Ladies and gentlemen, welcome to the FIGS First Quarter 2022 Earnings Conference Call and Webcast. My name is Felicia. And I will be your operator today. [Operator Instructions]. I will now hand over to Carrie Gillard, Vice President of Investor Relations. Please go ahead, Carrie.

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

Thanks, Carrie, and good afternoon, everybody. Thank you for joining us for our first quarter 2022 conference call. Before we start, I want to mention that today is International Nurses Day. It wraps up nurses week, one of our most important events, where we go above and beyond to celebrate our nursing community. Here at FIGS, we are committed to celebrating, empowering and serving our Awesome Humans every single day. Our health care professionals are the reason we exist, and we try to get back to them every chance we get. Now let's talk about the business. FIGS delivered strong Q1 performance with 26% revenue growth year-over-year and an adjusted EBITDA margin of 23% as we further advanced our product innovation and broadened our reach. While these results were lower than our expectations, our ability to deliver outsized growth and strong profitability in Q1 is a testament to our team, our business fundamentals and our incredibly loyal customer base. This is especially true given the supply chain and macroeconomic headwinds that ramped up significantly during the quarter. Health care professionals are at the center of everything we do, and we approach every decision with them in mind. We're also building FIGS for the long term. Using these guideposts and the inherent strength of our business model, we remain confident in our ability to continue to achieve strong results despite these challenging conditions. Let's focus in on our key performance metrics. Net revenues were up 26% to $110 million, led by a significant increase in AOV and continued growth in revenue per customer. Our active customer base grew 31% over the last 12 months to nearly 2 million by the end of Q1. Our trailing 12-month net revenues per active customer increased $13 year-over-year to $226. We delivered a 16% increase…

Thanks, Trina, and good afternoon, everyone. I want to reiterate what Trina said. We are immensely proud of the performance we delivered in the first quarter and our ability to continue to navigate the evolving and dynamic supply chain challenges we are experiencing today. Now let's dive right into the financial results. Net revenues for Q1 were up 26.4% to $110.1 million compared to Q1 last year. Our unique financial model was driven, in part, by a robust customer dynamic, which despite a challenging backdrop, continues to strengthen. Our net revenues per active customer increased to 226, up 6% from 213 the prior year. Average order value, or AOV, grew 16% from the prior year to 116 this quarter. This result was due to a substantial increase in lifestyle adoption driven by continued growth in footwear and outerwear. As we expand our layering system offering, our customers are increasingly purchasing a complete head-to-toe look, and we see this in our metrics. In Q1, customers who purchased a lifestyle item had over 20% more units per transaction than their scrubs-only counterparts. AOV also benefited from lower discounts through strategic reductions in our promotional strategy. Our Q1 revenue growth came in lower than planned, primarily due to the supply chain challenges affecting our scrubwear products that Trina discussed earlier. As a result of these impacts, primarily a color launch that moved out of the quarter and a delay in 2 of our most popular franchises, the high-waisted Zamora and Yola, which we transitioned to a new yoga weight fan, our repeat frequency and order growth was lower than anticipated in the quarter. Despite these headwinds, we are proud of our team's resilience and agility and still achieving 26% net revenue growth. Gross margin for Q1 decreased 40 basis points year-over-year to 71.2%.…

[Operator Instructions]. The first question comes from Bob Drbul from Guggenheim Securities.

A couple of questions I just think more on the top line and I think your customer. When you look at the changes that you're seeing in your customer spending, can you maybe break down, if you think some of it is COVID pull forward versus just a tougher environment on the macro? I was just like if you could maybe break it down a little bit more, the priorities on what you see impacting the overall business, that would be helpful. And the second question is on -- when you think about the new outlook in terms of '22 for the full year, can you break down some numbers around air freight? What's in your new numbers on the air freight on the gross margin? You can give us a little color on the second quarter in terms of the rate, but it would just be helpful to have a little bit more on the dollar numbers that you're spending in aggregate as we think about the full model.

Thanks, Bob. Great question. I think we'll break it up into a few parts. But from the demand side, we're -- it's mainly the supply chain issues that we discussed. From the demand perspective, we're seeing a bit from an inflation standpoint and from a shift in consumer spending, but the majority of the -- on the supply side. And so we're doing everything we can to get our goods to our health care professionals throughout the rest of this year. But that's really where we're seeing that. We're still planning to deliver 22% to 26% growth for the year. And we do believe that once the supply chain challenges subside, that we can accelerate our growth. As a reminder, this market opportunity remains massive. And as you know, we're the clear leader in the space. As it relates to outlook, Daniella, if you want to take that?

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

The next question comes from Adrienne Yih from Barclays.

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

Thank you, Adrienne. I think what's most important here at FIGS is to ensure that our prices are actually advantaged gross margins that have been built from day 1 here at FIGS. We're not seeing any real need from a costing perspective beyond the strategic decisions we're making around air freight to increase our costing given as active with our manufacturing partners. So -- and the good news about the business is that 80% of our product, as you know, comes from 1 fabrication, over 80% of our business is 13 core style. So we're going to continue to monitor the situation and make the best decision for our community that enables us to serve and meet the high expectations of the health care professionals we serve.

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

Our next question in the queue comes from Lorraine Hutchinson from Bank of America.

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

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

The next question comes from Michael Binetti from Credit Suisse.

