FIGS, Inc.

Ladies and gentlemen, welcome to the FIGS first quarter 2022 earnings conference call and webcast. My name is Felicia and I'll be your operator today. Please note there'll be a questions and answer session. If you wish to join the queue, please press star followed by one on your telephone keypad. I will now hand over to Kerry Gillard, Vice President of Investor Relations. Please go ahead, Kerry.

Good afternoon, and thank you for joining today's call to discuss FIGS first quarter 2022 results, which we released this afternoon and can be found in our earnings press release and in the shareholder slide deck on our investor relations website at ir.warefigs.com. Presenting on today's call are Trina Speer, our co-founder and co-chief executive officer, and Daniela Ternschein, our chief financial officer. As a reminder, remarks on this call that do not concern past events are forward-looking statements. These may include predictions, expectations, or estimates, including about future financial performance, market opportunity, or business plans. Forward-looking statements involve risks and uncertainties, and actual results could differ materially. These and other risks are discussed in our shareholder slide deck and SEC filings, including the 10Q we filed today, which we encourage you to review. Do not place undue reliance on forward-looking statements which speak only as of today and which we undertake no obligation to update. Finally, we will discuss certain non-GAAP metrics which we believe are useful supplemental measures for understanding our business. Reconciliations of non-GAAP measures to their most comparable GAAP measures are included in the shareholder slide deck and earnings press release we issue today. Now, I'd like to turn the call over to Trina Spear, Co-Chief Executive Officer of SIGS.

