FIGS, Inc.

Good afternoon. Thank you for attending today's FIGS third quarter fiscal 2023 earnings conference call. My name is Cole, and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to our host, Jean Fontana. Please go ahead.

Thank you. Good afternoon, and thank you for joining today's call to discuss FIGS third quarter 2023 results, which we released this afternoon and can be found in our earnings press release and in the stockholder presentation posted to our investor relations website at ir.warefigs.com. Presenting on today's call are Trina Spear, our co-founder and 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 SEC filings, including in the 10 key 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 and key performance indicators, which we believe are useful supplemental measures for understanding our business. Definitions and reconciliations of these non-GAAP measures to their most comparable GAAP measures are included in the stockholder presentation we issued today. Now, I'd like to turn the call over to Trina Spear, who's Executive Officer of VIX.

Thanks, Jean. Good afternoon, everyone. Thank you for joining us for our third quarter 2023 conference call. We are very pleased to have delivered better than expected net revenues and adjusted EBITDA margin for the third quarter. I would like to thank our entire fixed team for their hard work as well as their devotion to our healthcare community. Touching on some highlights from the quarter, net revenues grew 11% compared to the prior year period, driven primarily by nearly 20% growth in active customers with another record number of new customers added in the third quarter. Beyond the market share gains we are driving the United States We are building demand internationally with record growth of 81%. We are replicating the powerful word-of-mouth dynamics that we fueled in the U.S. over the last decade. Within teams or B2B business, we saw strong performance with a growing number of institutions coming to FIGS to professionalize their organizations. We also continue to make meaningful progress in normalizing inventory levels, which declined 15% compared to the third quarter of last year. Looking at profitability, we delivered an adjusted EBITDA margin of 17.2% ahead of our expectations and generated free cash flow of $46 million for the third quarter. Our third quarter performance underscores our ability to deliver on our objectives, and as a result, we are raising our full-year net revenue and adjusted EBITDA margin guidance, which Daniela will speak to shortly. Turning to our business highlights, as we execute our strategic priorities, we remain committed to our mission of serving those who serve others. Everything we do is centered around the healthcare community, from the product innovation we bring to bear, to our compelling marketing campaigns, to the inspiring ambassadors we partner with, to our work around advocacy. Product innovation for FIGS is above all about solving real-world problems for the healthcare community with premium products that offer supreme functionality, comfort, and style. Our customer-first approach to product attracts new healthcare professionals to our brand and drives loyalty amongst our existing customers, demonstrated by the fact that repeat customers continue to generate roughly 70% of our net revenues. Our merchandising strategy is to build a product assortment that not only stands alone, but can be matched back to our core scrubs offering to create a complete layering system. We leverage customer insights to bring new product across our categories, These are limited-edition styles that create a flywheel effect that drives both excitement and traffic, whereby customers buy these new styles in addition to replenishing their core. During the third quarter, for example, we introduced our Natal Scrub Tops and Lesage Scrub Jogger with a feminine twist while maintaining maximum movement and utility. We also launched our first wide-leg pant, the high-waisted Yendi Card Go Scrub Pants. The success of these limited edition style drops match back with our core scrub styles and reflect our ability to deliver a consistent stream of newness that our customers want. Another area of strength is in collaboration. We seek partnerships with brands that are leaders in their industries, have similar values to FIGS, and complement our own core capabilities. We have talked in the past about our New Balance partnership, where we continue to see tremendous growth in footwear intentionally designed for healthcare professionals. Most recently, we collaborated with Echo, a leading digital health company that is advancing how healthcare professionals detect and monitor heart and lung disease. We launched the co-branded Core 500 digital stethoscope that was supported by our campaign, Innovation You Can Hear, which exemplified how we create powerful storytelling that captures the attention of our community. Turning to building and deepening engagement with our community. Our marketing strategy reflects a combination of engaging campaigns with creative storytelling, segmentation strategies that align our content to our channels, to our audience, and personalized messaging based on our deep understanding of our customers. The efficiency of our marketing engine enables us to reinvest dollars into top-of-funnel strategies, which help to drive another record number of new customers in the third quarter. As part of our new customer acquisition efforts, we are engaging students who have long purchase cycles as they are just entering their 30-plus year career. We are creating local on-campus experiences with customized products for each school with colors and embroidery. We are also leveraging the Teams platform in order to become the exclusive provider to universities and associations. These efforts led to a new partnership with Veterinary Business Management Association, a student organization spanning 38 universities. We also maintain a strong connection with our community by delivering campaigns that highlight awesome humans, new technical innovation, and cultural moments that drive heightened excitement and a call to action. For Breast Cancer Awareness Month we teamed up with F Cancer on a mission to prevent, detect, and unite. We donated $50,000 to this organization to advance health equity through education, community clinics, and screening. Some of our greatest moments with the healthcare community come through our advocacy. Beyond the products we deliver, the way we utilize our platform to stand up for their rights and their well-being, without hesitation, is what generates such intense loyalty to our brand. This quarter, during the largest strike of healthcare workers in U.S. history, we spoke out in support of higher pay, safe working conditions, and sustainable patient loads, all core tenets of our Austin Humans Bill. Our Instagram posts generated some of our highest engagement over the past year, and letters to Congress sent through our advocacy hub spiked. To date, our community has sent almost 3,000 letters to Congress through our advocacy hub. Looking at our performance outside the U.S., we are thrilled to see the growing affinity for the FIGS brand across continents. International delivered record net revenue growth of 81%, reflective of strong performance across countries, including our longest-standing markets, Canada, UK, and Australia. We added seven new countries, including Poland, Kuwait, and Singapore during the quarter. And similar to Mexico and the Philippines, our entrance into these new regions arose from strong grassroots demand signaling the growing recognition of FIGS worldwide. Turning to our B2B business, teams delivered exceptional net revenue growth year over year with orders from best-in-class healthcare organizations such as the American Student Dental Association, AYA Healthcare, and Veterinary Emergency Group, VEG. a fast-growing emergency care organization with over 60 locations. Inbound demand is growing as more institutions are looking to FIGS to help them professionalize their staff with premium uniforms. FIGS is best positioned to support these institutions with a best-in-class technology platform and products that help their professionals look good, feel good, and perform at their best. Turning to retail, I am super excited to share that we will officially be opening our first permanent retail store which we refer to as a community hub, on November 3rd, which is tomorrow, in Century City Mall. We are incredibly proud of this achievement, not only because this is our first branded permanent retail location, it's really the first of its kind, a space that was created and is purely dedicated to healthcare professionals. In addition to enabling healthcare professionals to feel, try on, and become educated about our products, our community hubs will serve healthcare professionals through purposeful programming and events, on topics that they really care about. In closing, while we are proud of what we have accomplished to date, we have so much untapped potential, which I will speak to following Daniela's review of our financial results.

