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spk14: opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I'd now like to turn the conference over to our host, Jean Fontana. Please go ahead.
spk04: Thank you. Good afternoon and thank you for joining today's call to discuss FIGS four quarter and full year 2020 results, which were released this afternoon and can be found in our earnings press release and in the stackable presentation posted to our FIGS website at .WareFIGS.com. Presenting on today's call are Trina Spear, our co-founder and chief executive officer, and Daniela Ternshine, 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 the 10 KB file 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-GAP metrics and key performance indicators, which we believe are useful supplemental measures for understanding our business. Definitions and reconciliations of these non-GAP measures to their most comparable GAP measures are included in the stockholder presentation released today. Now I would like to turn the floor
spk08: over to Daniela Ternshine. Thank you, Jean. Looking back at 2023, we outperformed our expectations with net revenue growth of 8% and adjusted EBITDA margin of 15.8%. We reduced inventory by 33% and generated strong pre-cash flow of $85 million. Looking across the business, we grew our active customer base 13% versus last year. Additionally, we achieved 18% net revenue growth in non-scrubs, 42% growth in our international business, and nearly 50% growth in our team's business. We also opened our first permanent retail location, our community hub in Los Angeles, with strong early reads in traffic and conversion. Importantly, we continued to lay groundwork to scale our business with investments in infrastructure and technology. While we are proud of these accomplishments, recent trends have become more challenging, which I will speak to in more detail shortly. But I want to share right up front my fervent position that we are on the right course. During 2023, we took measures to right size our inventory levels, which are leading to some after effects. However, the work we have underway to create a more solid foundation from product to marketing to operations will set us up to succeed in the future. We remain the distant leader in healthcare apparel and have the scale and balance sheet to opportunistically invest across numerous growth levers. Now, diving in a bit deeper to provide context on our 2024 net revenue outlook. With respect to the macro environment, we believe there are two factors that are impacting the healthcare apparel industry. First, we continue to see inflation weigh on consumers, including our healthcare community, two thirds of whom make less than $100,000 a year. They have less spending power than they did two years ago and are being more intentional about how they spend every dollar. Second, we believe that the sustained fatigue and stress amongst healthcare professionals post-COVID may be impacting behavior. The traumatic experience of COVID followed by the sustained high demand for healthcare workers is taking its toll on our community and may be impacting their purchasing decisions. Our healthcare is human roundtable discussion this past November shined a light on just how much pressure they're under. And we believe we may be seeing this reflected through lower engagement metrics. We are in the trenches with our community on these challenges and are diligently working to help solve them through our awesome human bill. Despite these external challenges, we remain optimistic about the state of the healthcare workforce long term, particularly given that healthcare and social assistant jobs are projected to be the fastest growing of any sector between 2022 and 2032 and are estimated to create about 45% of all projected job gains over that period. This is according to the Bureau of Labor Statistics. In addition, a recent survey by the University of Maryland Baltimore showed that 38% of Gen Z plans to pursue a career in healthcare. Outside of these macro factors, we've also taken a step back to assess our own performance. In 2023, one of our top priorities was to reduce inventory levels back to approximately 25 weeks of supply by year end. We were successful in meeting our goal with only modest impact on our gross margin. We did this in part by bringing back a number of products from prior launches. For example, through our iconic FIGS 10 campaign, we relaunched 10 of our community's favorite colors in 10 weeks. At times, we also leveraged conversion driven marketing, including promotional messaging to move through our inventory. We believe this may have contributed to the lower frequency and active customer trends we're now seeing. Looking back, we think we got away from the cohesive brand building strategy that ties our product launches to powerful storytelling campaigns. Our success has been based on brand excitement that ignites a word of mouth flywheel. This flywheel is what makes FIGS fundamentally different and we're at our best when it's clicking. In 2024, our focus will be leveling up on innovation and rebuilding our brand momentum through a number of initiatives. As discussed last quarter, we are evolving our supply chain through best in class partners across continents to deliver the most advanced products to healthcare professionals. In addition to innovation and quality new products, we are enhancing important details like our waistbands, our trims, zippers, fabrication. We have also embarked on an initiative to improve fit consistency across our assortment, which we are excited to roll out over the next year starting as early as Q2. As we continue to advance our technical capabilities, we also see opportunity to lean further into our layering system by becoming the category defining brand across scrub wear, outerwear, footwear, under scrubs, compression socks, bags, and so much more for healthcare professionals. Non-scrubs represented 23% of net revenue in the fourth quarter, reflecting strong performance in a number of these categories and we see meaningful runway ahead of us. The recent launch of our on shift Sherpa bomber jacket was one of our biggest to