Good afternoon. Thank you for attending today’s FIGS Third Quarter Fiscal 2023 Earnings Conference Call. My name is Cole and I will be the moderator for today’s call. [Operator Instructions] I would now like to pass the conference over to our host, Jean Fontana. Please go ahead.

Thank you. Good afternoon and thank you for joining today’s call to discuss FIGS third quarter 2023 results, which we released this afternoon and can be found in our earnings press release and in the stockholder presentation posted to our Investor Relations website at ir.wearfigs.com. Presenting on today’s call are Trina Spear, our Co-Founder and 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 in 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 which we undertake no obligation to update. Finally, we will discuss certain non-GAAP metrics and key performance indicators, which we believe are useful supplemental measures for understanding our business. Definitions and reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in the stockholder presentation issued today. Now, I’d like to turn the call over to Trina Spear, Chief Executive Officer of FIGS.

Thanks, Jean. Good afternoon, everyone. Thank you for joining us for our third quarter 2023 conference call. We were very pleased to have delivered better-than-expected net revenues and adjusted EBITDA margin for the third quarter. I would like to thank our entire FIGS team for their hard work as well as their devotion to our healthcare community. Touching on some highlights from the quarter. Net revenues grew 11% compared to the prior year period, driven primarily by nearly 20% growth in active customers with another record number of new customers added in the third quarter. Beyond the market share gains we are driving in the United States, we are building demand internationally with record growth of 81%. We are replicating the powerful word of mouth dynamics that we fueled in the U.S. over the last decade. Within teams, our B2B business, we saw strong performance with a growing number of institutions coming to FIGS to professionalize their organization. We also continue to make meaningful progress in normalizing inventory levels, which declined 15% compared to the third quarter of last year. Looking at profitability, we delivered an adjusted EBITDA margin of 17.2% ahead of our expectations and generated free cash flow of $46 million for the third quarter. Our third quarter performance underscores our ability to deliver on our objectives and as a result, we are raising our full year net revenue and adjusted EBITDA margin guidance, which Daniella will speak to shortly. Turning to our business highlights. As we execute our strategic priorities, we remain committed to our mission of serving those who serve others. Everything we do is centered around the healthcare community, from the product innovation we bring to bear, to our compelling marketing campaigns to an inspiring ambassadors we partner with, to our work around advocacy. Product…

Thanks, Trina, and good afternoon, everyone. I will begin my discussion with a review of our third quarter financial performance followed by our revised 2023 outlook. Overall, we are pleased to have exceeded our net revenues and adjusted EBITDA guidance and to be once again raising our full year guidance. We did this while making significant progress toward our strategic priorities, normalizing inventory, and generating strong free cash flow. For the third quarter, net revenues grew 10.7% to $142.4 million, compared to $128.6 million in Q3 last year, primarily due to an increase in orders from existing and new customers, as well as higher AOV. We were pleased to deliver a 19.6% increase in active customers, fueled by ongoing initiatives to drive brand awareness globally and strong reactivation rates among lapsed customers. As Trina stated, we reached another third quarter record in new customers. AOV increased nearly 2% versus last year’s Q3, led by higher units per transaction, or UPT, and to a lesser degree, by an increase in average unit retail, or AUR. AOV continues to benefit from the product mix shift, driven largely by the strength in footwear and outerwear. This was partially offset by a higher mix of sales occurring during our planned sample sale in September. Gross margin for Q3 was 68.4%, compared to 70.6% in Q3 2022. The 220-basis-point decline compared to Q3 last year was primarily due to product mix shift. We saw strong growth in non-scrub wear categories including footwear, as well as in certain limited-edition styles. Non-scrub wear grew 26.4% to 19.3% of net revenues in the third quarter versus 16.9% in the same period last year. To a lesser degree, gross margin was impacted by a higher mix of promotions, as well as higher duties. This was partially offset by lower…