Thanks, Trina, and good afternoon, everyone. I will begin my discussion with a review of our third quarter financial performance, followed by our revised 2023 outlook. Overall, we are pleased to have exceeded our net revenues and adjusted EBITDA guidance and to be once again raising our full year guidance. We did this while making significant progress toward our strategic priorities, normalizing inventory and generating strong free cash flow. For the third quarter, net revenues grew 10.7% to 142.4 million, compared to 128.6 million in Q3 last year, primarily due to an increase in orders from existing and new customers, as well as higher AOB. We were pleased to deliver a 19.6% increase in active customers, fueled by ongoing initiatives to drive brand awareness globally and strong reactivation rates among lapsed customers. As Trina stated, we've reached another third quarter record in new customers. AOV increased nearly 2% versus last year's Q3, led by higher units per transaction, or UPT, and to a lesser degree by an increase in average unit retail, or AUR. AOV continues to benefit from the product mix shift driven largely by the strength in footwear and outerwear. This was partially offset by a higher mix of sales occurring during our planned sample sale in September. Gross margin for Q3 was 68.4%, compared to 70.6% in Q3 2022. The 220 basis point decline compared to Q3 last year was primarily due to product mix shift. We saw strong growth in non-scrubber categories, including footwear, as well as in certain limited edition styles. Non-scrubware grew 26.4% to 19.3% of net revenues in the third quarter versus 16.9% in the same period last year. To a lesser degree, gross margin was impacted by a higher mix of promotions as well as higher duties. This was partially offset by lower air freight utilization and better freight costs. Moving to operating expenses. Selling expense for Q3 was $32.2 million, representing 22.6% of net revenues compared to 24.8% in Q3 2022. The 220 basis point decline was a result of lower fulfillment expenses, as we lost elevated storage costs last year, and to a lesser extent, leverage within shipping expense due to higher AOV. This was partially offset by higher duties related to the increased mix of international sales and a higher mix of promotional sales. Marketing expense for Q3 was 19 million. representing 13.4% of net revenues compared to 15.6% in Q3 2022, reflecting digital marketing efficiencies. We continue to flex our marketing spend to optimize our return and maintain a disciplined approach to balancing investments in top of funnel marketing and maintaining first order profitability. G&A expense for Q3 was 36.2 million, representing 25.5% of net revenues compared to 21.5% in Q3 2022. The increase in G&A as a percentage of sales is due to higher investment in people, including salaries, bonus, payroll tax, and stock-based compensation expense, partially offset by lower professional fees. In addition, as you may recall, last year we saw an 190 basis point benefit due to a change in our accrual methodology for charitable donations. Taking this to the bottom line, our net income was $6.1 million, or $0.03 in diluted EPS for the quarter. This compares to net income of $4 million and diluted EPS of $0.02 per share in Q3 2022. Adjusted net income was $6.3 million and diluted EPS as adjusted was $0.03 in Q3 2023 as compared to adjusted net income of $4.1 million and diluted EPS of $0.02 in Q3 2022. Finally, our adjusted EBITDA for Q3 was $24.4 million for an adjusted EBITDA margin of 17.2% compared to 16.4% in Q3 2022. Turning to our balance sheet, we finished the quarter with cash, cash equivalents, and short-term investments of $232 million. Inventory declined 15% to $143 million at the end of the third quarter compared to $168 million in the third quarter last year. We made significant progress moving towards more normalized levels and expect inventory to decline again in Q4. Lastly, free cash flow was 46 million in the quarter. Moving to our outlook, starting with the top line. We expect fourth quarter net revenue growth to be up low single digits, reflecting ongoing macro uncertainty and recognizing that there may have been some pull forward of demand given the outperformance of the third quarter. We expect the macro environment to continue to weigh on the consumer at least into the first half of next year. Moving to gross margin for the fourth quarter. We expect better freight costing to be offset by a shift in product and promotional mix. Looking at selling expense, we expect to incur approximately $2 million in initial startup costs for our fulfillment enhancement project. These elevated costs are expected to extend into the first three quarters of 2024. In addition, we expect selling expense to be impacted by higher relative growth in our international business, which carries both duties as well as higher shipping expense given that we currently distribute all products from our California facility. As a result of these factors, we expect fourth quarter adjusted EBITDA margin of between 11 and 12%. Based on our better than expected third quarter performance and outlook for Q4, we now expect 2023 net revenue growth of approximately 8.5% and adjusted EBITDA of approximately 14%. This is up from our previous expectation of 5.5% to 7.5% net revenues growth and 12.5% to 13.5% adjusted EBITDA margin. Overall, we are really proud of what we have delivered in this uncertain macro environment, and we remain excited about the long-term growth potential of our business as we continue to advance our leadership position within the healthcare apparel industry. We have an incredibly healthy balance sheet with ample cash and no debt, and our business model generates strong cash flow. We are making the investments today that we believe will drive accelerated future performance as we move past near-term macro challenges. I will turn it back to Trina to discuss where we are investing in our business for the long term.