date and is a great example of what we're able to bring to the market outside of course scrub to address the needs of healthcare professionals on shift and off. Lastly, as we take our product innovation to the next level, we are introducing extremes. Extremes exemplifies how things can serve even the most extraordinary needs of healthcare professionals. This year, we plan to introduce a series of innovative launches featuring technical products designed to solve problems for some of the most specialized fields within medicine. Last month, we launched our first extremes collection supported by an exciting marketing campaign featuring Dr. Luke Bennett, the medical performance director for HINSTA, the medical team supporting formula one. Our large scale score storytelling campaigns will be designed to shine a spotlight not only on the extraordinary work that these healthcare professionals do every day, but also on just how extreme all healthcare professionals are. We have a series of exciting partnerships within sports medicine and other areas of healthcare as well, including search and rescue, large animal vets, and EMT. These big brand moments will be augmented with a series of evergreen and smaller product launch campaigns throughout the year, as well as community events and activations that will enable us to engage healthcare professionals in person. The success of our brand has not just been about great product innovation and powerful brand marketing, it's the seamless integration of both that generates excitement, leading healthcare professionals to share their FIGS experience with one another. We believe that our extremes initiative is integral in rebuilding the powerful word of mouth dynamic that helped us to surpass a half a billion dollars in 2022, just 10 years after our inception. To lead our integrated marketing strategy, Benet Eaton has joined FIGS as chief marketing officer, bringing 15 years of experience, most recently as Nike's head of brand marketing for New York City. In addition to Nike, her background includes Ralph Lauren and Under Armour. We look forward to having her lead our brand and digital marketing efforts as we work to get back the secret sauce that has driven our success for over the last decade. While we're excited about our strategic initiatives to drive brand momentum, we know that building new and existing customer engagement in an environment of the headwinds facing our healthcare professionals will take time, which is reflected in our guidance. The healthcare industry is evolving, and we're taking steps to evolve with it while also leveraging our multiple growth levers. Starting with international, net revenue grew 42% in 2023 versus the same prior year period. The strong performance was driven by growth in our more established markets, stemming from localization efforts and targeting initiatives as well as traction we were gaining in the 10 markets we entered in 2023. Mexico and the Philippines remain our top new markets, and as you may recall, this came with minimal marketing investment. We plan to add new markets in 2024 as we continue to build our brand globally. We are also excited to share that for the first time in our company's history, FIGS is partnering with medical teams behind sport, starting with Everton Football Club of the English Premier League, which is the most viewed sports league in the world. Our relationship with Everton's medical team demonstrates our commitment to celebrating healthcare professionals who have dedicated their lives to serving others, including athletes. Finally, in support of our growing international business, we plan to open a distribution center in Canada in 2025, which we believe will meaningfully improve our margin and enhance the customer experience with shorter shipping time. Our team's business grew net revenue by 66% as compared to the fourth quarter last year. We successfully launched our Teams app open access test, enabling businesses of any size to purchase grubs through our platform, which contributed to strong growth in the quarter. We believe that our ability to serve businesses of any size through this platform meaningfully increases our addressable market. In addition to serving these customers with premium products, we also offer personalization, including embroidery. During the holiday season, we created a customized experience for our largest Teams customer, a travel nurse agency, to offer a gifting experience to their employees. With healthcare evolving to become more specialized, personalized, and localized, we see tremendous opportunity to grow this business through an expanded assortment and exceptional online digital experience. The U.S. Concierge medicine market is expected to double to $13.4 billion by 2030. We see this reflected in record membership growth amongst Concierge clinics and in the increased M&A activity within the primary care space. These trends validate our efforts to expand our Teams business. Turning to retail, we are pleased with the early results of our first community hub since our opening in early November. We believe that consumers still want that in-person shopping experience as evidenced by the fact that in 2023, e-commerce comprised only .6% of total retail sales in the United States. Our community hub is attracting new customers to the brand while also enabling us to serve existing customers with an additional shopping channel. Since opening in Century City, we've received requests from numerous healthcare professionals to open a store in their market. We are targeting a summer opening for our second community hub in Philadelphia. The 4100 square foot location will enable us to deliver events and programming that align with our community pillars and advocacy efforts. The large store format will also enable us to better showcase our broader layering system, presenting an opportunity to drive higher AOV. To exceed half a billion dollars as a digital only brand is something we're very proud of, and we believe that we can deliver an exceptional shopping experience across multiple channels. Our community hub rollout strategy will remain, test, learn, apply, and win. And finally, we are laying