, shipping and fulfillment disruption, and dependence on the FIGS brand and key personnel. The company’s dual-class shares concentrate voting control, and it relies on exemptions from certain NYSE governance requirements.
Investor verification priorities
- Verify whether revenue growth can be sustained as purchase frequency moderates and revenue per active customer declines.
- Track inventory levels, storage expense, promotional activity and gross-margin recovery.
- Assess whether operating expense growth and stock-based compensation continue to outpace revenue growth and pressure earnings.
- Monitor operating cash conversion and the use of cash for investments, alongside the $33.1m inventory commitments and future lease costs.
- Follow the securities class action and derivative litigation, including any change in the company’s loss assessment or disclosures.