Figs: The Underrated DTC Darling

TLDR:

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FIGS is underrated. Here’s 2k words why.

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Now let’s dive into why Figs is one of the most underrated public DTC companies.

FIGS deserves more love. And a higher stock price.

FIGS doesn’t get enough credit for the DTC darling that it truly is. FIGS launched in 2013 with a simple goal: make Scrubs look good. They’ve expanded into basically the luxury outfitter of medical professional everywhere and ridden that success to a public company.

It’s down -76% from it’s IPO in 2021, trading at $8.23/share with a $1.38B market cap. My take, that’s more of a reflection of the market than anything else. This company seems to be hitting its marks, executing on its strategies and controls its destiny.

This is probably a company out of reach for an acquisition, but I’m still bullish on its future growth. So let’s dive in to see how we can take this company into the billions.

The Financial breakdown

The Financial TLDR:

At a half billion in sales with an actual net income, Figs is one of the top public Consumer brands that’s getting beating up in the public markets mostly due to IPO’ing at the end of the bull run. At its current stage it also doesn’t fit a typical investor narrative of high growth or high profits.

But it has the bones to be both in the future.

• Decent Growth

• Fat Margins

• Actually Profitable

Figs was able to grow well, keep most of it’s gross margin intact, barely increase SG&A, and flip from losing -$9.6m in 2021 to making $21.1m in Net Income in 2022. That’s something that should be applauded. Most of the other companies we looked at were burning cash, reversing growth or barreling towards bankruptcy.

The global scrubs market is $94B. Figs is the premium brand in the space with tons of TAM in front of it but isn’t growing very quickly. That’s intentional as capital has gotten expensive, but it opens an interesting challenge for the brand…

Do they have enough time to capture the market before a competitor moves into their lane and captures their market share?

Here’s how I’d grow FIGS to $1b+ in Topline:

1) Get more aggressive with Marketing.

It’s easy to say hard to do in this environment. They’ve been very disciplined and created a situation where they control their own destiny, but there is so much growth opportunity in front of them.

Spending 15% of Revenue on Marketing is appropriate for a biz this size, but when you consider their Selling expenses increased +46% YoY vs. Marketing only increased +32% YoY. It begs the question… Should they be spending more on Marketing?

There’s room for them to spend more if they want to. The TAM in enormous compared to their current 0.5% market share. Competitors haven’t caught up and don’t seem fast moving, but how long do they really have? While everyone pulls back in the recession, now feels like the time to hit the gas.

FIGS established itself as the luxury distributors in the space. Recession or not they have double protection against a negative economic cycle.

1. Their customers are significantly less likely to lose their job than that average consumer.

2. It’s a luxury product which typically isn’t heavily effected by recessions.

The other piece to consider is in 2022 they had 2x the inventory on hand ($177m) than in 2021. That’s isn’t to say they’re falling into the inventory death spiral, but that is significantly more capital tied up in inventory. The best way to move more inventory. Spend more on Marketing.

It’s only a matter of time before incumbents clone them. How long can they operate at chugging away levels before they lose market share to the old school players that launch a new premium line with the deeper distribution?

Solution: They need to invest more in marketing to take the market, before incumbents catch up.

2) Triple down on Footwear

They already have a successful partnership with New Balance. The New Balance 996 is one of the top rates “Shoes for nurses” and the partnership seems to be going well. But there’s so much growth for them in footwear either by capturing margin or expanding their marketshare.

Especially when foot pain is a hair on fire pain point for their core audience. We’re talking about an audience that spends 10+ hours a day on their feet: standing, running, lifting.

Either they should have New Balance ($5B cap) invest in them going all in on the relationship, or buy one of the DTC Nurse footwear brands (Clove/Gales). Cloves probably fits their branding better.

Comfortable footwear lines would give FIGS more products to sell into their core audience that fits perfectly into their branding. They have methodically owned medical professionals’ wardrobe, they should capture the margin on footwear as well. It’s too hard to just enter footwear but if they could bring a partner in more closely it’s a massive lever for them.

Plus an entry product for everyday people looking for comfortable shoes expands their market as well. Similar to how everyday joes buy athlete-level products, the footwear worn by doctors/nurses would be a great marketing angle to sell other “on your feet all day” consumers.

Solution: Go deeper in Footwear to unlock more margin + marketshare.

3) Internationalize the business faster.

Sales by region isn’t broken out in the Earnings report, but my guess is the majority of sales are in NA. That’s the obvious place to start and build especially for a DTC brand, but there are medical professionals all over the world.