Thanks, Daniella. We believe that the growth and the evolution of the healthcare industry combined with our leadership position in healthcare apparel and strong balance sheet creates significant, long-term opportunity for FIGS. As Daniella stated, we will leverage our strong cash flow conversion dynamics and scale to lay the groundwork for multiyear growth. These investments span across several areas of our business. I’ll begin with product, the lifeblood of FIGS. We are evolving our sourcing strategy to deliver the most innovative and high-quality products healthcare professionals have ever experienced. We are refining our supplier base with best-in-class partners. We are working to optimize lead times to bring more flexibility to our supply chain. And finally, we are diversifying geographically to mitigate risk. We are confident that this is the right direction for our company as we widen the moat around our business and advance our leadership position. Second, we will continue to invest in driving international growth to become the global leader in healthcare apparel. We are building our localization capabilities, expanding our ambassador network, and deploying brand initiatives in existing and in new markets. Third, we are building our go-to-market strategy for our teams business to capture the growing trend in more specialized and consumerized medicine. We see a huge opportunity to capture share in an area of the healthcare industry where innovation is lacking. To capture this opportunity, we are upgrading the technology behind our team’s platform to create a seamless experience for administrators, saving them time and resources when procuring the uniforms of their staff. Their staffs need to do their jobs. The next generation of this platform is on track, and we’ll launch later this year. Finally, we are just one community hub in on our retail strategy. We are going to learn from our early experience and ensure we have the right talent in place to successfully and profitably build out our retail presence. As we build for the future, we are setting the foundation for a global distribution network. Our fulfillment enhancement project is on track for 2024, and we plan to open a Canadian DC in 2025. In conclusion, we see tremendous opportunity to leverage our authenticity, industry leading product innovation, strong balance sheet, and scale to capitalize on the tailwinds in the growing healthcare industry. Healthcare professionals are at the heart of everything we do and serving them is what guides our company from how we approach product innovation, how we engage with our community, and how we show up through our advocacy. These are the values that will keep our company on track to serve healthcare professionals like no other brand and to deliver long-term profitable growth for our community, our employees, and our shareholders. With that, I will turn it over to the operator to take your questions.

Thank you. We will now begin the Q&A session. [Operator instructions] Our first question is from Edward Yruma with Piper Sandler. Your line is now open.

Hi, good afternoon. Thanks for taking the question. Congrats on the results. I guess, first, I would love to click down a little bit more on the driver of gross margin. I know you talked a little bit about mix shift to non-scrub. We’d like to maybe go a little further there. Can you talk about the performance of some of your newer products like the under-under scrubs, lab coats, things that are more evergreen in the assortment versus something like footwear? And then as a follow-up, we’ve gotten a lot of questions on the distribution center investment cadence. So, if you wouldn’t just mind maybe giving us a quick update on how we should think about that over the coming quarters. Thank you.

Sure, I can start talking about the drivers of gross margin. So, the biggest driver year-over-year was product mix shift both into non-scrub wear as we saw big acceleration in footwear but also into our limited-edition scrub wear. To a smaller extent, it was mix shift, promotional mix. We did see some outperformance in our sample sale and also higher duties and again that was offset by better than expected by better freight both ocean and air freight.

And in terms of product innovation, we continue to see our layering system resonate with our community. And so, we saw that with our underwear, which we launched in the quarter with our outerwear. Our Sherpas are doing really well, our footwear collaboration with New Balance and so, non-scrubs as a percent of total is almost 20% of our business. And as we continue to build out these categories, we’ll get leverage from a costing perspective, but, they need to grow – build out and that’s what we’re really focused on. And you see – we talked a little bit about how these scrubs, whether it’s within scrubs or outside of scrubs, across our under scrubs, across our outerwear and our footwear, how we’re able to match that back to the core. And really, we’re seeing our healthcare professionals engage with these new styles, as well as the core and kind of replenishing our core. And those two things are working really well together.

And on your last question on investments for our fulfillment enhancement project, so we’re expecting about $2 million of start-up costs in the fourth quarter. Looking into 2024, we’re still expecting total project costs to be $16 million to $18 million. So, $14 million to $16 million of that taking place in 2024 as a result of that, we are expecting some pressure in selling as a result of this fulfillment enhancement initiative, but do believe that it’s going to enable us to drive better efficiency, better reliability, a better customer experience over the long-term and we are still expecting about $20 million of capital expenses in 2023 with the majority of that taking place in the fourth quarter.

Thanks so much.

Our next question is from Brooke Roach with Goldman. Your line is now open.