Thanks, Daniela. We believe that the growth and evolution of the healthcare industry, combined with our leadership position in healthcare apparel and strong balance sheet, creates significant long-term opportunity for FIGS. As Danielle has stated, we will leverage our strong cash flow conversion dynamics and scale to lay the groundwork for multi-year growth. These investments span across several areas of our business. I'll begin with products, the lifeblood of FIGS. We are evolving our sourcing strategy to deliver the most innovative and high quality products healthcare professionals have ever experienced. We are refining our supplier base with best in class partners. We are working to optimize lead times to bring more flexibility to our supply chain And finally, we are diversifying geographically to mitigate risk. We are confident that this is the right direction for our company as we widen the moat around our business and advance our leadership position. Second, we will continue to invest in driving international growth to become the global leader in healthcare apparel. We are building our localization capabilities, expanding our ambassador network, and deploying brand initiatives in existing and in new markets. Third, We are building our go-to-market strategy for our team's business to capture the growing trend in more specialized and consumerized medicine. We see a huge opportunity to capture share in an area of the healthcare industry where innovation is lacking. To capture this opportunity, we are upgrading the technology behind our team's platform to create a seamless experience for administrators, saving them time and resources when procuring the uniforms their staff need to do their jobs. The next generation of this platform is on track and will launch later this year. Finally, we are just one community hub in on our retail strategy. We are going to learn from our early experience and ensure we have the right talent in place to successfully and profitably build out our retail presence. As we build for the future, we are setting the foundation for a global distribution network. Our fulfillment enhancement project is on track for 2024, and we plan to open a Canadian DC in 2025. In conclusion, we see tremendous opportunity to leverage our authenticity, industry leading product innovation, strong balance sheet and scale to capitalize on the tailwinds in the growing healthcare industry. Healthcare professionals are at the heart of everything we do and serving them is what guides our company. From how we approach product innovation, how we engage with our community and how we show up through our advocacy. These are the values that will keep our company on track to serve healthcare professionals like no other brand and to deliver long-term profitable growth for our community, our employees, and our shareholders. With that, I will turn it over to the operator to take your questions.