Thanks, Carrie, and good afternoon, everybody. Thank you for joining us for our first quarter 2022 conference call. Before we start, I want to mention that today is International Nurses Day. It wraps up Nurses Week, one of our most important events where we go above and beyond to celebrate our nursing community. Here at FIGS, we are committed to celebrating, empowering, and serving our often humans every single day. Our healthcare professionals are the reason we exist, and we try to give back to them every chance we get. Now, let's talk about the business. SIGS delivered strong Q1 performance with 26% revenue growth year-over-year and an adjusted EBITDA margin of 23% as we further advanced our product innovation and broadened our reach. While these results were lower than our expectations, our ability to deliver outside growth and strong profitability in Q1 is a testament to our team, our business fundamentals, and our incredibly loyal customer base. This is especially true given the supply chain and macroeconomic headwinds that ramped up significantly during the quarter. Healthcare professionals are at the center of everything we do, and we approach every decision with them in mind. We're also building FIGs for the long term. Using these guide codes and the inherent strength of our business model, we remain confident in our ability to continue to achieve strong results despite these challenging conditions. Let's focus in on our key performance metrics. Net revenues were up 26% to $110 million, led by a significant increase in AOV and continued growth in revenue per customer. Our active customer base grew 31% over the last 12 months to nearly 2 million by the end of Q1. Our trailing 12-month net revenues for active customer increased $13 year-over-year to $226. We delivered a 16% increase year over year in our AOV to $116. Our lifestyle business grew 81% year over year to 18% of our net revenues, up from 12% in Q1 of last year. And our international business grew 59%, representing 8% of net revenues, up from 6% in Q1 of last year. Now, I'd like to share more about what we're seeing with our supply chain and customers since we last spoke to you in early March. As you may remember, beginning in Q3 of 2021, we began implementing mitigation strategies to help us get ahead of port congestion and longer transit time. We adjusted our transit time assumption, increased our weeks of supply for our core styles and core colors, and when necessary, utilized additional air freight. We built our 2022 plan based on these mitigation strategies and believed we were positioned well to navigate these challenges effectively. We also expected to have less reliance on the air freight in 2022 than we had had at the end of 2021. However, since early March, we've seen an intense and persistent surge in the volatility of ocean transit times for receiving our products, largely due to vessels being unexpectedly rerouted by carriers while in transit. Shipping times began to vary, ranging from as fast as 30 days to upwards of 120 days, and it's difficult to see this unpredictability ending soon. The lack of reliability has reduced our visibility into when our products will arrive, and without predictability, we are less able to mitigate these issues with longer lead times alone. This has impacted our ability to keep core products in stock and execute our color and product drops that fuel our growth. As a result, our Q1 revenue growth was lower than expected as we had to shift a planned color launch out of the quarter and were limited in our ability to keep in stock two of our most popular core franchise styles. For the rest of the year, we plan to significantly increase our use of air freight to reduce our exposure to these unpredictable transit times. While this will create additional gross margin pressure for the year, this is the right thing to do for our business and for our healthcare professionals. We have readjusted our product launch calendar to further mitigate these impacts and to more reliably deliver the innovative products our customers want and need. In addition to these supply chain challenges, as March progressed, we also began to see trends soften due to macroeconomic factors such as high inflation and shifts in consumer spending patterns. While our largely non-discretionary, replenishment-driven business model is enormously resilient in the current environment, we are not completely immune to these factors in the near term. So to summarize, Supply chain disruptions have intensified significantly since the beginning of March, and macroeconomic trends are probably having some impact on our customers. As a result, we are revising our full-year outlook, which Daniela will say more about in a moment. That all said, I want to remind everyone that we have a deep connection with our healthcare workers who live in their uniforms, and the demand for our brand remains strong. our leadership position, our incredibly strong brand, and our passionate community gives us considerable advantages in this climate. For example, in Q1, searches for the term scrubs grew 3% year over year as compared to 7% for the fourth quarter. In comparison, searches for the term figs grew 44% year over year in Q1 compared to 40% in the fourth quarter. Data like that is why we remain confident in our ability to achieve at least $1 billion in annual net revenue by 2025. Now, let's go into more detail on how we are advancing our key strategic priorities to drive to that $1 billion number. Our key areas of focus are product innovation, deepening the connection to our customers, and growing brand awareness. Let's start with product. Product innovation is our foundation. We are changing the definition of a healthcare professional's uniform. Our holistic approach focused on driving innovation across our layering system, from base layer to outer layer, remains at the heart of our product design and development. This starts with our scrubware products, which represent over 80% of our revenue. In Q1, we released our reimagined Ion Light line collection, now known as FreeX. FreeX is a sustainable functional fabric engineered with 92% recycled poly and a mesh lined interior for breathable warmth. This unique fabrication is both fur and liquid repellent, which makes it perfect for our veterinarians and dentists. The collection is just one of the many ways we are innovating