Good afternoon and thank you for taking our question. Trina, I was hoping you could elaborate on any changes or trends you’re seeing and consumer behavior that you’ve seen as you move through the third quarter and into fourth quarter to date. Have you seen any changes in price elasticity of demand or any trends or changes in how consumers are engaging with the brand as student loan repayments resume and as we see some changes in the macro in aggregate?

Thanks, Brooke. Yes, I think we’re seeing kind of two dynamics going on. The first one is there was a lot of stocking up during the pandemic and there was obviously a heightened need for scrubs during that time. There was stimulus. Interest rates were super low and, we are experiencing the hangover effect of that. And we see that mainly in our frequency rates. And so, we do believe that we, at this point, have abnormally low repeat frequency. And we believe we will see that normalize over time, and we will see going into next year and beyond what a more normalized cadence will look like from our healthcare professionals. But as you know, healthcare professionals, they are buying about, pre-pandemic 4 to 6 sets a year. They are spending about $550 a year. And so, with us, they are buying more like 2 to 3 sets a year and spending about $212. So, this is a huge opportunity going forward. The second piece that we think is happening is the macro environment, there is still a lot of uncertainty. And as you mentioned with student loans and other dynamics, that we think will be a short-term headwind, but we do believe we’re able to offset some of this repeat frequency with new customer ads and you’ve seen that in the last quarter.

Very clear, thank you so much for that. Daniella, can you comment on inventory rationalization? Are you still targeting 25 weeks of supply by the end of the year? And how should we be thinking about further cadence of inventory drawdown over the next few quarters?

So, we’re still on track to deliver approximately 25 weeks of supply at year-end. As a reminder, this is slightly above our normalized level of 16 to 20 weeks, which we expect to be able to get back to in 2024. Important to note, still about 50% of our inventory is in core styles and classic colors, so sell all year round. Never goes out of stock, never goes out of style. And as you saw, we made progress in the second quarter and the third quarter on moving inventory receipts lower. And we’re going to expect to make further progress there in the fourth quarter with minimal planned receipts. And I think we continue to be really focused on maintaining the integrity of our brand with a really disciplined promotional strategy with so much growth ahead of us. And we’re going to continue to work through our inventory at the right rate and pace for our business. Looking into 2024, when we’re back at that kind of 16 to 20 weeks of supply, we would expect to grow inventory in line with sales going forward.

Thank you so much. I’ll pass it on.

Our next question is from Dana Telsey with Telsey Advisory Group. Your line is now open.

Hi, everyone. Congratulations and nice to see the progress. Trina, you mentioned the sourcing diversification opportunity. What are you doing exactly, where are you going, and what do you see as the opportunity and lead times, as I would think that could also be a gross margin driver? And then just secondly on the more efficient marketing spend in digital marketing, how do you planning marketing going forward? Thank you.

Thanks, Dana. Okay. So, from a sourcing strategy perspective, we’re developing new supplier relationships and really leveraging their capabilities to help us continuously up our game and continuously execute on new ideas. And that comes in the form of fabrication styles, details that our healthcare professionals need to do their jobs. And it really comes from the lens of bringing product that solves problems for people. And so, that’s where we’re focused. And to your point about lead times, we do believe the optimization of lead times will help us. It’s going to create a lot more flexibility, being able to deliver and respond to what we’re seeing with our community and what they want and what they need and deliver that in a more timely – in a more timely way. So, we’re excited about that as well. And we’re also aligning with sourcing partners across geographies, from Asia to the Middle East to LatAm. And yes to diversify and get better lead times for sure, but also to access the best-in-class manufacturing talent and to mitigate risk through geographic diversity. And so, we’re really excited about the shifts that we’re making. Our ethos around gross margin is unchanged. And so, as this strategy unfolds, we’re going to be focused on leveraging our high-margin core to drive more innovation, while maintaining an extremely strong margin rate. As relates to marketing, we’re continuing to execute on our strategy of driving bottom-of-the funnel tax gains and taking those gains and investing in top of the funnel. And so as we reach tipping points in cities across the U.S. And now in some of our international markets as well, we see word of mouth driving our tax down. And so, we have to take those gains and invest in top of the funnel, driving brand awareness, driving more healthcare professionals into the family. And so, that’s why, our – we’re able to maintain our efficiency and you’re seeing that quarter after quarter.