the foundation to scale. We are undergoing the transition of our fulfillment operation to a -in-class tech-enabled facility we will launch later this year that will enable us to scale and provide a better customer experience. In conclusion, we recognize that industry dynamics are creating some near-term pressure, but we have been and will continue to take steps to offset these headwinds and position ourselves for long-term growth. We are unwavering in our belief that building a brand the right way takes time, but is the most authentic and valuable way to do it. We are positioning our company to capitalize on the opportunities in front of us while taking important steps to make us a stronger, more resilient company in the future. We remain bullish on our long-term opportunity for several reasons. We are the pinnacle brand in the healthcare apparel space. We've just hit one million followers on Instagram, showing how we have the most loved brand in the industry. We have ample market share opportunity across geographies, channels, and professions. We have long-term healthcare industry tailwinds. We have a strong balance sheet with 250 million in cash and short-term investments. We have no debt, and we continue to be a cashflow generative business. I remain confident that the strategies we have underway will lead to healthy, long-term, sustainable growth. Now, I want to take a moment to acknowledge the announcement related to Daniela Ternshein's decision to leave FIGS to assume a CFO role at another company. I am so grateful for her contributions over the last five and a half years as she helped us build the brand that serves those who serve others. Daniela has had the backs of our healthcare community, and she has been an incredible leader and thought partner to me and the whole FIGS family. She has also built out the best of the best finance team, leading us to over half a billion dollars in net revenue while also being profitable. We are fortunate to have Daniela with us through mid-April to ensure a smooth transition. Kevin Fosse, our corporate controller, has been part of the FIGS family for the last three years, and we have every confidence in his ability to serve as our interim CFO. With that, I will turn the call over to Daniela to provide details on our fourth quarter and full-year results in our outlook for 2024.
spk06: Thank you, Trina. My time at FIGS has been an incredible experience, and I'm so grateful to have been part of this growth journey. I am so proud of what we have accomplished over the last several years, and I truly believe that there is so much opportunity ahead. Our finance team is comprised of some of the best and the brightest, and I have every confidence that we will have a seamless transition under Kevin's leadership. I will now turn my discussion to a review of our fourth quarter financial results, followed by our outlook for the first quarter and full-year 2024. We were pleased to have exceeded our adjusted EBITDA margin expectations for 2023. As we consider our 2024 outlook, we are mindful of the current macro challenges and remain focused on leaning into our brand DNA to drive improved and more consistent performance in the future. Importantly, we have a strong balance sheet to make sound investments in business to drive long-term sustainable growth. As noted in our press release, our fourth quarter reflects a 4.7 million net revenue reclassification from selling expense to a contra revenue account. This is associated with an accounting change for duty subsidies that we have been paying on behalf of our Canadian customers. Now turning to our results. Beginning with the top line, for the 2020 Q4 net revenue reclassification, the net revenue reclassification was not reflected in our Q4 net revenue guidance of low single-digit growth. Active customers for the 12-month period increased 13% compared to a record quarter of new customer growth in last year's Q4. As a reminder, we anticipated that the strong performance of our sample sale would pull forward some demand into the third quarter. AOV increased .5% to $117 in the fourth quarter due to higher average unit retail or AUR driven by product mix. Trailing 12-month net revenues per active customer decreased 5% to $210. Gross margin for Q4 was .5% compared to .2% in Q4 2022. The net revenue's impact of the reclassification negatively impacted gross margin by 100 basis points. Gross margin benefited from lower air freight utilization, improved ocean freight costs, and a more favorable promotional mix partially offset by product mix. Selling expense for Q4 was $28.1 million, representing .4% of net revenues compared to .8% in Q4 2022. The $660 basis point decrease was primarily due to lower warehouse storage and associated labor costs within the facility, as well as improved domestic shipping fees. As a reminder, selling expense no longer includes the $4.7 million in duty subsidies we reclassified. Marketing expense for Q4 was $20.1 million, representing .9% of net revenues compared to .8% in Q4 2022. The decline in marketing expense as a percentage of sales is largely due to lower brand marketing, including out of home. We continue to drive marketing efficiencies and spend on both new customer acquisition and retention, maintaining first order profitability. G&A expense for Q4 was $35.4 million, representing .5% of net revenues compared to .2% in Q4 2022. The decrease in G&A as a percentage of sales was largely due to lower legal fees and insurance costs, partially offset by investments in people. Our fourth quarter net income was $10 million, or diluted EPS of $0.05, as compared to net income of $3.4 million, or $0.02 in diluted EPS in last year's fourth quarter. Finally, our adjusted EBITDA for Q4 remained strong, at $26.6 million for an adjusted EBITDA margin of .4% compared to .6% in Q4 2022. Briefly touching on the full year, net revenues were $545.6 million, an increase of .9% year over year. Gross margin was 69.1%, a decrease of 100 basis points year over year, due to product mix shift and, to a lesser extent, higher duties and a higher mix of OCE sales, partially offset by lower air freight utilization and ocean freight rates. As a