with specific professions in mind as we continue to serve the needs of our customers and drive brand loyalty. We're also seeing tremendous success in the franchises we are building around our 13 core styles. In Q1, we launched new slim styles like our slim Katarina scrub top, a fresh look on a timeless favorite with a more tapered fit. And just like we've seen with our high-waisted pants, this style is resonating with our customers. In the less than three months since it launched, this slim style already makes up 21% of core Katarina scrub top sales. Outside of scrubs, we are excited by the continued strong growth in our lifestyle offering, which were up 81% in the first quarter. On shift, off shift, head to toe, we are outfitting the medical community through our innovative layering system and driving increasingly higher purchases of complete looks with our complimentary color coordinated products. Our lifestyle products like underscrubs, outerwear and footwear are specifically designed with the needs of the healthcare professional in mind. These categories did not exist before FIGS. It's a market we created and we are expanding it every day. Let me say a bit more about footwear. In Q1, we upped our footwear game, debuting a new style with even more colors that strategically aligns and complements our full layering system, and it's working. Our footwear revenue in Q1 alone was larger than all of our footwear revenue in 2021, a great indicator of the progress we have made in this key category, as well as the ability of our brand to extend beyond scrubs. Our strategy of deepening and expanding our products is resonating with our community. As of today, we officially have over 2 million active customers. This is an important milestone for us as we continue to build a truly iconic brand. And as a reminder, this growing community comes back to SIGS again and again with almost 70% of our revenues coming from repeat customers. These individuals are our brand evangelists. They stay up until midnight to see our latest release and buy it before it sells out. And they spread the word to colleagues that the latest color and style has launched. This dynamic is incredibly difficult to replicate, and it motivates new customers to try FIGS. Our brand and the loyalty it drives transcends beyond making great products, and our engagement on social reflects the deep connections we have made. For instance, across our almost 1.2 million followers on social, we have an engagement rate of over 3% compared to the industry standard of approximately 1%, which means our healthcare professionals are interacting with our brand three times more frequently, and we continue to grow this relationship through unfiltered, authentic, honest conversation. We also look to build deeper connections with our customers through localized experiences, After a two-year hiatus due to COVID, we're very excited to be returning to our roots of in-person community building. In just a few days, we will be bringing almost 200 of our awesome humans on a retreat filled with yoga, meditation, and reflection. These are some of the most influential voices in healthcare, voices that deeply believe in our mission and absolutely love our products. And their authentic connection to FIGS further drives meaningful engagement with our community. While word of mouth remains our primary source of new customers, investing behind top of the funnel marketing strategy is a key focus for us in 2022. And with only 2 million active customers today, out of the 21 million healthcare professionals in the U.S. alone, we have so much room to grow. This year, we are targeting select cities, Seattle, Houston, Philadelphia, and Chicago, with powerful integrated marketing campaigns and activations, beginning with our pop-up experience in Houston that kicked off Nurses Week. We've intentionally chosen markets with dense concentrations of medical professionals where we are under-penetrated. Our active customer counts in these markets represent less than 12% of healthcare professionals in the area. And similar to the successful penetration these out-of-home strategies have driven in key cities like New York and Los Angeles, we are confident these brand activations will bring more often humans into the FIGS family. And our focus does not stop with the U.S. Healthcare professionals around the world are underserved by the legacy products and buying experiences available to them. That's why we are continuing to build out the FIGS experience in our international market, learning as we go, inspiring those Austin humans outside of the U.S., just as we have done domestically. In the quarter, international grew 59% year-over-year, and we are continuing to develop the experience with site-specific assets, a promotional strategy, greater localization, and an increased ambassador presence. Additionally, we are excited to announce that in April, we soft-launched seven new countries in the EU, Belgium, France, Germany, Ireland, Italy, Netherlands, and Spain. While we have a lot of work to do to scale overseas, we're seeing great early results. I'm incredibly proud of the work the team has done to expand our international presence, as this remains a massive area of untapped potential for FIGS. I'll close by saying this. Bigs continued to grow significantly in the first quarter, despite the headwinds created by unprecedented supply chain issues and macroeconomic uncertainty. Year over year, we grew revenue, users, AOV, and all other aspects of our business. We remain on track to reach at least $1 billion in annual net revenue by 2025. And I want to stress, because of the nature of our business, we believe our growth will be less impacted by the macroeconomic environment than others in the consumer space. FIGS is incredibly well positioned to continue to be the brand for healthcare professionals. Our business model is based on a largely non-discretionary replenishment-driven core product. Healthcare occupations are projected to add more jobs than any other occupational group through 2030, and the industry dynamics remain as strong as ever. Our management team is best in class, and through innovative products, a superior user experience, and a deep connection with our community, we've created a formidable boat as the clear D2C leader in the space. With that, I will hand the call over to our CFO, Daniela Tarnschein.