Thank you.

Our next question is from John Kernan with TD Cowen. Your line is now open.

Good afternoon. Thanks for taking my question. How should we think about the long-term margin structure of the business? Gross margin has been very stable in a fairly volatile macro. I guess when we think about G&A and selling expenses, what are the opportunities long-term to see some leverage on these line items? It sounds like selling has some – has some expenses coming on for next year for distribution. I’m just curious, how do we think about both those expense line items going forward. Thank you.

Thanks, John. So, we continue to believe that we will get to a high teens adjusted EBITDA margin. I think it’s helpful to think about kind of the different components of what needs to happen. You spoke to our really strong gross margin rate. I think we’re going to continue to deliver that very strong gross margin. Trina spoke about evolving our supply chain to drive greater innovation and quality. We’re also expanding our layering system. And so, both of these items, we might see some short-term fluctuations, but really we’re positioning the business for the longer-term. And we have a lot of confidence that these changes that we’re making are really going to enable us to be better positioned three to five years from now and also gain a lot of efficiency over time as we scale. Particularly to selling, so, we do expect 2024 to be burdened with fulfillment project costs, but we are expecting to move past that in 2025. In the near-term, we may see a higher cost per order as we invest behind customer experience, but we’re going to plan to leverage that as we scale. In addition, in selling we do expect to see a higher penetration of international which does carry duties and higher shipping costs and that’s going to have a short-term impact on selling expense. But once we open a Canadian DC in 2025, we should be able to drive significant cost savings related to duty and shipping expenses. And over time, we believe we can leverage G&A and continue to remain really efficient in our marketing as we always have been. I think just taking a step back, right, we have a strong balance sheet, strong cash flow generation to really invest in our future growth now. And so, we really want to take advantage of our leadership position to capture the opportunities across global healthcare.

Understood, and thanks for the very thorough answer. Just maybe one quick follow-up on the previous thing, it was Brooke’s question on inventory. Do you expect inventory to grow in line with sales next year or should we still be cycling down year over year in inventory?

I think in the first half, we will still be working to get to that 16 to 20 weeks of supply. Looking into the back half of 2024 is when we would expect to see inventory grow more in line with sales once we’re in that normalized place.

Got it. Thank you.

Our next question is from Alice Xiao with Bank of America. Your line is now open.

Hi, thank you for taking my question. I’m hoping to get more detail about teams and international since those are the two areas driving your new customer acquisition. How big is each as a percent of sales now? What are the long-term impacts to AOV as both of these categories grow, i.e., does teams provide an AOV benefit given the bulk orders? And then does international AOV tend to be higher or lower than domestic? And then lastly, to summarize all that if you could touch upon the contribution margins for both of these categories as well? Thank you.

So looking at our teams and international businesses. So, speaking to the AOV that we see in each of those, teams does carry a higher AOV as these are generally larger orders. It also has a higher contribution margin, so gross margin is pretty similar. We do see some offset in higher discounts for these bulk orders, but generally they are buying more of our core product, which helps to keep gross margin relatively stable. And then we get a lot of benefits below gross margin looking at efficiencies in outbound shipping. And also today, it’s entirely inbound, so no marketing expense. So, teams really accretive from a contribution margin standpoint. International today carries a slightly lower AOV, but we see a lot of opportunity to drive that higher over time. From a contribution margin perspective today, we’re really focused on keeping the experience similar for our international customers. And so, to do that, we’re subsidizing a lot of the shipping and duty expenses as we sell from our – our distribution center in California. From a marketing perspective, as Trina mentioned, we’re really efficient. And so, as we expand our distribution network, as we open a Canadian DC in 2025, like we spoke to, we see a lot of opportunity to drive better profitability in international over the long-term because of the strong fundamentals that we have today.

Thank you.

Our next question is from Adrienne Yih with Barclays. Your line is now open.

