Hello, everyone, and welcome to the FIGS Second Quarter 2022 Earnings Conference Call. My name is Victoria, and I will be coordinating your call today. [Operator Instructions]. I'll now pass over to Todd Maron, Chief Legal Officer, to begin. Please go ahead.

Hi, everyone. And thank you for joining today's call to discuss FIGS' second quarter 2022 results. We released our results earlier this afternoon, and they 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 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 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 on the call, which we believe are useful supplemental measures for understanding our business. Reconciliations of these non-GAAP measures to their most comparable GAAP measures are included in the earnings press release and shareholder slide deck we issued today. Now I would like to turn the call over to Trina Spear, Chief Executive Officer of FIGS.

Thanks, Todd, and good afternoon, everyone. Thank you for joining us for our second quarter 2022 conference call. I would like to start today's call by thanking the entire FIGS team for their engagement, agility and impressive execution. I am especially grateful for their unwavering commitment to the health care community as we work each and every day to create products that help our Awesome Humans better serve their communities. Now on to our results. We delivered another strong quarter with continued advancements across our key growth strategies. In the second quarter, we delivered top and bottom line results that beat our expectations despite a challenging macro environment, with net revenue growth of 21% and an adjusted EBITDA margin of 18%. We continue to see a strong response to our product innovation in both our scrubwear and lifestyle offerings as well as the ongoing deep engagement amongst our customers. We are especially pleased with our strong performance during Nurses Week, particularly in light of the supply chain challenges we faced earlier in the quarter. Looking at our performance, net revenue was once again driven by growth in active customers, which increased 26% and reached over 2 million. Growth was also driven by higher AOV and revenue per customer. We expanded brand awareness globally, and our first order retention rate also remained strong at approximately 50%. We delivered strong adjusted EBITDA performance, and gross margin exceeded 70%, which was also ahead of plan. We are very proud of this performance in light of cost pressures in the supply chain and inflation. Now I'd like to provide a brief update on the supply chain, which we feel really good about. Overall, supply chain and logistics remain pressure points for the industry. However, we continue to navigate these challenges well. We are no…

Thanks, Trina, and good afternoon, everyone. We are pleased with our second quarter performance as we successfully navigated supply chain headwinds and delivered results ahead of our expectations. Now looking at our financial results. Net revenues for Q2 increased 21% to $122.2 million compared to Q2 last year, driven by an increase in active customers as we continue to expand our reach globally and maintain strong retention as well as higher average order value, or AOV. AOV grew 6% from Q2 2021 to 109 this quarter as we increased deposit share. This growth was driven by both higher units per transaction and average unit retail as we continued strong adoption of our lifestyle offerings, led by growth in footwear, outerwear and underscrubs. We continue to find that our lifestyle pieces are additive as orders containing these items had a 27% higher APT in the second quarter than orders without lifestyle pieces included. Net revenues per active customer increased to $227, up 4% from Q2 2021, driven by the growth in AOV. As Trina discussed, frequency was slightly down year-over-year, but has since stabilized from Q1 levels as we return to a more consistent product launch calendar in the second quarter. Gross margin for Q2 was 70.6% as compared to 73.3% in Q2 2021, above our expectations due to lower-than-expected freight costs. The 270 basis point decrease as compared to Q2 last year was primarily due to a higher freight expense for both air and ocean in addition to shifts in our product mix. This was partially offset by improved product costs in scrubwear as we continue to scale. Moving to operating expenses. Selling expense for Q2 was $26.8 million, representing 21.9% of net revenues compared to 19% in Q2 2021. The increase was due to higher shipping and fulfillment expenses…

Thank you. We will now start our Q&A session. [Operator Instructions] Our first question comes from Edward Yruma at Piper Sandler. Please go ahead.