Thank you. We will now begin the Q&A session. If you'd like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by two. Again, to queue for a question, please press star one. We'll pause here briefly as questions are registered. Our first question is from Edward Yurma with Piper Sandler. Your line is now open.

Hey, good afternoon. Thanks for taking the question. Congrats on the results. I guess first, I would love to click down a little bit more on the driver of gross margin. I know you talked a little bit about mixed shift to non-scrub, but I'd like to maybe go a little further there. Can you talk about the performance of some of your newer products, like the under-underscrubs, lab coats, things that are more evergreen in the assortment versus something like footwear? And then as a follow-up, we've got a lot of questions on the distribution center investment cadence. So if you wouldn't just mind maybe giving us a quick update on how we should think about that over the coming quarters. Thank you.

Sure, Ed. I can start talking about the drivers of gross margin. So the biggest driver year over year was product mix shift, both into non-scrub wear, as we saw, you know, big acceleration in footwear, but also into our limited edition scrub wear. To a smaller extent, it was makeshift promotional mix. We did see some outperformance in our sample sale and also higher duties. And again, that was offset by better than expected, by better freight, both ocean and air freight.

And in terms of product innovation, you know, we continue to see our layering system resonate with our community. And so we saw that with our underwear, which we launched last in the quarter with our outerwear. Our Sherpas are actually doing really well. Our footwear collaboration with New Balance. And so, you know, non-scrubs as a percent of total is almost 20% of our business. And, you know, as we continue to build out these categories, we'll get leverage from a costing perspective, but, you know, they need to grow, build out, and that's what we're really focused on. And you see, you know, we talked a little bit about how these drops, whether it's within scrubs or outside of scrubs, across our underscrubs, across our outerwear and our footwear, how we're able to match that back to the core and really, you know, we're seeing our healthcare professionals engage with these new styles as well as the core and kind of replenishing our core. And those two things are working really well together.

And on your last question on investments for our fulfillment enhancement project, so we're expecting about $2 million of startup costs in the fourth quarter. Looking into 2024, we're still expecting total kind of project costs to be $16 to $18 million, so $14 to $16 million of that taking place in 2024. As a result of that, we are expecting some pressure in selling as a result of this fulfillment enhancement initiative, but do believe that it's going to enable us to drive better efficiency, better reliability, a better customer experience over the long term. And we're still expecting about $20 million of capital expenses in 2023, with the majority of that taking place in the fourth quarter. Thanks so much.

Our next question is from Brooke Roach with Goldman. Your line is now open.

Good afternoon, and thank you for taking our question. Trina, I was hoping you could elaborate on any changes or trends you're seeing in consumer behavior that you've seen as you moved through the third quarter and into fourth quarter to date. Have you seen any changes in price elasticity of demand or any trends or changes in demand how consumers are engaging with the brand as student loan repayments resume and as we see some changes in the macro in aggregate.

Thanks, Brooke. Yeah, I think, you know, we're seeing kind of two dynamics going on. The first one is, you know, there was a lot of stocking up during the pandemic, and there was obviously a heightened need for scrubs during that time. There was stimulus. Interest rates were super low, and We are experiencing the hangover effect of that, and we see that mainly in our frequency rates. And so we do believe that we, at this point, have abnormally low repeat frequency. And we believe we'll see that normalized over time, and we'll see going into next year and beyond what a more normalized cadence will look like from our healthcare professionals. But as you know, healthcare professionals, you know, they're buying about, you know, pre-pandemic, four to six sets a year. They're spending about $550 a year. And so with us, they're buying more like two to three sets a year and spending about $212. So this is a huge opportunity going forward. The second piece that we think is happening is the macro environment. There's still a lot of uncertainty, and as you mentioned with student loans and other dynamics, that we think will be a short-term headwind. But we do believe we're able to offset some of this repeat frequency with new customer ads, and you've seen that in the last quarter.

Very clear. Thank you so much for that. Daniela, can you comment on inventory rationalization? Are you still targeting 25 weeks of supply by the end of the year? And how should we be thinking about further cadencing of inventory drawdown over the next few quarters?

So we're still on track to deliver approximately 25 weeks of supply at year end. As a reminder, this is slightly above our normalized level of 16 to 20 weeks, which we expect to be able to get back to in 2024. Important to note, still about 50% of our inventory is in core styles and classic colors. So sell all year round, never goes out of stock, never goes out of style. And as you saw, we made progress in the second quarter and the third quarter on moving inventory receipts lower, and we're going to expect to make further progress there in the fourth quarter with minimal plan receipts. I think we continue to be really focused on maintaining the integrity of our brand. with a really disciplined promotional strategy with so much growth ahead of us. And we're going to continue to work through our inventory at the right rate and pace for our business. Looking into 2024, when we're back at that kind of 16 to 20 weeks of supply, we would expect to grow inventory in line with sales going forward.