Great, thank you. Good afternoon. My one question – my first question is on the community hub that you released this afternoon. Trina, can you talk about the store, if you have any metrics at all? And I know it’s kind of the first store, but really kind of the intention behind it. Is it intended to be more of a showroom environment or is it a kind of fully stand-alone box with depth and breadth of inventory? And then my second question for Daniella is on the supply chain. It sounds like you’re sort of back to normal supply, but it doesn’t sound like there is a ton of inbound manufacturing. When would you think that the kind of – when would you restart up kind of manufacturing? And how much of the new product that you would be kind of manufacturing is going to be new versus core? Thank you.

Thank you. So, in terms of the store or community hub, we couldn’t be more excited about it. It’s the first solely branded healthcare apparel store in the world, which is crazy to say because this was a dream that we had about 11 years ago. And since then, there is really been no place for healthcare professionals to go and not only get their uniforms so they can do their job, but also connect with each other. And we’re really excited about that, providing that. And so, that’s why we’re so excited about the programing we’re going to have and the way in which we’re going to engage with our community. I think our communities can be able to learn more about our products. They are going to be able to try it on, really understand their size and all the different styles or different fabrications. And this is – I mean, we couldn’t be more excited. I think the largest, most iconic brands have stores, and our plan is to be a very large, very iconic brand for a long, long time. It’s not a showroom, so we carry inventory and so you can get what you need and you can leave the store with the uniform that you need. You might have to go to work the next day and you want to wear your new things, and we want to provide that opportunity. And so, we’re officially opening tomorrow. So, we will be providing you with all the detail in the future. But if you are in LA, please come by.

Well, congrats on that.

Thank you.

On your question on inventory, so we are really proud to be working down our inventory balance while sustaining such a strong gross margin rate. We have work to bring inventory down by lowering receipts in the fourth quarter, but I think it’s important to note that we are still bringing in new products just in shallower buys. It’s not going to feel very different to our customers, and it’s still going to enable us to drive excitement and engagement. We are going to continue to play on lower core orders to bring our inventory balance down while still bringing newness and innovation going into 2024.

Great. Thank you very much. Best of luck.

Thank you.

Our next question is from Rick Patel with Raymond James. Your line is now open.

Thank you. Good afternoon. I am hoping you could dig deeper into the international business. So, you have launched in a lot of new markets within the past couple of years. What have you learned about what works, what doesn’t? And then as we think about the next year, do you have more countries in the pipeline that you expect to launch in or are you going to focus more on your existing markets?

Thanks Rick. Okay. So, I think from an international perspective, what we have learned is that our localization strategies are really working. When we are localizing our messaging, our communications, even our products and what we are showing on our site at any given time, obviously, our currency, being able to check out and pay in local currency is really important. So, localization is really going well. I think the other thing that is working well is how we are being opportunistic, right. We are seeing the demand organically from a number of countries, and we are opening them up and we are not even really spending on marketing. And we are seeing that demand and we are seeing that build in markets that maybe we weren’t even planning over a year or so ago to open that market. And that’s been really exciting. So – and I think the other thing that’s been really great to see is the word-of-mouth dynamics. They are very similar to what we have seen in the United States, that we are seeing different markets in these tipping points around how people are coming back and engaging with the brand over time, how referrals and people are telling their friends, their colleagues about FIGS. And that’s been really great to see. And so, going into next year and beyond, I think we are going to continue to be opportunistic. We are obviously going to invest in our existing markets and ensure that we continue to build the brand. And as we see the brand awareness grow, we are going to continue to invest behind that. But we are also going to be opportunistic as we open up new markets next year.

Can you also touch on the outlook for promotional events in the fourth quarter? I am curious if you expect a similar cadence to last year or if you have different activations in mind?

So, our guidance assumes that we continue to maintain discipline around our promotional events. As you know, we don’t typically do kind of like-for-like events every quarter. And we think that’s really important to ensure that our customer isn’t waiting for the next event. And we also just have more flexibility as a B2C-only company to be really nimble in our strategies and adjust based on our inventory position, based on the volume, based on what we are seeing in the customer kind of spend. So, we are always going to focus first and foremost on protecting our brand, but we also recognize that customers have been leaning into promotions during this difficult time. So, we are going to plan to respond accordingly depending on the environment.

Thanks very much.

Our next question is from Bob Drbul with Guggenheim. Your line is now open.