Hey guys, good afternoon. Thanks for taking the question and congrats on the quarter. Two questions from me. I guess, first, on the quarter itself, a lot of your other peers saw the curating sales trends in the quarter. I know you guys provided the kind of proviso that macro could weigh on results, which would drive you to be the lower end of the guide. I guess did you see any change in your trend during the second quarter? And then Trina, a bigger picture question for you. You and Heather have been very successful at managing business together. I guess, first, congrats to both of you. How does this management shift change the way that you guys run the business, if at all? And does this allow you to maybe be more nimble or grow faster? Thank you.

Thanks, Ed. I'll take the first question. So in response to trends that we saw in the quarter, as we discussed, we did see an acceleration in frequency during 2020 to 2021 due to COVID, elevated stimulus, stay-at-home orders and other macro factors. Since then, it came down a bit in 2022, partly due to supply and has since settled slightly ahead of 2019 levels. On the flip side, we have seen continued gains in AOV as customers are buying more overall when they shop. So we're really excited to see continued growth in revenue per customer. Despite the macro environment, it shows that our customers are still continuing to come and spend more over time in aggregate. In the beginning of the quarter, we were still dealing with more supply chain challenges. So it was really great to be able to see trends improve throughout the period as we continue to manage through those issues.

And in terms of -- and Ed, great to hear from you. In terms of Heather and myself, Heather has always been incredibly -- really an expert of -- product genius, creative genius. This is really where she adds the most value. She's going to really focus on product innovation, and I'm going to be focused on the strategic direction and overseeing the day-to-day operations of the business. I think this is a great thing for the company. I do, to your point, think it's going to allow us to move very quickly, being nimble and provide a lot of clarity, both internally and externally. And it's very much as a natural evolution of where we are today.

Thanks so much.

Thanks for your questions. Our next question comes from Adrienne Yih at Barclays. Please go ahead.

Hello, everyone. And let me add my congrats. Nicely done navigating through these murky, murky waters. So Trina, I guess my first question for you is, I'm curious about sort of consumer behavior. You obviously did not raise prices this year. You made an intentional move not to kind of pass through some of the inflation you're seeing. So I'm wondering how customers have reacted to that? Do they see your product as kind of like an "Equip Value" and everything is inflating around them? And then what's happening with the replenishment length? Obviously, the frequency, it sounds like she's coming back and she's buying more. But is she replenishing on a longer and maybe she's not working as much. So is that lengthening out? And then Daniella, I'm wondering if you can help us sort of -- you talked about offset by kind of economies of scale and hitting some breakpoint numbers. Can you parse out at all or give us any color on what that -- what the AUC would look like ex-inflation as you reach these new break points? Thank you very much.

Sure. So Adrienne, I think in terms of pricing and what we're providing. As you know, we've always been focused on providing real value, affordable accessible products for our health care professionals. And we have a really robust process around how we price. I think to your question around frequency, right, we've seen a repeat frequency. We moderate a bit, actually. But in the second quarter, we've improved our repeat frequency versus the first quarter. So Daniella can kind of dive into that. But I think what we have really been focused on is not necessarily how often people are coming to us, whether they come back less often and spend more or come back more often and spend less. Where we're really focused is on revenue per customer, right? And what we continue to see is that number is going up and to the right. And so even though they are coming back a little less often when they're coming, they're spending more, and we don't see any real shift in trade down, right? We don't see any -- nobody wanting to go back to the world of holding up their pants or have -- or obtaining their wedding ring to the shop, right? They want FIGS. So when they're coming to buy scrubs, they buy FIGS.

And as it relates to your second question about the economies of scale that we see in our product costing, so we're really excited to continue to see those offsets in gross margin in product costing as we scale, particularly within our core scrubwear. Within that, we have seen some inflation in materials, but it's been great to see that our growth has really outstripped that increase. And that's because a lot of what we do within core scrubwear. Over 50% of our business is in core scrubs and core styles, and so we're able to get really strong efficiencies from such a big base, and we expect to see that in the future.

Very helpful, best of luck. Thank you.

Thanks, Adrienne.

Thank you. Our next question comes from Lorraine Hutchinson at Bank of America. Please go ahead.