percentage of net revenues, operating expenses slightly increased to .8% from .6% in the prior year, primarily due to higher general and administrative expenses, offset by lower marketing and selling expense. Adjusted EBITDA margin was .8% as compared to .2% in the same period last year. Touching on our balance sheet, we finished the quarter with cash and cash equivalents and short-term investments of $246.7 million. Inventory decreased 33% to $119 million at the end of the fourth quarter, reaching our target of approximately 25 weeks of supply for year end. Overall, we are comfortable with the balance of core and limited edition inventory levels and believe we will be back to normalized weeks of supply in 2024. Capital expenditures for the year totaled $16.3 million, of which $12.2 million is associated with the fulfillment enhancement project. Before turning to our guidance, I want to reiterate some of the comments Trina discussed in regards to factors impacting our business. First, we believe macro challenges such as inflation will continue to pressure healthcare professionals in the near term. We believe this could be exacerbated by the rising fatigue and stress among some workers in the industry. Looking at our own business, during 2023, as we focused on getting down inventory to more normalized levels, we believe we may have shifted a bit too far away from our approach of tying product launches to brand storytelling campaigns. We believe that the strategic actions we are taking in product and marketing will ultimately drive improved performance that we recognize that this will take time, which is reflected in our outlook. Looking at profitability, we expect selling expense pressure associated with our fulfillment enhancement project and deleverage on GNA to pressure adjusted EBITDA margin in 2024. We are confident in the steps we are taking to drive improved performance and therefore, we plan to continue to leverage our strong balance sheet and cash flow dynamics to make strategic investments that will position us to scale our business for future growth. Now moving to guidance for the full year 2024. As a result of the aforementioned factors, we expect net revenues to be flat to down mid single digits as compared to the full year 2023, reflecting pressure and frequency trends and active customer growth. Looking at cadence, we expect the third quarter to be the most challenged of the year as the anniversary of the strong volume generated by last year's sample sale as we continued to work down inventory levels. Turning to growth margin for the year, we expect to be roughly in line with our 2023 rate as we elevate products with new fabrications and trends and continue to see product mix shift. We expect this to be offset by a duty cost benefit later in 2024. Turning to selling expense, transitory costs associated with our fulfillment enhancement project are estimated to be approximately 14 million or about 250 basis points in 2024. In terms of ongoing fulfillment related costs, we expect that the costs associated with the new facility will offset the savings we gained on storage costs to house excess inventory last year. Therefore, 2023 represents a good baseline for what we expect selling expense to be as a percentage of sales following the completion of our transition to our new fulfillment center. Longer term, we expect to gain leverage as we scale. In terms of cadence, we expect the majority of these transitory costs will be spread within the first three quarters with the second quarter carrying the highest expense. The bulk of the project involves moving our fulfillment to a new facility in 2024 while simultaneously continuing operations in our current facility to ensure a smooth transition. The projected 14 million in transitory costs are largely associated with temporarily running the two concurrently. The new facility will operate with -the-art robotics and new technology that we expect to increase reliability, flexibility, and efficiency as well as improve order delivery times. In addition, we expect this new facility to have the capacity to support one billion in net revenues as we continue to scale our business. GNA is expected to de-leverage based on our net revenue outlook. We are taking a close look at our structure to identify saving opportunities but will continue to invest in the areas of our business that drive growth. We expect DNA to increase commensurate with the increase in capital expenditures. As a result of these factors, adjusted EBITDA margin for full year 2024 is expected to be between 11 and 12 percent. This reflects approximately 250 basis points of cost from the transitory portion of our fulfillment project. In terms of our Q1 2024 outlook, we expect net revenues to decline in the low single digits, reflecting pressure and active customer growth and continuation of slower frequency trends. We expect gross margin to be down versus Q1 last year due to investments in innovation and product mix shift. Looking at operating expenses, for selling expense, we expect the transitory fulfillment project cost to impact Q1 by approximately 370 basis points. Offsetting this will be the benefit of the cost savings from non-recurring storage fees from last year as well as the duty reclassification. Net-net, we expect selling expense to de-leverage by approximately 70 basis points, which also takes into account higher ongoing fulfillment costs. As a result, we expect first quarter adjusted EBITDA margin to be approximately 7.5 percent. Capital expenditures for 2024 are expected to be between 18 and 19 million, including 13 to 14 million in fulfillment enhancement related costs. In conclusion, we believe we have identified areas of opportunity to reignite demand in our business, but also recognize that this will take time and we are still facing macro headwinds. We remain excited about the long-term prospects for our business. We are the distant leader in healthcare apparel with distinct competitive advantages in product innovation and brand love coupled with the scale and balance sheet to invest in future growth. With that, I will turn it over to the operator to kick off our Q&A session. Operator?