Thank you so much.

I'll pass it on. Our next question is from

Dana Telsey with Telsey Advisory Group. Your line is now open.

Hi, everyone. Congratulations and nice to see the progress. Trina, you mentioned the sourcing diversification opportunity. What are you doing exactly? Where are you going? And what do you see as the opportunity in lead times as I would think that could also be a gross margin driver? And then just secondly on the more efficient marketing spend in digital marketing, how do you plan marketing going forward? Thank you.

Thanks, Dana. Okay, so from a sourcing strategy perspective, you know, we're developing new supplier relationships and really leveraging their capabilities to help us continuously up our game and continuously execute on new ideas, and that comes in the form of fabrication, styles, you know, details that our healthcare professionals need to do their jobs, and it really comes from the lens of, you know, bringing product that solves problems for people. And so that's where we're focused. To your point about lead times, we do believe the optimization of lead times will help us. It's going to create a lot more flexibility, being able to deliver and respond to what we're seeing with our community and what they want and what they need and deliver that in a more timely way. So we're excited about that as well. And we're also aligning with sourcing partners across geographies. from Asia to the Middle East to LATAM, and yes, to diversify and get better lead times for sure, but also to access the best-in-class manufacturing talent and to mitigate risk through geographic diversity. And so we're really excited about the shifts that we're making. Our ethos around gross margin is unchanged, and so as this strategy unfolds, We're going to be focused on leveraging our high margin core to drive more innovation while maintaining an extremely strong margin rate. As we release some marketing, we're continuing to execute on our strategy of driving bottom of the funnel tax gains and taking those gains and investing on top of the funnel. And so, you know, as we reach tipping points in cities across the U.S. and now in some of our international markets as well, we see word of mouth driving our cash down. And so we are able to take those gains and invest in top of the funnel, driving brand awareness, driving more healthcare professionals into the FIGS family. And so that's why, you know, we're able to maintain our efficiency and you're seeing that quarter after quarter.

Thank you. Our next question is from John Kernan with TD Cohen.

Your line is now open.

Good afternoon. Thanks for taking my question. How should we think about the long-term margin structure of the business? Gross margin has been very stable in a fairly volatile macro. I just I guess when we think about G&A and selling expenses, what are the opportunities long-term to see some leverage on these line items? It sounds like selling has some expenses coming on for next year for distribution. I'm just curious, how do we just think about both those expense line items going forward? Thank you.

Thanks, John. So, you know, we continue to believe that we, you know, we'll get to a high-teens adjusted EBITDA margin. I think it's helpful to think about kind of the different components of what needs to happen. You spoke to, you know, our really strong gross margin rate. I think we're going to continue to deliver that very strong gross margin. Trina spoke about evolving our supply chain to drive greater innovation and quality. We're also expanding our layering system. And so both of these items, we might see some short-term fluctuations, but really we're positioning the business for the longer term. And we have a lot of confidence that these changes that we're making are really going to enable us to be better positioned three to five years from now and also gain a lot of efficiency over time as we scale, particularly to selling. So we do expect 2024 to be burdened with fulfillment project costs, but we are expecting to move past that in 2025. In the near term, you know, we may see a higher cost per quarter as we invest behind customer experience, but we're going to plan to leverage that as we scale. In addition, in selling, we do expect to see a higher penetration of international, which does carry duties and higher shipping costs, and that's going to have a short-term impact on selling expense. But once we open a Canadian DC in 2025, we should be able to drive significant cost savings related to duty and shipping expenses. And over time, you know, we believe we can leverage G&A and continue to remain really efficient in our marketing as we always have been. I think just taking a step back, right, we have a strong balance sheet, strong cash flow generation to really invest in our future growth now. And so we really want to take advantage of our leadership position to capture the opportunities across global health care.

Understood, and thanks for the very thorough answer. Just maybe one quick follow-up on the previous, I think it was Brooke's question, on inventory. Do you expect inventory to grow in line with sales next year, or should we still be cycling down year over year in inventory?

I think in the first half, we'll still be working to get to that 16 to 20 weeks of supply. Looking into the back half of 2024 is when we would expect to see inventory grow more in line with sales once we're in that normalized place.

Got it. Thank you.

Our next question is from Alice Dow with Bank of America. Your line is now open.