Thanks, Trina. And good afternoon, everyone. I want to reiterate what Trina said. We are immensely proud of the performance we delivered in the first quarter and our ability to continue to navigate the evolving and dynamic supply chain challenges we are experiencing today. Now let's dive right into the financial results. Net revenues for Q1 were up 26.4% to $110.1 million compared to Q1 last year. Our unique financial model is driven in part by our robust customer dynamics, which despite a challenging backdrop, continue to strengthen. Our net revenues per active customer increased to 226, up 6% from 213 the prior year. Average order value, or AOV, grew 16% from the prior year to 116 this quarter. This result was due to a substantial increase in lifestyle adoption, driven by continued growth in footwear and outerwear, As we expand our layering system offerings, our customers are increasingly purchasing a complete head-to-toe look, and we see this in our metrics. In Q1, customers who purchased a lifestyle item had over 20% more units per transaction than their scrubs-only counterparts. AOV also benefited from lower discounts through strategic reductions in our promotional strategy. Our Q1 revenue growth came in lower than planned. primarily due to the supply chain challenges affecting our scrubber products that Trina discussed earlier. As a result of these impacts, primarily a color launch that moved out of the quarter and a delay in two of our most popular franchises, the high-waisted Zamora and Yola, which we transitioned to a new yoga waistband, our repeat frequency and order growth was slower than anticipated in the quarter. Despite these headwinds, we are proud of our team's resilience and agility in still achieving 26% net revenue growth. Gross margin for Q1 decreased 40 basis points year-over-year to 71.2%. This decrease is primarily due to higher use of air freight, as well as higher freight rates across both ocean and air. Partially offsetting these gross margin headwinds, we saw continued improvements in product costing and scale, and lower discounts that enabled more full-price sales in the quarter. Moving to operating expenses. Selling expense for Q1 was 22.1 million, representing 20% of net revenues compared to 19.7% in Q1 2021. As we mentioned previously, we experienced increases in shipping rates from our carriers, partially offset by the increase in AOV. Marketing expense for Q1 was 15.4 million, representing 14% of net revenues compared to 12.4% in Q1 2021. As we discussed last quarter, in 2022, we are focusing our investments on top of funnel marketing initiatives aimed at driving brand awareness. As a result, we have higher brand spending Q1 compared to the prior year. The increase was largely driven by spend on enhanced creative as well as expenses related to the launch of our localized offline brand activations later in the year. Within marketing, we have built a diversified media mix that is not overly dependent on any single channel. As a result, we do not believe we are significantly impacted by Apple's privacy changes. However, the efficiency of our performance marketing was negatively impacted by our inventory constraints in Q1. We continue to believe the fundamentals related to the customer acquisition funnel remain strong, and we were able to maintain high efficiency even in a challenging environment by driving most of our acquisitions through word of mouth. G&A expense for Q1 was $27.2 million, representing 24.7% of net revenues compared to 21.1% in Q1 2021. This increase was primarily driven by non-cash stock-based compensation, the incremental capabilities we are building in key departments like product innovation, merchandising, and marketing, and public company costs, which did not exist in Q1 2021. Taking this to the bottom line, our net income was $9 million, or $0.05 in diluted EPS for the quarter. Adjusted net income was $10.5 million, and diluted EPS as adjusted was $0.05 in Q1 compared to $0.08 in Q1 2021. As expected, the decrease in diluted EPS as adjusted was driven by a decrease in adjusted net income year over year due to investments in the business. We believe these investments marketing, talent, and innovation are essential for our long-term success and position as well to capitalize on the long runway of growth ahead of us. Finally, our adjusted EBITDA for Q1 continued to be strong at 24.9 million for an adjusted EBITDA margin of 22.7% compared to 28% in Q1 2021. This change is primarily driven by increased investments in brand marketing and talent, as well as incremental expenses related to now being a public company. Despite a softer than expected top line, we continue to execute with discipline at the highest level, leveraging the strength of our financial model to deliver high revenue growth coupled with strong profitability. Quickly touching on our strong balance sheet, we finished the quarter with cash and cash equivalents of $189.4 million. Our cash on hand and cash flow generative business model enables us to strategically deploy capital to fuel our growth and operations over the long term. Turning to inventory, we ended this quarter with 102.8 million on our balance sheet. We continue to use our strong balance sheet to ensure we can meet future demand. The increase in our balance is being driven by our decision to increase weeks of supply on our core scrubber offerings, as well as higher in transit inventory given extended lead time and the impact of higher inbound freight costs. Moving on to our outlook. Based on the challenges that Trina discussed, we now expect 2022 net revenues to be approximately 510 to 530 million, representing growth at 22 to 26% compared to 2021. This change is primarily driven by the increased supply chain disruption that began in late Q1 and that we expect to impact us for at least the remainder of the year. Specifically, this is making it more difficult for us to bring product enhancements to market quickly and plan and sync our color-coordinated launches, which feature multiple colorways with products from facilities around the world. For example, in April, we had to split a tri-color launch that was fully merchandised and campaigned together into two completely separate launch dates. This led us to move the largest volume colorway weeks later, leading to a suboptimal experience for our customers and missed demand opportunities. While these inventory constraints are the primary factor affecting our outlook for the full year, we also recognize that our consumers are facing pressure from macroeconomic factors, particularly inflation, as well as shifts in their spending patterns. The Salesforce Q1 Shopping Index recorded a 3% decline for global digital sales in the first quarter of 2022, the first recorded drop in the nine-year history of the index. We continue to grow significantly in Q1, despite the decline in this index. But as a completely digital company that is rapidly scaled during this time, we understand this could be having some impact on FIG, and we are adjusting our expectations accordingly. To be clear, our business fundamentals have not changed, and our growth will continue to be driven by the largely non-discretionary or punishment-driven nature of our core product portfolio, combined with increased adoption of our complete layering system. With respect to growth margin, flexibility is critical to operating in this challenging environment, and we are committed to making the right decisions for FIG's long-term success. Given the increased unreliability of ocean freight, we are shifting more of our freight mix to air to ensure timing consistency for our launches. As a result, we are now anticipating our gross margin to come in between 67% to 68%, which is below our previous outlook of 70% plus, but remains a leader in the apparel space. We believe these headwinds are temporary and do not structurally change our long-term margin profile. While we anticipate these challenges to continue throughout the year, we believe they will ease in the future and we will return to our long-term targets. For adjusted EBITDA, high growth, balance of profitability are key tenets of our business model. And in this environment, we must adapt to maintain the correct equilibrium. As a result of the near-term pressure we see in top-line growth and growth margin, we are now anticipating our 2022 full-year adjusted EBITDA margin to be in the range of 16% to 18%, which is below our previous outlook of 20-plus percent. SIG's future growth ultimately depends on making smart investments in product innovation, marketing, and community to support our long-term ambitions. That means that while we will remain disciplined, we will not prioritize short-term profitability at the expense of our future. As always, we will find places to drive efficiency so that all of the pressure we see in revenue and growth margin does not flow through to the bottom line, enabling us to continue to deliver strong profitability in spite of the near-term challenges. We believe we can return to higher profitability once these challenges pass. Moving to tax. We expect our full year tax rates to be approximately 36% to 37% as a result of several non-district items driving our effective rate higher. We also expect capital expenditures to be in the range of $8 to $12 million for the year, with the increase primarily driven by our fulfillment expansion. Now, I'd like to give you some perspective on our quarterly flow. As it relates to the top line, we expect our second quarter revenue growth rate to be less than 20% as we continue to be impacted by supply chain challenges and macroeconomic factors, including the re-phasing of our product launch calendar, which means more launches to the second half of the year. As it relates to growth margin, based on what we see today, we anticipate our second quarter growth margin rate to be at the high end of our full year range. Finally, within operating expenses, we are planning higher marketing spend in the second quarter to support our efforts around Nurses Week and our ambassador retreat that Trina described. Additionally, within selling, we expect higher one-time costs in Q2 associated with the expansion of our existing fulfillment center. And finally, we expect higher G&A expenses in the second quarter, primarily due to copying of periods with no public company costs. Given these factors, Q2 adjusted EBITDA margin is expected to be in the low teens. In closing, we are incredibly excited about the long runway of growth ahead of us. And despite the near-term challenges, we remain confident in our ability to achieve at least $1 billion in net revenues by 2025. We have a great business model, a world-class management team, and a dedicated community we're passionate about. We cannot wait to deliver on all of our plans to support SIG's awesome humans. With that, I will turn it over to the operator to kick off our Q&A session, first with our analyst community. After addressing their questions, we will then answer a handful of questions received from our shareholders through the Shisei platform. Operator?