This is another considerable capital commitment, but rolling through the luxury medical markets across the world will probably be more lucrative short term than convincing the audience who hasn’t bought yet to get off the fence. Those purchases require time anyway vs. getting access to the customers dying their products in other countries that can’t currently access them.

This is harder for a company that is all in on DTC. The ‘own everything’ mentality makes it hard to consider international wholesale partners, but FIGS is built for those relationships. 70% GM % with a strong brand is the quintessential margin profile for wholesale.

They would probably need access to more capital, but it will unlock much faster growth in 18-24 months. They’ll build the brand faster in more places and test what markets it makes sense to build out a more formal presence. Not every market will be worth entering depending on the stage of the business. Not matter what, if FIGS wants to be the dominant brand they’ll have to partner with some of them anyways.

That growth will fuel more cash turns which will fuel more product line expansions allowing the business to scale faster. When that flywheel really starts turning it open up a massive B2B hospital distribution strategy for them that will be the next a massive growth lever for them past the $1B mark.

Solution: Grow faster through international wholesale expansion.

4)  Spin off an affordable sub-brand.

Figs costs ~2-4x the average scrubs provider. They are basically the LVMH of medical outfitting. The current premium brand needs to be protected, but the pricing excludes the majority of the medical professionals. Not everyone who works in these settings makes enough to afford $80 scrubs.

Again we’re playing in enormous TAM ($94B). How can FIGS capture more of that? There’s a great Toyota - Lexus moment here. Different brands targeting different markets that are all made with the same process, distribution and similar parts.

FIGS remains the luxury medical outfitting brand and they create a completely separate Figs subsidiary to operate as the disruptive affordable brand. Take the same designs/wins and resources to win the higher-volume lower market, but keep the special materials/designs for the premium brand.

This way, current FIGS buyers feel special and will buy the more expensive, premium products, while the audience that aspires to wear FIGS become regular buyers, not just 1-2 items/yr customers.

Solution: Launch a subsidiary brand to take the lower market before competitors innovate.

5) Reverse into home-wear and completely own the customer’s wardrobe.

Figs has nailed the comfortable + look good at work problem set. Their customers trust them outfit them in the most important status environment in their life. Why not expand the catalog to do it at home as well?

They have the opportunity to become the Nike for medical professionals.

Everything a medical professional wears to and from the “hospital” would be FIGS.

• When they step into a hospital they wear high-performance FIGS.

• When they head home they wear comfortable FIGS.

• Customers who want to be like medical professionals wear FIGS in support.

The company already owns the narrative and distribution into this community.

Post-COVID, First responders + Medical professionals are treated more like heros. Similar to how we treat athletes in America.

They’d be stepping down production into less complicated fabrics. The products would be the less complicated version of medical apparel. They already know the styles, color/design palette their customers like. This is a high-value customer base and the current product lines are just the first line into their lives.

Solution: Expand into general Apparel and become the Nike of Medicine.

Final Thoughts

All-and-all FIGS, is playing the game right and deserves more credit.

They’ve been growing for years in a truly innovative manner and disrupting their category. Scaled aggressively when money was cheap and pivoted to sustainable growth in a tough macro.

There’s an enormous TAM ahead of them and are currently the dominant brand in space.

The only real risk is if someone catches up before they hit true escape velocity. Feels weird to say that, but even as a public company they’ve only captured 0.52% of the scrubs market.

The more interesting piece here…

Figs is pioneering the pajamas at-work trend. Post-COVID consumers expectations of being comfortable + presentable at work has hit a new high and the trend is here to stay. Figs is one of the first, most successful brands to actually execute this.

The model will rollout to in other categories in other forms and factors. We’re going to look back in 20 years when everyone is wearing some form of “Proleisure” to work and if FIGS is still around they’ll be one of the true pioneers of the space.

🧠 The Takeaways

FIGS is the true DTC darling that even as a public company has eons of growth ahead of it.

1. Premium branding, price point, and margins give FIGS dominant position to execute the Wholesale expansion crucial to get to $1B+ in annual sales.

2. The growth opportunities to become a complete Apparel brand for one of the highest paid consumer groups is in their future and hopefully roadmap.

3. FIGS pioneered the Pro-leisure category. Now they have the opportunity completely disrupt multiple categories.

👷 What can you do about this?

1. Partner into new categories to de-risk the entry test. If it works deeper partnership or acquire brands to expand rapidly.

2. How healthy are your margins? How much are you controlling SG&A as a % of Sales?

3. What other categories can you take your core branding and expanding into?

The best ideas in business are usually approaching your same problems with a different approach.

Jeremy Horowitz

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