Hi. Thank you for taking my question. I'm hoping to get more detail about teams and international since those are the two areas driving your new customer acquisition. How big is each as a percent of sales now? what are the long-term impacts to AOV as both of these categories grow, i.e., does Teams provide an AOV benefit given the bulk orders, and then does international AOV tend to be higher or lower than domestic? And then, you know, lastly, to summarize all that, if you could touch upon the contribution margins for both of these categories as well. Thank you. Oh. So, looking at our teams and international businesses, so speaking to the AOV that we see in each of those, teams does carry a higher AOV as these are generally larger orders. It also has a higher contribution margin. So, gross margin is pretty similar. We do see some offset in higher discounts for these bulk orders. but generally they're buying more of our core product, which helps to keep gross margin relatively stable. And then we got a lot of benefits below gross margin, looking at efficiencies in outbound shipping, and also today it's entirely inbound, so no marketing expense. So teams really accretive from a contribution margin standpoint. International today carries a slightly lower AOV, but we see a lot of opportunity to drive that higher over time. from a contribution margin perspective today, we're really focused on keeping the experience similar for our international customers. And so to do that, we're subsidizing a lot of the shipping and duty expenses as we sell from our distribution center in California. From a marketing perspective, as Trina mentioned, we're really efficient. And so as we expand our distribution network, as we open a Canadian DC in 2025, like we spoke to, we see a lot of opportunity to drive better profitability and international over the long term because of the strong fundamentals that we have today.

Thank you.

Our next question is from Adrian Yee with Barclays. Your line is now open.

Great. Thank you. Good afternoon. My one question, my first question, is on the community hub that you just released this afternoon. Trina, can you talk about kind of the store, if you have any metrics at all, and I know it's kind of the first store, but really kind of the intention behind it. Is it intended to be more of a showroom environment? Or is it a kind of fully standalone box with depth and breadth of inventory? And then my second question for Daniela is on the supply chain, it sounds like you're sort of back to normal supply, but it doesn't sound like there's a ton of inbound manufacturing. When would you think that the kind of, when would you restart up kind of manufacturing and how much of the new product that you would be kind of manufacturing is going to be new versus core? Thank you.

Thank you. So in terms of the store, Community Hub, you know, we couldn't be more excited about it. It's the first solely branded healthcare apparel store in the world, which is crazy to say because this was a dream that we had about 11 years ago. And since then, there's really been no place for healthcare professionals to go and not only get their uniforms so they can do their job, but also connect with each other And, you know, we're really excited about that, you know, providing that. And so that's why we're so excited about the programming we're going to have and the way in which we're going to engage with our community. I think our community is going to be able to learn more about our products. They're going to be able to try it on, really understand their size. all the different styles or different fabrications. We couldn't be more excited. I think the largest, most iconic brands have stores, and our plan is to be a very large, very iconic brand for a long, long time. It's not a showroom, so we carry inventory, and so you can get what you need, and you can leave the store with the uniform that you need. You might have to go to work the next day, and you want to wear your new figs, and we want to provide that opportunity. And so we're officially opening tomorrow, so we will be providing you with all the detail in the future. But if you are in LA, please come by.

Well, congrats on that.

Thank you.

On your question on inventory, so we're really proud to be working down our inventory balance while sustaining such a strong gross margin rate. We have work to bring inventory down by lowering receipts in the fourth quarter. But I think it's important to note that we're still bringing in new products just in shallower buys. It's not going to feel very different to our customers, and it's still going to enable us to drive excitement and engagement. We're going to continue to plan, you know, lower core orders to bring our inventory balance down while still bringing newness and innovation, you know, going into 2024.

Great. Thank you very much. That's a lot. Thank you.

Our next question is from Rick Patel with Raymond James. Your line is now open.

Thank you. Good afternoon. I'm hoping you could dig deeper into the international business. So you've launched in a lot of new markets within the past couple of years. What have you learned about what works, what doesn't? And then as we think about the next year, do you have more countries in the pipeline that you expect to launch in or Are you going to focus more on your existing markets?

Thanks, Eric. Okay, so I think from an international perspective, what we've learned is that our localization strategies are really working. When we're localizing our messaging, our communications, even our products and what we're showing on our site at any given time, obviously our currency, being able to check out and pay in local currency is really important. So localization is really going well. I think the other thing that is working well is how we're being opportunistic, right? We're seeing... the demand organically from a number of countries and we're opening them up and we're not even really spending on marketing and we're seeing that demand and we're seeing that build in markets that, you know, maybe we weren't even planning over a year or so ago to open that market and that's been really exciting. So, and I think the other thing that's been really great to see is the word of mouth dynamics. They are very similar to what we've seen in the United States. That we're seeing different markets in these tipping points around how people are coming back and engaging with the brand over time, how referrals and people are telling their friends or colleagues about FIGS, and that's been really great to see. And so going into next year and beyond, I think we're going to continue to be opportunistic. We're obviously going to invest in our existing markets and ensure that we continue to build the brand. And, you know, as we see the brand of Burness grow, we're going to continue to invest behind that. But we're also going to be opportunistic as we open up new markets next year.