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your telephone keypad. The first question comes from Bob Durbel from Guggenheim Securities. Please go ahead. Your line is now open.

Hi. Good afternoon. A couple of questions. I just think more on the top line and I think your customer. When you look at the changes that you're seeing in your customer spending, can you maybe break down if you think some of it is COVID pull forward? versus just a tougher environment on the macro i'm just like if you could maybe break it down a little bit more the priorities on what you see you know impacting the overall business that would be helpful and the second question is is on when you think about the new outlook in terms of 22 for the full year can you break down some numbers around air freight um you know what's in your new numbers on the air freight on the gross margin

you gave us a little color on the second quarter in terms of the rate but it'll just be helpful to have a little bit more on the dollar numbers um you know that you're spending in aggregate as we think about the full model thank you thanks bob um you know great question i think we'll we'll break it up into a few parts um but from the demand side you know we're it's mainly um you know the supply chain issues that we discussed you know from the demand perspective we're seeing a bit uh from an inflation standpoint and from a shift in consumer spending but the majority of uh the you know the q1 challenge as well as well as the rest of the year is really on the supply side and so uh we're doing everything we can to get our goods to our healthcare professionals uh throughout the rest of this year um but that's really where where we're seeing that um you know we're still planning to deliver 22 to 26 growth for the year And we do believe that once the supply chain challenges subside, that we can accelerate our growth. You know, as a reminder, this market opportunity remains massive. And as you know, we're the clear leader in this space. As it relates to Outlook, Danielle, if you want to take that.

Yeah, I'll take growth margin in Outlook. You know, we're navigating some very fluid and evolving dynamics as it relates to inbound, really seeing unprecedented challenges that are impacting almost everyone out there. And so a reminder on growth margin, we were already expecting to be down relative to 2021. due to ocean and air freight generally being higher and also increasing transit times resulting in the need for continued air freight. We've been able to offset some of that near-term pressure through driving more sales at full price and also continued product costing benefits as we scale. That said, we're anticipating an additional 300 to 400 basis points of impact due to the increase in air freight spend that we're planning for the back half of the year. You know, most importantly, our underlying business model is not changing. We believe that these pressures are temporary and that when these supply chain disruptions ease, we'll be able to return to our long-term gross margin target. You know, we're making the right decisions for our business, and we're doing what's best for our business and our customers for the long term.

Thank you very much.

The next question comes from Adrian Yee from Barclays. Please go ahead. Good afternoon.

Trina, my first question is, it's on pricing. I think that in past calls, you've talked about the need to sort of maintain your pricing. Has that actually changed? And what does, I guess it's for Daniela, the other half of it, what does your average unit cost look like within your inventory. So what's your AUC up? You know, kind of general industry is sort of like 10%-ish. And I'm just wondering, have you changed your philosophy on whether you should or could be raising prices, especially now that, you know, there's all this kind of macro pressure that is now out there? So that's my first question. Thank you.

Thank you, Adrian. You know, I think what's most important here at FIGS is to ensure that our prices are affordable and accessible for every healthcare professional around the world. As you know, we have structurally advantaged gross margins that have been built from day one here at FIGS. You know, we're not seeing any real need from a costing perspective beyond, you know, the strategic decisions we're making around air freight to increase our costing. given you know as actually as we're scaling we're seeing a lot of benefit um uh from a costing perspective with our manufacturing partners so uh and you know the good the good news about the business is that you know 80 of our products as you know comes from one fabrication you know over over 80 of our business is 13 core styles so we're going to continue to monitor the situation and make the best decision for our community that enables us to serve and and meet the high expectations of the healthcare professionals we serve.

Yeah, and Adrienne, as it relates to your question on average unit cost, you know, I think we are a little bit different. While we're seeing higher air freight spend and higher air and ocean rates, we're actually seeing this offset by better costing across the board, and it's really driven by what we're seeing in our core scrubware. So in, you know, top selling styles like Katarina, Kazma, and Zamora, we've been able to offset any increases in raw materials through continued efficiencies as we grow and we scale. So while we're seeing some increases in average unit costing, it's not as large as probably other people in the industry.

Our next question in the queue comes from Lorraine Hutchinson from Bank of America. Please go ahead, Lorraine. Your line is now open.

Hi, this is Alice Xiao on for Lorraine Hutchinson. Thank you for taking our question. We wanted to get an update on sourcing. Since the majority of fabrics are sourced out of China, did the recent lockdowns impact your ability to get inventory for later this year? And if there are any impacts, can you give any guidance on how we can try to quantify that and then also maybe elaborate a bit on how you're navigating them?

Sure. So I think for us, the main impact that we're facing from the supply chain side is on the transit side. As it relates to our manufacturing partners, we have had no shutdowns, and we are fully operational across our supplier network. But it is a fluid situation that we're evaluating as we move forward here. so we're working with all of our partners we're seeing where uh the delays are and and we've been able to navigate quite uh fluidly across our supply chain but we'll keep you updated as we go the next question comes from Michael binetti from Credit Suisse please go ahead Michael

Hey, guys. Thanks for taking our questions here. Trina, I just want to make sure I understand what you guys are referring to when you say you saw some changes in consumer spending patterns in the first question. And then I would love to know, just given how dynamic the situation is right now, I guess you reported and guided us on March 8th, and revenues obviously ended lower than planned for the full quarter. Can you help us think a little bit more about the cadence that you saw through the quarter, the exit rate? It must have been a fairly significant downturn at the end of the quarter. And then I'm just – sorry for the multi-part here, but I'm wondering how much cushion you have below the gross margin line to defend that EBITDA margin you gave us if sales or inventory flows worsen from here, again, knowing how volatile the environment is right now.