spk14: Thank you. If you'd like to queue for a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove your question, you can press star two. Again, to queue for a question, please press star one. We will pause here briefly as questions are registered.
spk15: Our first question is from Brian
spk14: Nagel with Oppenheimer. Your line is now open.
spk10: Good afternoon. Thanks for taking my questions. So Danielle, I guess the first question I have, just to make sure we're clear on this. So the EBITDA guidance, EBITDA margin guidance for 2024 is 11 to 12. We said the 250 basis points reflects the transitory costs. Is that all that's abnormal in 2024? Are there other factors that are temporarily suppressing EBITDA margins next year, or this year?
spk06: Thanks for the question, Brian. So our 2024 EBITDA outlook of 11 to 12 percent, once you adjust for the 250 basis points of transitory selling expenses, gets you to 13 and a half to 14 and a half percent. I think the other thing that is impacting the outlook is the revenue guide. And so we are expecting to see some short-term deleverage in G&A expenses. I think looking into the future, we believe that a high teens adjusted EBITDA margin is still a really good target for our business. And I think we showed in 2023 at almost 16 percent that we're pretty close to that target as well. And so, yeah, super proud of the performance we delivered.
spk10: Got it. Okay, then my second question, just with respect to, I guess, the revenue guidance or what you're seeing with the consumer. So the more challenged backdrop that you and Trina, articulated as well, is it something you're seeing here? Have you seen that more here as we've started to progress into 2024? And then the second question I have with that is, recognizing that you are the leader out there in a very, very fragmented space, but are you seeing any indications of all that, for one reason or another, your target consumers are trading away from FIGs to something else? Or is it simply this weaker activity on the part of your core consumers?
spk06: Well, I'll take the first part in terms of what we're seeing in 2024. So I think, like we've said in the past, year over year, we have a different schedule for events, for launches, and so it's very hard for us to compare apples to apples. However, the trends that we're speaking to in our outlook in terms of continued pressure on frequency rates, but also pressure on active customer growth, we're utilizing the information that we have here to date to inform our outlook. And so that's how we're encompassing that information. And I'll pass it over to Trina to talk about your second
spk08: question. Yeah, thanks, Brian. So I think what we're seeing with the consumer more broadly is that the economic landscape has felt uncertain for the our customer base since 2021 when COVID-19 has really slowed since then. So inflation has really been impacting our base. Two thirds of our customers make less than 100 grand a year, and they have less spending power than they did two years ago and are being more intentional about they spend every dollar. The second impact that we've seen has more, it's more related to the healthcare community and the sustained high demand that is being really put on this community and taking a toll on them. There is a supply and demand imbalance, a staffing shortage where healthcare professionals are being asked to do much more than they have had to do in the past. Long term, healthcare is an incredibly strong segment and it's going to continue to grow, but that's what we're seeing. And to your question around, are they trading down? We really are not seeing that. A very large player in the less premium part of the healthcare apparel industry by the name of SPI just filed for bankruptcy. So we really, this isn't really specific. We think this is being felt by the overall industry. And I do think that staying true to who we are, staying true to our authenticity, our product innovation, our brand storytelling and advocacy is what will help us win long term.
spk10: That's very helpful. So before I hand it over to Danielle, best of luck in your next endeavor. It's been a pleasure working with you. Thank
spk06: you so much, Brian.
spk14: Our next question is from Edward Ruma with Piper Sandler. Your line is now open.
spk09: Hey, good afternoon, guys. Thanks for taking the questions. I guess first, I know you listed a curious to link back to the comments on pockets of incremental demand that you see. So is it these kind of more niche applications? Is it the layering system? I guess, kind of what gives you comfort in that medium term view based on what you see in the product offering today? And then second, we'd just love to kind of think through the promotional calendar now that you've gotten inventory more aligned as there is the expectation that promotions should be broadly lower than they were in 23. Thank you.
spk08: Sure. Thanks, Ed. So I think from a product perspective, in 2023, we had a number of launches, but we were also bringing back a number of different styles and colors from the past. And so if you look at the cadence of the year, Net-Net, there was less newness, was less innovation in terms of where we are now. And we're very proud of the ability of what we did in terms of bringing down our inventory from a peak of 190 million to 119 million in Q4. And so where are we now on products? We have a very healthy week of supply. We feel really good about our ability to introduce innovation across new fabrications, product features and functionality in both scrubs and in non-scrubs. And this includes our outerwear business, footwear, under scrubs, lab coats, compression socks, really stepping up and leveling up on all of these categories, all with the needs of the healthcare professional in mind. A good example of this, and I mentioned it, is our on-shift Sherpa bomber jacket. It was one of our best outerwear launches since 2022. Our scrub legging launch was a huge success. So we're energized by what we've seen in Q1, but we know that building the level of engagement that we had will take time, but we are going to continue to bring healthcare professionals new innovation that not only drives them to really engage any particular launch, but also drives the core. And that's the flywheel that has made us so successful. In terms of the promotional calendar, Danielle, do you want to take that one? Yeah.