Can you also touch on the outlook for promotional events in the fourth quarter? I'm curious if you expect a similar cadence to last year or if you have different activations in mind.

So our guidance assumes that we continue to maintain, you know, discipline around our promotional events. As you know, we don't typically do kind of like for like events every quarter. And we think that's really important to ensure that our customer is isn't waiting for the next event. And we also just have more flexibility as a D2C-only company to be really nimble in our strategies and adjust based on our inventory position, based on the volume, based on what we're seeing in the customer kind of spend. So we're always going to focus first and foremost on protecting our brand, but we also recognize that customers have been leaning into promotions during this difficult time. So, you know, we're going to plan to respond accordingly depending on the environment.

Thanks very much.

Our next question is from Bob Dribble with Guggenheim. Your line is now open.

Hi, good evening. This is for Bob Dribble. I wanted to follow up on Adrienne's question about the community hubs. Can you point out any meaningful digital halo effects or any uptick in the area that you're implying? Because I'm pretty sure the area is very heavy on the healthcare community, so I just wanted to understand what was behind the location. And also, I wanted to ask about the competition. Any updates on the competitive environment? Are the promotions driven by new players or promotions solely by macro? Thank you.

Sure. So as it relates to our community hub in Century City, it's really central. It's central to health care clinics that are actually located in Century City Mall, like One Medical, like Kind Body and others. And there's also a number of hospitals within a few miles. from Century City Mall. So we did a lot of analysis around, and as you know, as a DDC company, we have so much data around our customers and where they live and where they work. And so utilizing that to figure out where to put our community hub, and that will be our strategy going forward to, you know, that will help us decide where to go next and where to put our store. So, and to your point, I think the digital halo is really important. Stores in many ways are profitable billboards and they are able to drive our digital business as well. You try on your uniform in the store, you figure out your size, and then you can kind of shop the next time online after understanding that. And so there's a lot of benefits. Other retailers have seen, you know, AOVs much higher than what they see online. There's also a lot of different metrics out there around other retailers and what they see as it relates to omnichannel and how the repeat effect of having an omnichannel business across both online and off. And so we look to see that over time as well. As it relates to the competitive landscape, we really haven't seen much change since we talked about this last time. From our perspective, we're adding new customers at a record rate. We're continuing to widen the moat between us and everybody else. The next closest competitor continues to be about one-tenth our size. And how are we widening the moat? We're doing it with new product, innovation, elevated quality. We're engaging our customers. We're advocating for them. And so we do remain the leader in the space. And we're going to continue to invest in widening the moat between us and everybody else. And during this, you know, given this environment, I think a lot of companies are pulling back, and they are, you know, standing still. And what we're doing is, given we have $232 million of cash, we have no debt, we're generating cash, we're making investments, really smart investments, so that over time, we are widening that moat between us and everybody else. And in continuing to show up in the most authentic and the most, you know, the most meaningful way and purpose-driven way for our community.

Awesome. Thank you. Good luck.

Thank you.

Our next question is from Matt Karanda with Roth MKM. Your line is now open.

everybody thanks for taking the questions um just on the new customer ads in the quarter just any uh specific uh breakdown of how many came from international versus sort of the core domestic market and then on the new cohorts that you've been acquiring any notable differences there versus your core consumer just in terms of product mix full price versus off price propensity aovs etc

So looking at our new customer ads, international, we're really pleased with the growth that we saw in the quarter. But it's also great to see that domestic is continuing to add more new customers year over year. And I think that really just speaks to the opportunity that we have within the U.S. to continue to penetrate and grow our brand awareness. So we continue to see a healthy mix between the two. We're not seeing a lot of difference in the new customers that we're adding today. We're seeing similar growth. Obviously, we've spoken about some of what we've seen on the spending patterns in terms of higher AOV offset by lower frequency. We're seeing that across the board on our new customers and our repeat. Otherwise, yeah, they look pretty similar to the customers that we've been acquiring.

Okay, great. And then just on the store strategy, I think it's been asked in different ways, but I just wanted to put a finer point on the question. Are stores, in your view at this point, a growth driver with sort of four-wall ROI metrics that you would expect to sort of achieve, or are these kind of more of a brand beacon? How should we be thinking about sort of the store strategy? And I know, obviously, with the understanding that it's early, just given that we had the first one, but just wanted to ask specifically on that.