Sure. Yeah, I mean, I think in terms of what we're seeing and experiencing from the consumer side and just the macroeconomic changes, right, we have a pandemic, we have supply chain volatility, high inflation, consumer spending shifts, and a host of other significant macro issues. And there's a lot of uncertainty in the world. But I want to be clear that While we're not immune to it, it's having relatively less of an impact on us than others. You know, I feel really good about our business model and our long-term prospects. You know, what hasn't changed is that we're able to navigate through this uncertainty by controlling what we can. So we're airing products so that we can meet the demands of our healthcare professionals, and we're also, as a reminder, you know, we sell nondiscretionary products that healthcare professionals need. and are pretty recession resilient. So as we continue to move forward here, we feel really good about the industry that we're in and the replenishment-driven nature of our business. As it relates to your other happier question, Daniela, do you want to take that?

Yeah. So I'll start. Michael, with cadence through the quarter. So as of our last earnings call, our trends were on track with expectations, and we had our sample sale in the first week of March that did really well on fewer promotional days year over year, which gave us a lot of confidence in our plan. uh we began to experience impacts in our business in early march we started to really see the increased unreliability and volatility around transit times and the biggest impact for the quarter was a color launch that was planned for the end of the quarter uh that actually moved into q2 so that had the largest impact for what we saw in q1 as it relates to adjusted EBITDA margin and gross margin. So I want to start by saying that we're really proud of our ability to deliver 23% adjusted EBITDA margin despite lower than planned revenue in the quarter. I think that's really a testament of our business model and our management team's commitment to high growth and strong profitability. And so when we think about the full year, we're going to continue to invest in places that are really essential to building a strong foundation for long-term growth, like marketing, and product innovation, and technology. So within marketing, it's critical for our long-term growth and brand awareness. So we're going to continue to invest here. We think it's going to stay consistent as a percentage of net revenues. Selling, we're expecting to de-lever slightly. because of expansion in our fulfillment, also with higher shipping rates that we've been seeing. Finally, within G&A, this is the biggest area where we think we can really drive efficiency and where we have flexibility if revenues are to be higher or lower than we anticipate. So we'll continue to look for ways here to really balance investment as the year progresses. And so, you know, very few companies at our stage that are able to really invest meaningfully in their business while simultaneously being really disciplined and sustaining a best-in-class adjusted EBITDA margin profile, and we're going to continue to do just that.

Thanks, guys.

Our next question comes from Lauren Schenk from Morgan Stanley. Lauren, your line is now open. Please go ahead.

Great, thank you. I was wondering if there's any dollar amount you can put around the color launch in the first quarter to just help us triangulate, you know, how much of the disappointment is relative to that launch relative to macro. And then in terms of the back half of the year, how are we thinking about third and fourth quarter? Should third quarter be significantly better than the second quarter? Or is it more going to be a bell curve with fourth quarter better? Thanks.

Yeah, so as it relates to what we saw with the color launch and supply chain in the first quarter, you know, a couple factors for supply chain challenges in the first quarter, the first of which was the color launch that moved out. But we were also out of stock on some of our key core franchises, like our high-waisted Zamora and Yola. And so... not giving exact numbers, but the majority of the impact that we saw in the first quarter was related to the supply chain challenges. And we do believe that the macroeconomic factors were impacting us to a lesser extent. And that's what we expect to see in our full year outlook and how we're modeling it in our full year outlook. As it relates to the third and fourth quarter, we're not really guiding specifically to quarters in the back half of the year. We will say that because of the changes that we've made to our product calendar, we've moved more of our product launches into the back half of the year. And so we do feel, you know, we feel good about our outlook and our ability to hit the third and fourth quarter and hit our full year outlook.

The following question comes from Brian Nagel from Oppenheimer. Please go ahead, Brian.

Good afternoon. I apologize for the repetition in my question because it's going to follow on some of the other questions. But they're just looking at the, I guess, the top line dynamics here in Q1. So my question is if the delays to the color launch were, you know, it sounds to me like a primary factor. in the sales shortfall in Q1. So the question I have is, has that product now been delivered? And with those sales then, if the product is available now in Q2, would that basically make up for what was lost in Q1, or is there some other factor at play there?