Thanks, good afternoon. I wanted to follow-up on some comments you made last quarter about trends softening due to macro factors. It sounds like things have improved since then. And I guess as you look at it in hindsight, was this simply just the supply chain issues? Or do you think something has changed with your underlying customer?

I mean we don't really see any real change in our underlying customer, right? Our business is resilient, recession-resistant, replenishment-driven health care professionals. They need our uniforms to go to work and do their jobs. We're not completely insulated from what's happening in the broader economic environment from an inflation standpoint, but we do feel like we're more resilient than others, and the health of our consumer is strong.

Thanks. And then I wanted to follow-up on the product launches. Are you back on track at this point? I know you moved one out of -- 1Q into 2Q. Is that completely caught up?

Yes, so we had a product launch that shifted into the second quarter. Similarly, we've had a few things that shifted out of the second quarter into the third quarter. But we made the decision at the beginning of the year to utilize more airfreight to bring stability to this product launch calendar, and that's mostly going to impact Q3 and Q4. And we feel really good about the back half and the decisions we made and our ability to hit our calendar for the back half of the year.

Thank you.

Thank you. Our next question comes from Bob Drbul at Guggenheim Partners. Please go ahead.

Hi, good afternoon. Just two questions. Number one is on the lifestyle offerings in the non-scrub items, can you just talk a little bit more on sort of the appetite for the lifestyle? Have you seen any change in regards to the appetite for the non-replenishment type products? And then, Trina, can you just spend a little more time just what you've learned on the International side, maybe just prioritize which markets have been the most receptive to your entry and sort of how you might sell that from where we are today? Thanks.

Sure. I mean I think our lifestyle -- from a -- so first off, thanks, Bob, for the question. From a lifestyle perspective, we feel really great about our lifestyle offering. And a lot of these categories within lifestyle, we feel like we barely scratched the surface on what's to come. We mentioned underscrubs. Underscrubs is a massive category that grew 60% year-over-year. Lifestyle overall grew 70% year-over-year. And so our layering system, the way in which we're merchandising our products online with our kits, it's really resonating. It's really resonating with our community. And we feel like there's so much more to come in terms of what health care professionals are wearing underneath their scrubs, on the outer layers, to work, at work, from work, on-shift, off-shift, head-to-toe. There's so much more that we're excited to bring forth to this industry -- into this market. In terms of International, Canada, in U.K., Australia, these are markets that we've been in for a couple of years now. They're doing very, very well. We've launched into seven new countries in last quarter, and we made that announcement. I think what we're seeing is incredible results early on. And we have not even -- we've had such minimal marketing around these markets. And so what we're really trying to do is build a strong foundation. The words we use are go slow to go fast, right? So it's a really strong foundation so we could build long-term, sustainable profitable growth for many years ahead of us. So that's what we're doing.

Great, thank you.

Thank you. Our next question comes from Brian Nagel at Oppenheimer. Please go ahead.

Hi, good afternoon. Congrats on a nice quarter and navigating that macro down very, very well. So the first question I have with regard to product launches. Sorry, the question I have is going with to product launches. And I guess going back to what was said on -- which you outlined on the last conference call that as a result of the shipping issues, you had delayed some product launches or spread them out. So as you look at the business now, and if I'm hearing you correctly, that yes, there still are supply chain issues out there, but they seem like to becoming more manageable. And at the same time, you're actually having some of these costs come down at airfreight. Would you look to, once again, reaccelerate product launches or have you found a better spot now?

I think just based on what we've aired in, there's going to be a higher cadence around how we're launching products through the back half of this year, and that's really exciting. We're not looking to do anything beyond that. We made the strategic decision to airing those products, and so they're going to be launching in a really nice flow throughout the rest of this year. And there's so much that we're doing not only within scrubwear, but also to the question earlier, around underscrubs and outerwear. We also have extended sizing coming later this year at FIGS PRO. It's a huge innovation that we're going to continue to build on. So as you know, product innovation is everything to us. And even with having Heather focused a lot of her time and doubling down in innovation, we're so excited about what's to come going forward.

