FIGS Stock: Not A Buy, Not A Sell (NYSE:FIGS)

FIGS, Inc. (NYSE:FIGS) is a niche apparel company with large total addressable market in the global healthcare workforce. In light of a stock market full of opportunities with complicated technology and supply chains, I find it refreshing to consider a relatively simple clothing company and brand. According to a University of Florida study, human beings began wearing clothing approximately 170,000 years ago as a technology that aided the migration out of Africa into colder climates. Style, function, culture, and comfort are just a few in the myriad of factors that determine consumer preferences today. Our work wardrobe is an essential component of how we perform, and how our performance is perceived by customers and other stakeholders. Work is approximately 1/3 of our lives, and for that reason, if no other, the clothing we wear when working matters. Based on a large total addressable market, a solid brand name, and strong revenue growth, I rate FIGS a hold at current prices.

Total Addressable Market

FIGS is a direct-to-consumer workwear brand for healthcare professionals. Healthcare professionals, mostly nurses and doctors, typically wear scrubs, a garment designed to enable easy movement, durability, and comfort which can be easily sanitized to prevent the spread of contagions. According to the CDC, “Healthcare is the fastest-growing sector of the U.S. financial system. It employs over 18 million workers. Women represent nearly 80% of the healthcare work force.”

I do not take 18 million to be the total addressable market because there are administrators and other professionals in the sector who wear normal clothing to work. I thus take the sum seven major segments in calculating the U.S total addressable market.

According to the U.S Bureau of Labor Statistics in 2022, the most current data available, there were 761,700 physicians and surgeons in the United States. There were 1,389,900 nursing assistants and 3,130,600 registered nurses. There were 238,800 physical therapists, 133,900 occupational therapists, 146,200 dentists and 214,000 hygienists.

To avoid the risk of double counting, I will assume these seven segments of the healthcare workforce comprise the total addressable market for a conservative estimate and leave some very small, negligible segments out. Doing the addition, I calculate approximately a 6 million person TAM in the U.S.

To get a rough estimate of the global workforce, I take the scrub wearers per capita at around 1.8% in the U.S. and multiply by the global population to get around 162.7 million. This is likely overestimated, as not all countries have as good a healthcare workforce as the U.S. In its Q1 earnings presentation, FIGS states that it believes it has a global TAM of 118 million healthcare workers

Taking FIGS’ revenue of $516 million TTM, I calculate that they are generating approximately $86 per scrub wearer in the United States per year. This number isn’t staggeringly low, hence I don’t issue a buy call, but for reference the cost of a shirt is just $30 at the time of writing.

So on average, the relevant worker in the U.S. has about three FIGS shirts. The U.S market opportunity seems somewhat saturated, but the international market is not. FIGS has focused on international expansion, which I will discuss in the next section.

Revenue

Revenue has grown steadily to more than half of a billion dollars per year and in forecasted to continue growth through 2024 based on consensus estimates. The compound annual growth rate is over 66% from 2019 to 2022 and is expected to fall to around 40% based on December 2024 estimates. This growth speaks to the quality and therefore demand for the product.

A key component of the revenue growth strategy focuses on international markets. In its Q1 investor presentation, FIGS writes that it focused on international revenues, which grew on a net basis 45% year-over-year in Q1 2023. 2019 and 2020 target markets included Canada – its most penetrated market – Australia, and the UK. 2022 sales efforts focused on New Zealand, UAE, Israel, and number of European nations. FIGS is in the process of translating its marketing materials, which are currently rolling out.

According to FIGS, 15% of healthcare workers receive their scrubs through the institution that they work for. They are building an app that is projected to go live in Q3 2023 which will facilitate bulk ordering for organizations, with the capability to embroider logos and other personalization. FIGS is further expanding into the brick and mortar channel, with its first store set to open in Los Angeles in Q3 of this year. Taking these developments into consideration, the company guides 2023 revenue growth of 5.5% to 7.5%, while Seeking Alpha estimates it at the higher end of 6.9% growth year-over-year.

Profitability

FIGS’ profitability has taken a hit recently. This change in profitability is driven by EBITDA margin, so there is no depreciation, financing, or taxes driving these changes; it is all operational. From Q4 2020 EPS were $0.32, falling all the way to losses of -$.08 in Q4 2021. Earnings have since rebounded to $0.08 in Q1 2023, less than half of their highs for Q2 2022.

The costs driving the lack of profitability are primarily are primarily related to SG&A costs rather than COGS rising faster than the revenue growth rate. The FIGS SG&A investments have been quite substantial. In Q2 2021, SG&A more than tripled, and this spending has since decelerated but is still higher than revenue growth, thus causing the EBITDA margin contractions.

Valuation

Quant gives this stock a D- for valuation, as there are some reg flags but still some good. FIGS trades at more than 122x its earnings while the healthcare sector median is just over 26x. PEG is even worse, receiving an F at over 11. Its price/book is greater than 4, while the sector median is just 2.80. EBIT and EBITDA ratios are also well above the sector median.

To make matters worse, I furthermore question whether or not FIGS is truly a healthcare company, as it is primarily in the business of retail, the product being more of a luxury alternative to the traditional garments worn by healthcare workers. It may therefore correctly fall under the consumer discretionary sector, which garners lower sector median multiples in general.

The good news is that in the healthcare sector, the EV/sales ratio looks quite attractive, as does the price to sales. What helps here is that FIGS has very little debt on its balance sheet relative to its market cap and other companies in the sector. However, in the consumer discretionary sector it is still well above the median ratio here and therefore overvalued.

Risks

There are a few risks worth mentioning about holding FIGS. The first is that the vast majority of shares are held by institutions, as shown below in dark blue. As this company only recently went public, there is a strong likelihood that the investment banks that underwrote the IPO still hold many shares, which they are trying to sell off to investors. Therefore, a supply and demand imbalance my take place if investment banks decide to aggressively take this stock off their balance sheet for whatever reason.

Another key risk is product pricing. While data isn’t available on the average price per unit over time, I worry that it may be declining as FIGS tries to win market share and enter new markets. While this strategy may pay off if the “quantity effect” on revenue is greater than the “price effect,” the reverse may be true, in which case revenue would take a hit. Finally, I advise caution here as there are other competitors with larger brands in the adjacent “athleisure” space such as Lululemon (LULU). Based on my analysis as a consumer, Lululemon has primacy in this market and commands a very high price per unit, although they are more of a lifestyle brand than FIGS.

Conclusions

FIGS has a very large total addressable market in theory and has grown its sales at a very fast rate. It has, however, increased its SG&A spending faster than its revenue has grown, which is a bit of a red flag. It remains to be seen whether these investments will pay off, especially with modest year-over-year revenue growth guidance. The market may be close to saturated. Expectations in the near term don’t appear to be super high, and the lowest Wall Street price target, if it can be trusted, is just 2% below the current price. I would not recommend opening a position in this stock, as there are many better alternatives within the healthcare sector and the valuation on many measures appears to be too high. The strength of the brand and the loyalty of its following remains to be measured, and I therefore reiterate a hold rating on FIGS.