Yeah, I mean, I think so, you know, that launch, the Q1, it did occur in Q2, although there are some launches in Q2 that are moving into the back half of the year, which is why we're guiding the way we are in the second quarter of the year. So this is a fluid situation. What we're doing is we have set kind of a very strategic plan. You know, we're really strategically airing a number of launches this year that align with specific events with our community. And so Nurses Week, for instance, is a big week. Today's the last day. We had aired in our product to meet the demand, and it's been an incredibly strong week. I think there are other, you know, events throughout the rest of the year where we are airing our product in to meet the demand. But that being said, you know, a lot of these decisions have been made now

and coming into play in this in the back half of the year okay and then my my follow-up question so at least daniella you know we talked about there's just the supply chain disruptions in these longer it sounded like the ships are spending more time on the water now so i guess the question is this a new we've been talking about supply chain disruptions now for a while is this a new dynamic within the supply chain direction disruptions or just more of the same

So it's really changed significantly towards the beginning of March. And previously, we were seeing ships being on the water for longer, right, lead times as long as 120 days. And what we're seeing now is a lot of unpredictability and volatility. So we're seeing some of our ocean transit times exceed 120 days and be much longer than that. And it's creating a lot of unpredictability in our color launches and our calendar. We extended our lead times to really account for the longer transit times, but what we haven't been able to account for is this unpredictability and volatility, and that's what's causing a lot of the issues in the first quarter that we've seen.

So just a curious, I thought that when you're talking to your shipping partners, is there a reason for these, is there a clear reason why these ships in some cases now are spending more time in the water?

So several of our vessels, what we're really seeing is that our vessels carrying, you know, our important launch products have been suddenly and unexpectedly rerouted in transit. And that's what's leading to these really extremely delayed ocean transit times that we're seeing.

Okay. I appreciate the call. Thank you.

The next question comes from John Karenin from Cohen. Please go ahead.

Hey, good afternoon. Thanks for taking my question. So just on active customer growth, to get to the second quarter guidance, sequentially there's a big kind of deceleration in just the sequential add implied in the guidance that has to ramp pretty significantly as we get into Q3 and Q4. Is there anything from a seasonal perspective from Q3 and Q4, understanding Q4 is usually a much bigger quarter than the rest of the year, that It gives you the confidence in those customer ads as we go into the back half of the year, given you have cited some concerns over consumer spending.

What we saw in Q1 as it relates to new customers is that really the same things that drive repeat and loyalty and retention also drive new customers. So when we have fewer color launches, that impacts our new customers. We actually see two to three times more new customers on a launch day than an average day. And so we do believe that our numbers in Q1 were impacted by the supply chain challenges that we experienced. that we saw in the quarter. But we have a lot of confidence in the year due to the strategies that we have in place. So core products like our high-waisted are back in stock and we have mitigation strategies to limit that in the future. We refloat our product launch calendar so that there are more launches in the second half of the year, which gives us confidence in that as well. And we're also increasing investment in top of funnel, localized brand activation and brand awareness strategies. So we're gonna continue to do all of those things Sequentially, we also do see strength in Q4 because of Black Friday, Tiber Monday, and holiday. So we still have a lot of room to grow. We only have 2 million active customers today out of 21 million healthcare professionals. And so we feel really confident in our outlook and the active customer numbers for the back half of the year.

Got it. Danielle, just maybe one more question for you. You know, all the IPOs from last year in consumer and tech are trading, you know, much lower than where the IPO and deals happen. Any changes to stock-based comp and those figures and any equity compensation plans? And how do we think about share count for the full year? It looks like the share count came down quite a bit from Q4. So just curious on how to think about those kind of things.

Yeah, we haven't had any changes to how we're thinking about stock-based compensation. We continue to think it's an important tool to motivate and incentivize our employees. As it relates to share count, it's going to be impacted by the stock price, so we're expecting it to stay relatively consistent throughout the year with a little bit of growth from where we are today.

Okay, thank you.

The next question comes from Brooke Roach from Goldman Sachs. Please go ahead.

Good afternoon, and thank you so much for taking our question. I wanted to follow up on John's question regarding net new customers and how you're thinking about the demographics of those customers. As you dig into the new customers that you acquired this quarter, what did the demographics look like among those new customers this quarter or the past two quarters relative to prior year cohorts? Did you see any change in customer behavior among some of the lower income customers within the customer base?

We're not seeing anything particularly in our data. We see similar income levels in our new customers and also our existing ones and also a similar mix of professions that we've seen in the past. I think it's been an incredibly challenging time for all of us, especially our healthcare community, but we're not seeing anything in the data to, you know, guide us one way or the other on the demographics. I think it's important to note, right, healthcare professionals are not going away. So we still, you know, believe that once these supply chain challenges subside, the opportunity in front of us is massive, and we really believe we can accelerate from here.

Got it. And then just one final follow-up on the freight and transit times. As you look into the back half of the year, is there an optimal number of weeks of supply that you're looking to plan ahead for given the the very uncertain environment to potentially go back to using more ocean freight rather than air, or is that something that's just still TBD at this point?

