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In March of last year, I thought that FIGS (NYSE:FIGS) was losing its shirt, after a boom during pandemic times had reversed in a big way, mostly manifested through massive margin pressure.
That was bad enough, yet after a tougher 2022, the outlook for 2023 was not convincing either. This made me cautious, even as shares were down 85% from the highs, while the company preserved a net cash position. Ever since, shares have been trading flattish while operating performance has seen incremental improvements (both in sales and margins) creating a more constructive stance here.
Dressing Nurses And Healthcare Workers
FIGS is an emerging healthcare DTC apparel company which enjoyed strong traction, loyalty and momentum around the time of the public offering. Offering tailor made clothing for the industry, healthcare professionals were attracted to comfortable, durable, functional, and still stylish workwear at affordable prices. Moreover, clothing includes stretch, is anti-odor, anti-wrinkle and moisture-wicking.
Founded in 2013, a mere $17 million business in 2017 exploded to $263 million in 2020, with real traction seen ahead of the pandemic. With healthcare workers strained for time, the direct-to-consumer model provided a great driver to its business.
The company went public in spring of 2021 as shares were sold at $22 per share, far ahead of the midpoint of the preliminary offering range of $17.50 per share. This valued equity at $3.5 billion at the public offering levels, and that was even before the opening day rally brought shares up to levels in the mid-thirties.
These were high valuations, even as 2020 revenues rose by 138% to $263 million, with operating profits reported at $58 million. Margins of 22% compared to essentially break-even levels in the year before, but these were sky-high in relation to a >$5 billion valuation at the time.
The Downfall
Soon after the IPO, share price momentum and business momentum started to fade. Shares fell to the $20s by year-end 2022, and fell to a low of $6 per share in March 2023.
On the business front, FIGS grew 2021 sales by 60% to $420 million as EBITDA margins of 25% were down a point to the year before, with earnings of $56 million being equal to $0.30 per share. These were adjusted earnings, with GAAP losses reported due to a similar sized stock-based compensation expense.
The company initially guided for sales to grow by around 32% to a midpoint of $555 million in 2022, with EBITDA margins seen at 20%. Even this much less impressive guidance was too upbeat, as sales did end up increasing just 20% to $505 million, but moreover EBITDA margins fell to just 17% of sales.
With shares down to $6 in March 2023, a >$5 billion valuation has fallen to a $840 million operating asset valuation, equal to less than 2 times sales. The issue is that earnings power was very minimal in 2022, if we exclude for some adjustments.
The issue is that the 2023 outlook was anything but convincing, with sales seen up by mid-single digits, translating into revenues of around $530 million. An 11-12% EBITDA margin guidance basically implied that break-even results were to be expected. This more or less confirmed that this was a hype, and while shares had fallen too much to become bearish, I failed to see appeal as well, or green shoots, other than a modest sales multiple.
Trading Stagnant
Since March of last year, shares of FIGS have traded range bound between $5 and $9 per share, now trading flat at $6 per share. In May, FIGS posted a 10% increase in first quarter sales to $120 million, which was about the good news as operating profits fell by more than three-quarters to $3 million and change, with GAAP earnings of $1.9 million working down to a penny per share.
The company further quantified the 2023 outlook, seeing sales growth at a midpoint of 6.5% and margins around 12.5%, EBITDA margins those are. This was nothing too impressive, as first quarter adjusted EBITDA margins came in at 13.4%, with stock-based compensation being responsible for most of the gap between this metric and real profits.
In August, FIGS reported a 13% increase in second quarter sales to $138 million, as greater leverage (with stock-based compensation expenses) made that net earnings recovered to $4.6 million. The company reiterated the full year sales guidance, but saw EBITDA margins for the year around 13% of sales.
In November, FIGS posted a near 11% increase in third quarter sales to $142 million, as GAAP earnings improved to $6.1 million. For the year, sales are now seen up 8.5% with EBITDA margins seen around 14% of sales. Given that both growth and margins for the first nine months of the year top this guidance, this is either conservative or suggests that growth will slow down, not being too inspiring.
By now, net cash has risen to $232 million. Based on a diluted share count of 181 million shares, the operating asset value comes in around $850 million. This results in relatively modest sales multiples of just over 1.5 times, but still rather demanding earnings multiples, as the latter is hardly existing despite some sequential improvements. The question is if margins improvements can continue, certainly as FIGS is now gradually opening some stores as well, moving away from the pure direct-to-consumer business model.
And Now?
Right now, I feel more comfortable than I did in the spring of last year. Trading at similar price levels, FIGS is obviously seeing some better sales momentum and limited margin expansion, badly needed as earnings power remains relatively limited.
Given all this, with earnings power seen at $0.10-$0.20 per share, but with room to the upside, fundamental support is gradually appearing if we look at the operating asset valuations, although more work needs to be done on the margin front to have real conviction here.