spk06: So in terms of promotional cadence for 2024, I think it's important to note that in 2023, despite having an elevated inventory balance, we maintain discipline around our promotional events. And I think that's really apparent in the really strong gross margin rate that we delivered for the full year. And so looking into next year, our guidance assumes that we continue to maintain that same discipline around our promotional events. As you know, we don't do like for like events every quarter. And so we think that's really important to ensure that our customer isn't waiting for the next event. I think we're going to continue to be really focused on protecting our brand, but we're also really mindful of the fact that we're in a challenging macro environment, where as Trina discussed, the consumer is under pressure. So I think we're going to balance all of those things and expect to have a relatively similar promotional cadence in 2024.
spk15: Our next question is from Brooke Roach with
spk14: Goldman Sachs. Your line is now open.
spk05: Good afternoon, and thank you for taking the question. I was hoping we could talk a bit more about your marketing plans for the year. It looks like you saw some efficiencies in the fourth quarter, but revenues are under pressure and the customer is engaging a little bit differently. Can you talk about what's changing in your advertising and marketing spends in 2024 on customer acquisition costs and the absolute percent of planned marketing costs as a percent sales this year?
spk08: Sure, thanks Brooke. So first off, I want to reiterate how excited we are about Dena Eden joining us as our new CMO. I think we're currently making a shift to really tie our product, our merchandising and our marketing together with very intentional and cohesive brand campaigns and engaging our community at the top of the funnel. It is why our community loves figs. It is what has driven our success and having that lens is going to be super important over the long run. And so that is how we think about it. And I think the strategy around launching new products, engaging our community, they're waiting up until midnight seeing what we launched, they're engaging with that product and then replenishing the core. None of that is changing. That continues to be how we think about the merchandising behind that marketing. In terms of the spend in CAC, we've been, as you know, incredibly efficient. Marketing as a percent of net revenue has been around 15% and that's been stable quarter after quarter after quarter. We look to remain and be disciplined but are also evaluating certain parts of the business and opportunities where we can potentially push that more as we see across channels, across international, across teams, ways in which we can drive that long-term LTV and long-term return on that investment and that is where we're focused.
spk05: Great, thanks. And then just one quick follow-up for Daniela. Can you provide thoughts around what level of US versus international growth you're contemplating in the flat to down 5% revenue outlook for the year? Thank you.
spk06: We're not breaking out in the specific buckets. I think similar to what we've seen in the past, international is in earlier stages and we are expecting the growth trajectory to be stronger than the US. But I think we're really focused on, as Trina mentioned, driving intentional product innovation and combining that with cohesive storytelling and brand campaigns across our portfolio and that's going to ultimately drive both the US and the international business over time.
spk15: Our next question is from Dana Telsey
spk14: with Telsey Advisory Group. Your line is now open.
spk01: Hi Trina and best of luck, Daniela. As you mentioned about product launches to better enhance, to focus more on storytelling, the storytelling campaign part of it too, as we go through 2024 with the new people also that you've brought in, brought in the new people that you've brought in, Trina. How do you see the product telling story? What should we be looking for on the product cadence to drive excitement given the consumer, more consumer challenges now? How do you think about the product offering both in scrubs and in non-scrub wear? Thank you.
spk08: Thank you, Dana. You know, it's really exciting to be able to bring different stories around what healthcare professionals are doing in extreme environments and so our big campaign for the year is extreme and we feel as though showcasing, you know, even someone like Dr. Luke Bennett who's, he's the medical director behind HINSTA which is basically leading the medical team for formula one race car driving which is super cool and so telling that story, tying that to the racing suit that we launched, tying that to the entire collection that brought in different elements of that profession, bringing different elements and different innovation across, you know, across scrubs but also across outerwear. We've had a number of launches this quarter with an outerwear that ties to the extremes campaign and so this is a really exciting direction for us in launching pinnacle products that not just drive excitement for them and of themselves but also drive our community to the core and so that's what we're going to continue to do. There's a lot of opportunity within fabrication. We're right now developing two new fabrications within scrub wear that, you know, we believe are going to change the game and then outside of scrub wear, outerwear is a massive category. Healthcare professionals are still wearing jackets that are made to, you know, go hiking and rock climbing and so there's a lot of runway, I would say, in outerwear as is kind of the second behind scrub and then across the layering system for sure but tying these two pieces and really three, it's product, it's merchandising and marketing, tying these three pieces together in a really intentional way is the direction and is where we're headed.