Got it. And then my second question, so just with regard to macro -- if I'm hearing you correct, I think you're recognizing a more challenging macro backdrop. And it doesn't sound to me like you're saying -- I guess maybe a clarification, you're seeing anything really noticeable in your business that's purely macro-related. So the question I have then is as you think about your marketing, are there levers you're pulling with your own marketing that could help to offset -- could help to cushion a more challenging macro backdrop?

So as it relates to macro, we're recognizing -- we feel really good about the health of our business, but also recognizing that there's just a lot of uncertainty at the moment, and we don't fully know what the future will bring. In respect to marketing, nothing's really changed from how we're thinking about it on our last call. Still anticipating marketing to come in between 14% to 15% of sales for the full-year. I think it's important to note that how we grow is based on word-of-mouth. So we're able to be really efficient with our spend, and we also benefit from repeat dynamics within our business where we don't spend heavily to retain customers, they keep coming back because they love our product. So we're always balancing growth and profitability, and we're going to continue to do so. We're targeting cap that makes sense for the business. And this strategy makes sense for where we are today. We have so much room to grow, and we continue to think it's incredibly important to invest behind marketing.

Okay, well thank you and congrats again.

Thanks, Brian.

Thank you. Our next question comes from Rick Patel at Raymond James. Please go ahead.

Good afternoon and congrats on the strong execution. I'm hoping you can expand upon your guidance for gross margins in the back half. You had some nice upside in the second quarter despite the headwinds related to freight, which seem to be showing signs of improvement. So I'm hoping you can provide additional color on what your expectations are for the gross margin for the back half relative to three months ago? Just curious what's changed for the better and what you might be incrementally more cautious on?

So as we discussed on our last call, we do anticipate gross margin being lower in the back half of the year than the first due to a few factors. So first of all, we decided to airfreight more product in the second half than we did in the first to ensure that we hit our calendar and that we could fulfill demand in a timely manner. And while we have seen rates come down more recently, they're still much higher than pre-COVID levels. And we're being cautious about the potential for continued volatility, especially as we begin to enter high-volume, back-to-school and holiday season. So we want to make sure we're encapsulating everything and also giving ourselves room for the situation to change as we've seen it just be really dynamic in the past.

Thanks very much.

Thank you. Our next question comes from Brooke Roach at Goldman Sachs. Please go ahead.

Good afternoon and thank you so much for taking our questions. Trina, I'd love to dig into the outlook that you have for AOV, given several moving pieces here with product mix shifts, the promotional backdrop and also new product innovation that you have planned for the back half. Can you help us understand where you think that might move as you continue to build out your lifestyle portfolio?

Thanks, Brooke. Daniella, do you want to take that?

Yes. So with AOV, it's the same trends that we've been seeing for several quarters. So lifestyle mix drives higher average unit retail as our lifestyle products are generally higher priced. We also saw a higher AUR within lifestyle. So increasing shoes and outerwear, which are higher priced products in the portfolio. And again, UPT increasing as customers adding the full look to their cart. Really excited to see orders with the lifestyle piece, had 27% higher UPT than their scrubs-only counterpart. In the future, we're going to continue to execute on the same strategies that have driven AOV up to date. So continuing to focus on product innovation and really building out the full layering system and also continuing to focus on the digital products and make improvements there. So we're excited. We think it's going to continue to grow year-over-year, and we're excited to see it from here.

Great, thank you. And just as one quick follow-up. Trina, I think I heard you talk about size expansion as an opportunity for new innovation into the back half of this year. Can you talk to us a little bit about that opportunity and what you see its impact on the FIGS brand and the business overall?

Yes, we're super excited about this. And we've been talking about it for a very long time, and we feel as though we're almost there. So in terms of size -- extended sizing, inclusivity has always been part of what we do here and who we serve, and we have such a broad diversity of health care professionals that we are serving every single day. And so right today, we have extra, extra small, up to 2XL for women, extra small to 2XL for men. We have petite and tall and regular. Actually we launched our petite top yesterday, which is super exciting. So it's always been a part of what we do. So launching 3XL to 6XL, we're looking to launch later this year, and it's a really incredible thing and something that will very much be very exciting for our community.