Hi, good evening. This is Erinn Murphy [ph] for Bob Drbul. I wanted to follow-up on Adrienne’s question about the community hubs. Can you quantify any meaningful digital halo effects or any uptick in the area that you are implying, because I am pretty sure the area is very heavy on healthcare community, so I just wanted to understand what was behind the location? And also, I wanted to ask about the competition. Any updates on the competitive environment, the promotions driven by new players or promotions solely by macro? Thank you.

Sure. So, as it relates to our community hub in Century City, it’s really central, it’s central to healthcare clinics that are actually located in Century City Mall like One Medical, like Kindbody and others. And there is also a number of hospitals within a few miles of from Century City Mall. So, we did a lot of analysis around. And as you know, as a B2C company, we have so much data around our customers and where they live and where they work. And so, utilizing that to figure out where to put our community hub, and that will be our strategy going forward to – that will help us decide where to go next and where to put our store. So – and to your point, I think the digital halo is really important. Stores in many ways are profitable billboards, and they are able to drive our digital business as well. You try on your uniform in the store, you figure out your size, and then you can kind of shop the next time online after understanding that. And so there is a lot of benefits. Other retailers have seen AOVs much higher than what they see online. There is also a lot of different metrics out there around other retailers and what they see as it relates to omnichannel, I mean how the repeat effect of having an omnichannel business across both online and offline. So, we look to see that over time as well. As it relates to the competitive landscape, we really haven’t seen much change since we talked about this last time. From our perspective, we are adding new customers at a record rate. We are continuing to widen the moat between us and everybody else. The next closest competitor continues to be about one-tenth our size. And how are we widening the moat. We are doing it with new product innovation, elevated quality. We are engaging our customers. We are advocating for them. And so, we do remain the leader in the space and we are going to continue to invest in widening the moat between us and everybody else. And during this – given this environment, I think a lot of companies are pulling back, and they are standing still. And what we are doing is given we have $232 million of cash, we have no debt, we are generating cash, we are making investments, really smart investments. So, that over time we are widening that moat between us and everybody else and continuing to show up in the most authentic – in the most meaningful way and purpose-driven way for our community.

Awesome. Thank you. Good luck.

Thank you.

Our next question is from Matt Koranda with ROTH MKM. Your line is now open.

Hey, everybody. Thanks for taking the questions. Just on the new customer ads in the quarter, just any specific breakdown of how many came from the international versus sort of the core domestic market. And then on the new cohorts that you have been acquiring, any notable differences there versus your core consumer just in terms of product mix, full price versus off price, propensity AOVs, etcetera?

So, looking at our new customer ads, international, we are really pleased with the growth that we saw in the quarter. But it’s also great to see that domestic is continuing to add more new customers year-over-year. And I think that really just speaks to the opportunity that we have within the U.S. to continue to penetrate and grow our brand awareness. So, we continue to see a healthy mix between the two. We are not seeing a lot of difference in the new customers that we are adding today. We are seeing similar occupations. Obviously, we have spoken about some of what we have seen on the spending patterns in terms of higher AOV, offset by lower frequency. We are seeing that across the board on our new customers and our repeat. Otherwise, yes, they look pretty similar to the customers that we have been acquiring.

Okay. Great. And then just on the store strategy, I think it’s been asked in different ways, but I just wanted to put a finer point on the question. Are stores in your view at this point a growth driver with sort of four-wall ROI metrics that you would expect to sort of achieve, or are these kind of more of a brand beacon? How should we be thinking about sort of the store strategy? And I know, obviously, with the understanding that it’s early, just given that we had the first one, but just wanted to ask specifically on that.

Yes. I mean community hubs retail is definitely a growth driver with four-wall EBITDA profitability. But it will also be a brand identifier. We look to be an institution within cities across the United States. And I also think that what we are doing in person with our community is going to unlock a lot of what we are doing digitally. And I think there is a lot of synergies between what we are doing within our community hubs and that’s why we are calling them community hubs. And it’s not just about that transaction, it’s about much more, it’s about that connection. It’s about having events and programming that aligns with what our community cares about. And that alignment, in that, we have this diehard fanatical community. And every time we show up in person, whether it’s our pop-up shop, whether it’s our activations, whether it’s our mobile experiences, they want more of us. They are in five-hour lines waiting for FIGS. And so this is only going to continue to drive the business and not just what we are doing with our community hubs. It’s also going to drive teams as teams are going to walk in that door and say, hey, how do I get FIGS for my team. It’s going to drive what we do with digital. And then you shop online, you return in the store, etcetera. There is a lot of dynamics there that are going to be really beneficial over time. And so we are really excited to see how we continue to roll this out and we are really excited to see how our community continues to engage with us in person.