spk15: Our next question is from John
spk14: Kernan with TD Cohen. Your line is now open.
spk02: Hey, thanks for taking my question. Just wanted to, you know, take a look at, you know, selling expenses and the outlook for selling beyond fiscal 24, Daniella. You know, as, you know, top line growth returns, what do you think a normalized selling margin is for the business and, you know, what type of top line growth will you need to see that rate decline as a percent of sales?
spk06: Thanks for the question, John. So as we discussed, just to reiterate, we have about 14 million in non-recurring selling costs associated with our fulfillment enhancement project through third quarter of 2024. This compares to kind of the original 16 to 18 million that we cited previously. That is transitory, so looking beyond this transition year, those will roll off. There are also going to be higher costs associated with the facility but these are investments to drive better efficiency, flexibility, speed and accuracy really to enable us to better serve our customers and really setting the foundation for us to expand our distribution network in the future. Looking at ongoing costs, you know, as we said in the script, we do believe that 2023 is a pretty good baseline level to use going forward as, you know, these higher costs do offset the savings that we would have gained by no longer using the excess storage facilities to inventory. Over time, you know, there's a lot of opportunity to leverage this line item as we scale and also as we expand our distribution network and, you know, are serving our international customers, you know, closer to them, lower shipping fees and the like. And so I think as we mentioned, we do plan to open a Canada DC in early 2025. So that's going to be a really important driver of revenue and profitability on the horizon.
spk02: That's helpful. Thanks. And then when we look at the adjusted EBITDA margin, you know, you've been in the mid to high teens recently, with gross margin hovering around 69, 70%, what is the long-term path? How does it look back to that higher levels of adjusted EBITDA margin you've been in the past and how should we think about the underlying drivers of that?
spk07: So, yeah, I think, well, dependent on our sales growth,
spk06: we do believe that we can return to high teens EBITDA margin fairly quickly. You know, super proud to have delivered almost 16% adjusted EBITDA margin in the past year. I think looking at the P&L buckets, you spoke about gross margin, we're continuing to maintain a really healthy rate there while also driving, you know, more innovation, investments in quality and consistency. And I think into the future, we have the opportunity to really optimize in our supplier base and continue to drive better costing as we scale our core business and then continuing to invest some of those gains, you know, back into growth. Selling expense, we just chatted through kind of the puts and takes there. I think, you know, as Trina's discussed, we're going to continue to remain efficient in marketing spend, but also have the ability to flex up or down depending on what we're seeing in the environment. And over time, right, as we return to growth, we believe we can leverage GNA, but we're not going to make short term sacrifices. We're going to, you know, continue to invest in growth in the near term. I think, I think 2023 shows that our core business, you know, it's high margin, it's replenishment driven, it's highly profitable. I think there's some short term impacts that are creating some pressure in 2024, but fundamentals of our business remain really strong.
spk15: Our next question is from Rick Patel
spk14: with Raymond James. Your line is now open.
spk13: This is Josh Reiss filling in for Rick here. I was hoping you could dig a bit deeper on the growth in 4Q. Any context on how much of that growth came from the US versus international markets and how should we think about new customer potential in 2024 compared to what you achieved in 2023?
spk06: We don't provide more, you know, breakout on active customer mix between the US and international. I think similar to the growth rates that we're seeing between the two. You know, international is a stronger driver of growth, but I think in both cases, you know, we are under penetrated and we have a lot of opportunity to continue to add more customers into the fixed family. Looking into 2024, you know, as we've been speaking about, we are comping on a really strong period of growth customer as in 2023. You know, as a reminder, over the last several years, we've actually doubled our active customer base. And so we're comping some really big numbers here. And I think over time, as Trino is speaking to, we have an opportunity to really marry this intentional product innovation with our brand storytelling. I think the top of funnel marketing that we're doing is going to be a large customer acquisition driver, but these strategies will take time. And as a result, you know, we are speaking to some pressure and active customer growth looking into 2024.
spk15: Our next question is from Matt Coranda with Roth MKM. Your line is
spk14: now open.
spk11: Hey, everyone. Just wanted to clarify what you said in terms of that quarter that should be sort of the lowest growth quarter in 2024. And then maybe just if you could talk about the growth across the year, just given the overall sort of low single digit negative outlook for revenue at the midpoint, and then just factors that swing you towards sort of the bottom end of the guide and top end. Is it more product launches? Is it more successful promotions? Is it an improved macro that's on the high end of the guide? Like what are the puts and takes there?