Thanks so much. I'll pass it on.

Thank you. Our next question comes from John Kernan at Cowen and Co. Please go ahead.

Excellent, congrats on a nice quarter. Thanks for taking my questions. Daniella, just on inventory, it looks like the dollars and the growth rate accelerated from Q2. This -- or excuse me, into Q2 from Q1, and this theme we've seen across softlines retail. How do we think about inventory dollars as we get into the back half of the year and just the overall costs associated with this inventory that's on the balance sheet relative to where it was last year from an AUC perspective?

Definitely, so we're seeing shipments come in faster than anticipated as port congestion clears and some of the inventory plan for 4Q will actually be arriving in 3Q. So visibility in the supply chain has meaningfully improved and we made the decision to airfreight and bring goods in sooner to ensure we were positioned to hit our product calendar. As I mentioned in my prepared remarks, approximately 50% of our inventory is in core styles and core colors, products that live in our site year-round and are always available. Another 20% is in future launches that we brought in earlier. So we feel really good about our ability to sell through this with little risk.

Got it. And then just looking into next year. Obviously, some of the supply chain and freight costs have normalized, at least on a spot base system. I'm just curious, do you have any thoughts on the recovery potential from a margin standpoint and what you were hit with on a trade perspective this year?

So there remains considerable uncertainty in the macro environment today. We do believe that if we return to a more normalized supply chain environment, and this kind of is the continued path, that we can return to our long-term target. So we're going to continue to monitor what we're seeing in the supply chain and keep everyone updated on what that means for 2023.

Got it, thank you.

Thank you for your questions. Our next question comes from Noah Zatzkin at KeyBanc Capital Markets. Please go ahead.

Thanks for taking my questions and congrats on a great quarter. Just really quickly want to make sure I'm understanding. So your commentary around improving the supply chain improvement quicker than expected, did that shift anything in terms of product launches into the second quarter that were previously expected in the back half? And then just a follow-up, many of your peers have called out headwinds from fuel surcharges from carriers, just wanted to see if you were experiencing any of that? Thank you.

So as it relates to the second quarter, we did see a product launch moved from the first quarter into the second quarter, and we've seen one moved from the second quarter into the third quarter. But nothing has shifted forward as it relates to things that were originally planned for the back half moving into the second quarter. As it relates to fuel surcharges, it's definitely something that we have seen, and it is one of the reasons we see selling deleverage. I think it's important to note that we've been able to really offset some of these increases from fuel surcharges by the leverage that we get in AOVs and able to keep some of our margin and profitability that way.

Thank you.

Thank you, Noah for your question. At this time, there are no further questions, and I would like to pass back over to Trina.

Thank you so much, operator. So we have a few questions from our Say platform. Thank you all for writing in. It's so exciting seeing your questions. First one, FIGS stock is down since the IPO. What is FIGS doing to increase profit margins? First off, with respect to the stock price, and I think I said this on multiple calls like this, in the short run, everyone -- I think everyone knows now, the stock market is a voting machine. But over the long run, it's a weighing machine, and that's where we're focused. We're focused on building a company over the long run, an iconic brand over the next 100 years. And the stock market is extremely volatile, and that's due to a ton of different macro issues that I'm sure you're hearing all over the news and on a lot of other calls. So that's not where we're focused. We're focused on the fundamentals of our business and executing every day. And right now, the market isn't really reflecting the fundamentals of our business. In terms of our profits, even in the current environment, we're continuing to prepare significant growth with strong profitability. And that was true again in this quarter, right, where we grew 21% and had an adjusted EBITDA margin of 18%. We're really proud of that. And considering our growth and our profitability, the fact that we have a largely nondiscretionary replenishment-driven business, we're also serving the fastest-growing job segment in the country. We believe that our true value will be reflected in the long run. The second question we received, are you concerned with companies who sell knockoffs of your products at lower prices? First off, every day at FIGS what we say is we don't look less and we don't look right.…

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