Our next question is from Brian Nagel with Oppenheimer. Your line is now open.

Hi. This is William Dossett on for Brian Nagel. Good afternoon and nice quarter.

Thank you.

So, excuse me for going back to the quarter, but just to ask you about near-term sales guidance and understand this better. You indicated there may have been a pull forward in Q3. Could you elaborate on what you may have seen that caused that and to what degree this may have affected the quarter? And also any idea that you could give us on how demand tracked throughout the quarter.

So, related to kind of the third quarter and what we saw with the outperformance, so as we discussed our planned sample sale outperformed our expectations. We do believe there was potentially some pull forward associated with that, but we are really proud to pass through the majority of the beat and raise full year guidance for the second time this year in a really uncertain macro environment. Can you repeat your second question?

Just – yes, well, thank you for the first part. And yes, just any idea for how the demand tracked throughout the quarter?

Yes. Thank you. So, looking at the fourth quarter I think it’s what you are asking. And I think the Q4 guidance is not necessarily reflective of what we are seeing for our growth rate quarter to-date. It’s really more of an expectation of what we expect to see in the quarter for aggregate. As a reminder, we don’t do like-for-like events. We change our launch calendar. So, it’s hard to extrapolate kind of what’s happening in our quarter to the full period. I also think just given we have a lot of volume in front of us with our upcoming Black Friday, Cyber Monday events, we just want to be cognizant as we are guiding that there is a lot left in the period and that our consumer, especially at our income level, can be strained. And so, we are taking all of that into account in addition to the pull-forward potential that we discussed when thinking about our Q4 outlook.

Perfect. Yes, that’s very helpful. My next question was on gross margin – is a follow-up to a previous question on gross margins. Just the product mix shift, how did it change since you last laid out expectations in August? Is this just a temporary or more sustainable shift? And then looking to Q4 just, you all noted that better freight would be offset by a shift in product mix and promotional mix. So, just wondering if you could size the quantity of those impacts to gross margins at least directionally?

So, looking at our gross margin for the third quarter, we did cite product mix shift as the biggest impact year-over-year, mostly driven by mix shift into non-scrubwear. We spoke about the strong performance in both outerwear and footwear, which are categories that generally contain a lower gross margin rate and also mix shift into more of our limited-edition scrubwear. That was really within our expectations from August. I would say what did was a little different from what we expected was some of the outperformance of the sample sale, which had a bit of an impact on gross margins. I think related to that, we are really focused on how we continue to move through our inventory while simultaneously protecting the brand. It was all non-core products. And we are going to continue to move through inventory at the right rate and pace and deliver a really strong gross margin rate. Looking at the fourth quarter, similar to dynamics, we are expecting to what we saw in the third quarter with product mix as we continue to shift into more non-scrubwear and also our limited-edition scrubwear offset by better freight and promotional mix. Product mix will be the biggest impact followed by promotional mix.

Thank you. And then one last housekeeping item if I may, just could you discuss how to look at share-based compensation within your expense structure longer term if there is any changes?

Definitely, so within our stock-based compensation today, we have some portion of it that’s really non-recurring. And so, looking longer term, a portion of our executive stock-based compensation is going to roll off at the end of 2024. And then we will have another portion roll off at the end of 2025. So, we will start to see a more normalized stock-based comp as a percentage of sales by Q4 2025, which we expect to be about half of our current rate as a percent of sales.

Thank you very much. Good luck.

Thank you.

There are no further questions in the queue at this time, so I will pass the conference back to the management team for any closing remarks.

Thank you so much for joining us and we look forward to seeing you again soon.

That concludes today’s conference call. Thank you for your participation. You may now disconnect your line.