spk06: So looking at the cadence of growth throughout the year, we are expecting Q3 to be the most challenged because we are, you know, comping a very successful sample sale in the third quarter of last year that we spoke to, where we did have just a larger inventory position to drive that event. Speaking to kind of outperformance to our outlook, I'll pass it over to Trina.
spk08: Okay, in terms of the outperformance to our outlook, I think there's a number of things that will be able to drive that right. We saw success with our scrub legging. This is a completely new category that didn't exist in healthcare. And so being able to bring that to this community and have it be successful, you know, there are a number of different innovations that we're bringing forth throughout the year. And there is a lot, there is ability to outperform our expectations. And also the core, there's a number of things that we're doing from an evergreen marketing perspective to not only bring excitement around launches, but bring excitement around the replenishment aspect of needing to replenish your Caterina top and your Zomora pant and how often are you coming back throughout the year to do that?
spk11: Okay, helpful. And then just on the fulfillment project, is curious what changed on the numbers? It's not a huge difference, but I think it used to be about 18 million in terms of total project costs, and now it's 14. Just what came out of that, maybe help us understand a little bit about the change there.
spk06: Yeah, as we've gone, you know, throughout the year and gotten closer to this transition taking place, you know, it's really just updates to our project plan and timing of the duration that we will need to be running both facilities in tandem has helped to bring the cost down. So looking to, you know, optimize that and glad to see that those transitory expenses have come down with our most recent expectations.
spk11: Okay, thanks. I'll turn it over.
spk14: Our next question is from Angus Kelleher with Barclays. Your line is now open.
spk12: Hi, this is Angus on for Adrian. Thanks for taking my question and Daniela wishing you well on your next venture. As you look ahead to 2024 for selling expense, how do you think about the timing of the benefit from recapturing warehousing costs? And how many quarters do you expect to get that benefit along with the degree to which it will offset the fulfillment enhancement project beyond 1Q? And as a follow-up, curious about your new store given it's now been open for a few months. So any new learnings or early wins you could share there? Thank you.
spk06: So as it relates to our outlook for selling expense, we did discuss that we are expecting to see transitory costs as it relates to the transition. Those will be largest in the second quarter, but will take place in Q1 through Q3. And as we look at some of the transitory costs that we had previously to house excess inventory that we pulled forward, we are expecting that the ongoing costs of our new facility will offset the gains that we're getting from those costs looking into 2024. So looking past those transitory expenses, we think that 2023 represents a pretty good baseline for where we expect selling expense to be in the future. And I'll turn it over to Trina to talk about our store.
spk08: Yes, as it relates to our community hub in Century City, we've seen really early success and have really been pleased with the traffic. There are a number of days where we've had lines outside all down, all the way to the grocery store. We've had lines for our fitting room. And I think what we've realized, there's been a number of learnings. The store is about a thousand square feet. We're really excited to open Philly this summer. It is a bigger format, and so we're excited to have that location and that format to see what that does. But some of the exciting dynamics, over 40% of our customers are new to FIGS, just showing how we can continue to build the brand with people that may not know about FIGS. And so having that retail presence, having that community hub element where we're having events and we're showing up and doing different, really engaging our community in person is so important. And we really think that's going to unlock a lot of what we're doing digitally. And so I think we mentioned on the call, only .6% of consumers shop online. So having stores, having community hubs as part of our strategy is really important, and it's only going to further the brand love and community engagement that FIGS has. So very excited about what's to come.
spk15: Our last question is from Bob Dribble with
spk14: Guggenheim Partners. Your line is now open.
spk03: Hi. Two questions, quick questions. The first one is on the retail store, just following up from the prior question, is New York City an area where you're contemplating a store from a branding perspective? And the second question is, as you think about a slower environment, is there a skew rationalization opportunity that you are considering? Just trying to understand how you're approaching this slower environment. Thanks.
spk08: Thanks, Bob. Yes, we're very excited about New York City. It has been one of our key markets, one of our largest markets. It's amazing healthcare facilities, amazing hospitals in New York. And so we'll get there. We're lining it all up, but very excited about New York City. In terms of skew rationalization, I think we are one of the things that makes FIGS so special and such a great business model is having a very high volume with relatively low skew count. And so having this level of skew productivity is something unique to being a uniform company. It's a strategy that we will continue to follow, but feel very good about where we are from an inventory position and where we are from a skew count position.
spk03: Thank you.
spk08: Thank you. Thank you all for joining our Q4 and 2023 full year conference call. We'll see you soon.
spk14: Okay. That concludes today's call. Thank you all for your participation. You may now disconnect your line.
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