So it depends on what type of product, right? So within our core colors and our core styles, we are increasing our weeks of supply so that we're better positioned to meet the customer demand that we see. With a lot of what we're planning to air in the back half of the year, it's related to our product launches. So these generally, you know, they drive a lot of hype and excitement and engagement on the site. but they, you know, live for a short period of time. So it's not really about increasing weeks of supply. It's more about being really decision in our air choices and making sure that we are doing what we need to do to have the product here to meet the demand and to sustain our launch calendar and to grow at the race in our outlook.

Thank you. I'll pass it on.

The next question comes from Dana Telsey from Telsey Advisory Group. Please go ahead.

Good afternoon, everyone. As you think about your product assortment and also the expansion into lifestyle, how are you thinking about the marketing with the inventory delays and being able to continue to capture more customers, spend the marketing dollars, and not disappoint them? How are you thinking about the framework of how you're going to market, what you're going to market, and the ability to convert? Thank you.

Thank you, Dana. Great question. I think that's the decision that we're looking at all the time, right? How much product do we have? What is the demand that we're seeing? And how much are we spending from a marketing standpoint to really engage our community across platforms? You know, I think one of the things that's been really unique about FIGS is this balance, right, of growth and profitability. And what drives a lot of that is our best-in-class marketing efficiency. And so we're going to continue to be super disciplined about how we spend and where we spend those dollars to engage our community and have them – you know get the products they need as well as the products they want right and so even as our launch calendar is shifting even as we're you know moving some of our launches around we are consistently number one first and foremost engaging our community with the right products at the right time In addition to that, we are continuously bringing more as it relates to our lifestyle business. It's a great point, Dana. You know, 81% growth in our lifestyle business, and there's so much more that we're going to be bringing on this front. So it is that balance between the products we have, the launches that we, the cadence of launch, as well as the spend, and we're going to continue to be disciplined around all of it.

And one last thing, you've strengthened the team. I think you've added a new Jamie Pinto on the product side, strengthened the board. Anything that we should be looking at there? Are there people that you need to add or how you see the team developing?

Yeah, no, it's been a great number of additions. Jamie Pinto, our Chief Product and Sustainability Officer, joined us from Under Armour, and she's incredible. Our new board members, AG Lassley, Jeff Wilkie, Ken Lin, these are all legends and icons in their respective industries, and we're super honored and proud to work with them. Across the management team, we feel really great about our, you know, it's really a best-in-class management team, and our board is incredibly, they're exceptional. So we really feel good about where we're at, and we're going to continue to execute.

Thank you.

We have no further questions on the telephone line, so I will now hand back to Tina Spear, Co-Chief Executive Officer.

Thank you. Okay, before ending our call today, we would like to take some time to answer a few of the most upvoted questions from our shareholders through the SAIT platform. So the first question asks about our stock price performance and whether there are any plans for stock dividends or buybacks. So first of all, with respect to the stock price, as I've said before, in the short run, the stock market is a voting machine, and in the long run, it's a weighing machine. We have a very unique financial profile with an impressive combination of revenue growth and profitability. Our business model is based on a largely non-discretionary and replenishment-driven core product. and we're in a recession-resistant industry. This industry actually grew in both 2008 and 2009, and we are serving the fastest-growing job segment in the country. As a result, we do believe we're significantly undervalued right now, and with continued growth and execution, our true value will be reflected over the long run. In terms of dividends or buybacks, we don't have any plans for those at the moment because as a high-growth company, we believe the best return on our capital is investing back into our business to support our long-term growth. That said, if the stock continues to be undervalued, we will evaluate other options like share repurchases if we believe that is the best near-term return on our capital. The second question is about whether we're planning on expanding into markets outside of healthcare. We definitely believe that there are a number of other workwear segments beyond healthcare that are dramatically underserved, and over the long run, there's an opportunity for us to innovate in these categories. However, we're 100% focused on healthcare for the foreseeable future. The opportunity within healthcare is massive, and we are going to grow it further before we expand into other segments. Finally, we got a couple of questions about our team's business and specifically about partnerships with university nursing programs and large academic hospitals and whether we offer embroidery or color matching for colors that are required at those institutions. So as you all know, our team's business is where we partner with schools, healthcare institutions, and medical practices to supply FIGS directly to them. On the student side, we partner with many of the biggest universities, such as USC, NYU, and many others to outfit medical, dental, and other students. Many of these partnerships are initiated by students who love FIGS and take it upon themselves to coordinate large group orders. We also work with a large number of hospitals, concierge clinics, med spa chains and other institutions and practices to outfit them in FIGS. As for embroidery, we have our own FIGS tech enabled embroidery workshop that we offer logo and text embroidery and it allows our healthcare professionals to tell the world who they are and what they do. And as for color, we're leading the charge when it comes to colors we offer with our innovative drop strategy. Between our core and limited edition styles, we offer just about any color you can imagine. But what we actually think is most notable is how hospital departments and medical offices have switched to figs, to figs colors as their standard colors, like what we've seen over and over again with groups swapping out their old gray for figs graphite as an example. So I think that should cover all the questions from the SAVE platform.

Operator?

Thank you. With that, ladies and gentlemen, the call is finished. Thank you all for joining. You may now disconnect your lines.