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

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

Yes. So I'll start, Michael, with cadence through the quarter. So as of our last earnings call, our trends were on track with expectations, and we had our sample sale in the first week of March that did really well on fewer promotional days year-over-year, which gave us a lot of confidence in our plan. We began to experience impacts on our business in early March. We started to really see increase on reliability and volatility around transit times. And the biggest impact for the quarter was a color launch that was planned for the end of the quarter that actually moved into Q2. So that had the largest impact for what we saw in Q1. As it relates to adjusted EBITDA margin and gross margin. So I want to start by saying that we're really proud of our ability to deliver 23% adjusted EBITDA margin despite lower than planned revenue in the quarter. I think that's really a testament of our business model and our management team's commitment to high growth and strong profitability. So when we think about the full year, we're going to continue to invest in places that are really essential to building a strong foundation for long-term growth, like marketing and product innovation and technology. So within marketing, it's critical for our long-term growth and brand awareness. So we're going to continue to invest here. We think it's going to stay consistent as a percentage of net revenues. Selling, we're expecting to delever slightly because of expanding in our fulfillment also with higher shipping rates that we've been seeing. Finally, within G&A, this is the biggest area where we think we can really drive efficiency and where we have flexibility if revenues are to be higher or lower than we anticipated. So we'll continue to look for ways here to really balance investment as the year progresses. And so very few companies at our stage that are able to really invest meaningfully in their business while simultaneously being really disciplined and sustaining a best-in-class adjusted EBITDA margin profile, and we're going to continue to do just that.

Our next question comes from Lauren Schenk from Morgan Stanley.

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

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

The following question comes from Brian Nagel from Oppenheimer.

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

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

Okay. And then my follow-up question, Daniella, we talked about this, just the supply chain disruption in these longer. It sounds like the ships are spending more time on the water now. So I guess the question I have is, is this a new -- we've been talking about supply chain disruptions now for a while. Is this a new dynamic within the supply chain disruptions or just more of the same?

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

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

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

The next question comes from John Kernan from Cowen.

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

What we saw in Q1, as it relates to new customers, is that really the same things that drive repeat and loyalty and retention also drive new customers. So when we have fewer color launches, that impacts our new customers. We actually see 2 to 3x more new customers on a launch day than an average day. And so we do believe that our numbers in Q1 were impacted by the supply chain challenges that we saw in the quarter. But we have a lot of confidence in the year due to the strategies that we have in place. So core products like our high waisted are back in stock, and we have mitigation strategies to limit that in the future. We've reflowed our product launch calendar, so that there are more launches in the second half of the year, which gives us confidence in that as well. And we're also increasing investment in top of funnel, worldwide brand activation and brand awareness strategies. So we're going to continue to do all of those things. Sequentially, we also see strength in Q4 because of Black Friday, Cyber Monday and holiday. So we sold a lot of room to grow. We only have 2 million active customers today, out of 21 million health care professionals. And so we feel really confident in our outlook and the active customer numbers for the back half of the year.

Got it. Daniella, just maybe one more question for you. All the IPOs from last year in Consumer Tech are trading much lower than more of the IPO and deals happen. Any changes to stock-based comp and those figures and any equity compensation plans? And how do we think about share count for the full year? It looks like the share count came down quite a bit from Q4. So just curious on how to think about those [indiscernible]

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

The next question comes from Brooke Roach from Goldman Sachs.

I wanted to follow up on John's question regarding net new customers and how you're thinking about the demographics of those customers. As you dig into the new customers that you acquired this quarter, what did the demographics look like among those new customers this quarter or the past 2 quarters relative to prior year cohorts? Did you see any change in customer behavior among some of the lower-income customers within the customer base?

So we're not seeing anything particularly in our data. We see similar income levels in our new customers and also our existing ones and also a similar mix of professions that we've seen in the past. I think it's been an incredibly challenging time for all of us, especially our health care community. But we're not seeing anything in the data to guide us one way or the other on the demographics. I think it's important to note, right, health care professionals are not going away. So we still believe that 1 key supply chain challenges subside. The opportunity in front of us is massive and we really believe we can accelerate from here.

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

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

The next question comes from Dana Telsey from Telsey Advisory Group.

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

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

Got it. And one last thing. You've strengthened the team. I think you've added a new team on the product side, strengthened the Board. Anything that we should be looking at there? Are there people that you need to add? Or how you see the teams developing?

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

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

Thank you. Okay. Before ending our call today, we would like to take some time to answer a few of the most upvoted questions from our shareholders through the Say platform. So the first question asked about our stock price performance and whether there are any plans for stock dividends or buybacks. So first of all, with respect to the stock price, as I said before, in the short run, the stock market is a voting machine. And in the long run, it's a weighing machine. We have a very unique financial profile with an impressive combination of revenue growth and profitability. Our business model is based on a largely nondiscretionary and replenishment-driven core products, and we're in a recession-resistant industry. This industry actually grew in both 2008 and 2009, and we are serving the fastest-growing job segment in the country. As a result, we do believe we're significantly undervalued right now. And with the continued growth and execution, our true value will be reflected over the long run. In terms of dividends or buybacks, we don't have any plans for those at the moment because as a high-growth company, we believe the best return on our capital is investing back into our business to support our long-term growth. That said, as the stock continues to be undervalued, we will evaluate other options like share repurchases if we believe that is the best near-term return on our capital. The second question is about whether we're planning on expanding into markets outside of health care. We definitely believe that there are a number of other workwear segments beyond health care that are dramatically underserved. And over the long run, there's an opportunity for us to innovate in these categories. However, we're 100% focused on health care for the foreseeable future. The…

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