Yeah, I mean, community hubs retail is definitely a growth driver. with four-wall EBITDA profitability. It will also be a brand identifier. We look to be an institution within cities across the United States. And I also think that what we're doing in person with our community is going to unlock a lot of what we're doing digitally. And I think there's a lot of synergies between what we're doing within our community hubs. And that's why we're calling them community hubs. And it's not just about that transaction. It's about much more. It's about that connection. It's about, you know, having events and programming that aligns with what our community cares about. And that alignment and that, you know, we have this diehard fanatical community. And every time we show up in person, whether it's our pop-up shop, whether it's our activations, whether it's our mobile experiences, they want more of us. They're in, you know, five-hour lines waiting for figs. And so this is only going to continue to drive the business. and not just what we're doing with our community hubs. It's also going to drive teams. Teams are going to walk in that store and say, hey, how do I get fixed for my team? It's going to drive what we do with digital. And then, you know, you shop online, you return in the store, et cetera. There's a lot of dynamics there that are going to be really beneficial over time. And so we're really excited to see how we continue to roll this out. And we're really excited to see how our community continues to engage with us in person.

Our next question is from Brian Nagel with Oppenheimer. Your line is now open.

Hi, this is William Dossett on for Brian Nagel. Good afternoon and nice quarter.

Thank you.

So, excuse me for going back to the quarter, but just to ask about near-term sales guidance and understand this better. You indicated there may have been a pull forward in Q4 or Q3. Could you elaborate on what you may have seen that caused that and to what degree this may have affected the quarter? And also, any idea that you could give us on how demand tracks throughout the quarter?

So, related to kind of the third quarter and what we saw with the outperformance, so, you know, as we discussed, our planned sample sale outperformed our expectations. We do believe there was potentially some pull forward associated with that, but we're really proud to pass through the majority of the beat and raise full-year guidance for the second time this year in a really uncertain macro environment. Can you repeat your second question?

Just, yeah, well, thank you for the first part. And, yeah, just any idea for how the demand tracked throughout the quarter?

Yeah, thank you. So looking at the fourth quarter, I think is what you're asking. And, you know, I think the Q4 guidance is not necessarily reflective of what we're seeing for our growth rate quarter to date. It's really more of an expectation of what we expect to see in the quarter for aggregate. You know, as a reminder, we don't do like for like events. We change our launch calendar. So it's hard to extrapolate kind of what's happening in our quarter to the full period. I also think just given we have a lot of volume in front of us with our upcoming Black Friday Cyber Monday event, we just want to be cognizant as we're guiding that there's a lot left in the period and that, you know, our consumer, especially at our income level, can be strained. And so we're taking all of that into account in addition to the pull forward potential that we discussed when thinking about our Q4 outlook.

Perfect. Yeah, that's very helpful. My next question is a follow-up to a previous question on gross margins. Just the product mix shift, how did it change since you last laid out expectations in August? Is this just a temporary or more sustainable shift? And then looking to Q4, you all noted that better freight would be offset by a shift in products mix and promotional mix. So, just wondering if you could size the quantity of those impacts to gross margin, at least directionally.

So, looking at our gross margin for the third quarter, we did cite product mix shift as the biggest impact year over year, mostly driven by mix shift into non-scrub wear. We spoke about the strong performance in both outerwear and footwear. which are categories that generally contain a lower gross margin rate, and also mix shift into more of our limited edition scrubware. That was really within our expectations from August. I'd say what was a little different from what we expected was some of the outperformance of the sample sale, which had a bit of an impact on gross margin. I think related to that, we're really focused on how we continue to move through our inventory while simultaneously protecting the brand. It was all non-core product. And, you know, we're going to continue to move through inventory at the right rate and pace and deliver a really strong gross margin rate. Looking at the fourth quarter, you know, similar to dynamics we're expecting to what we saw in the third quarter with product mix as we continue to shift into more non-scrubware and also our limited edition scrubware offset by better freight and

Promotional mix product mix will be the biggest impact followed by promotional mix Thank you, and then one last housekeeping item if I may just Can you discuss how to look at a share based compensation within your expense structure longer term?

If there's any changes Definitely so within our stock based compensation today we have a You know, some portion of it that's really non-recurring. And so looking longer term, a portion of our executive stock-based compensation is going to roll off at the end of 2024. And then we'll have another portion roll off at the end of 2025. So we will start to see a more normalized stock-based comp as a percentage of sales by Q4 2025, which we expect to be about half of our current rate as a percent of sales.

Thank you very much. Good luck.

Thank you.

There are no further questions in the queue at this time, so I'll pass the conference back to the management team for any closing remarks.

Thank you so much for joining us, and we look forward to seeing you again soon.

That concludes today's conference call. Thank you for your participation. You may now disconnect your line.