Thank you for standing by, and good afternoon. Thank you for attending today's FIGS' Third Quarter Fiscal 2024 Earnings Conference Call. My name is Reagan, and I'll be your moderator today. All lines will be muted during the presentation portion of this call with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Tom Shaw, Senior Vice President of Investor Relations. Tom, you may now proceed.

Good afternoon, and thank you for joining us to discuss FIGS' third quarter 2024 results, which we released this afternoon and can be found in our earnings press release and in the shareholder 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 Sarah Oughtred, 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 opportunities 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 and 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 shareholder presentation we issued today. With that, I would now like to turn the call over to Trina.

Thanks, Tom. I'll start today with an overview of our third quarter results, where we had a number of impactful brand and product wins balanced by a few areas of opportunity in the quarters ahead. I'll then provide an update on some of the foundational initiatives that we have been focused on implementing this year, which we believe will better support and enhance how and where we deliver our game-changing product to our healthcare professionals. Finally, I'll highlight how our strong balance sheet and cash flow provide the flexibility to invest in the core, return value to shareholders and continue to disrupt the industry. Looking at the elements of the quarter, our top-line performance was supported by an expansive top-of-funnel marketing campaign, strong clinical innovation and positive signs around our core scrubwear. We are the clear leader in the space and continue to be encouraged by positive trends around frequency and traffic. Additionally, we remain in the early stages of capitalizing across the emerging growth drivers of the business, including International, TEAMS and Community Hubs. Areas where performance fell short of expectations largely stemmed from our overall footwear positioning and changes to our promotional timing. In footwear, we had Q3 specific delays in stock-outs and popular styles. We also underestimated the impact of removing the category from our Q3 promotion. Regarding timing, our back-to-school promotion was shifted later in the calendar this year, partly due to the timing of our Olympic focus, and we believe we lost some of our historical brand spotlight given the crowded promotional backdrop. While the impact of these factors was slightly more than expected and are factored into our expectations for Q4, they are all areas in our control, and we are taking action. From a margin perspective, gross margins were better than our outlook,…

Thanks, Trina, and appreciate the kind words. Before discussing the results and our updated outlook, I want to start with a few observations from my first three months in the role. It has already been an incredible experience being part of the team and brand that rallies relentlessly behind healthcare workers. I recently had the opportunity to connect with members of our Healthcare Advisory Board, who collectively provide a powerful voice of what it takes to be a healthcare professional, the challenges they face in their professions, and the unique role that we can play as a brand. I left touched and inspired by these amazing stories, and I'm humbled to play this part in our journey to celebrate and empower these Awesome Humans. As I look at the business side, several items are clear. We must continue to lead with premium product and innovation that both delivers on the high bar we have set and strives to address unmet needs. Trina laid out some of the foundational efforts here this year like fit and service. And I am excited to add additional rigor and process around areas like inventory management to refine how and when we invest in breadth and depth of product and color. We need to grow our brand awareness and bring more new healthcare professionals into our community. This requires a disciplined approach to how, when, and where we engage and optimizing the assortment for our customer. And we must evolve to meet the customer across a diverse range of channels, which is why we will remain laser-focused building on our work internationally in TEAMS and our Community Hubs. Together, these are the ingredients to both stabilizing our performance, returning to top-line growth and methodically rebuilding margins. And I look forward to working with all of…

Thank you so much. We will be now moving into our Q&A session. [Operator instructions] Our first question comes from Dana Telsey of Telsey Group. Dana, your line is now open.

Hi. Good afternoon, everyone. Hi, Trina, and nice to meet you, Sarah. As you think about the issues that happened this quarter and basically for 2024, given the transition year, what is steady that continues into 2025, whether it's on product or operations? And what enhancements and improvements do you see where the initiatives of 2024 become tailwinds in '25? And then, I just have a follow-up.

Thanks, Dana. Great to hear from you. So, I think as it relates to the things that are working and where we're focused, first on product, right? We're exceeding our customer expectations by delivering consistent innovation. We talked about how we've refined our fit in the second quarter. We're going to continue to have that rollout through the rest of the year going into 2025. This year, we had a full standardization of our fit, improving our fit tools, and we're launching that campaign next year. As it relates to marketing side and campaigns, we're coupling this innovation with top-of-funnel marketing and really bringing together storytelling, product, and timing to optimally align for our healthcare professionals and continuing to celebrate our Awesome Humans. And finally, we're investing in our future and investing in our growth levers. International continues to grow and scale. Our TEAMS business is a huge area of focus as we build out our outbound sales strategy there. And Community Hubs, now, we have two. We're going to be opening a number of Community Hubs next year as well. And so, I do think a number of things that we've been building will pay off in 2025 and beyond.

Got it. And then, when you think about the potential for tariffs going forward, how much of your merchandise is imported -- directly imported from overseas? How much from China? And how do you think of potential offsets there?

Yeah. So, from a tariff perspective, our finished goods are not coming from China. Given the political environment, we've operated in different environments over the last now 12 years and also have operated under Trump's administration in the past. And so, we're going to continue to be nimble across our supply chain, be aware of what's happening, and continue to optimize across all of our suppliers to bring in the highest quality goods to meet the needs of our healthcare professionals.

Thank you.

Thank you. Our next question comes from Rick Patel of Raymond James. Rick, your line is now open.

Hi. This is Josh Reiss filling in for Rick. I was hoping to dig in a bit on the U.S. numbers. So, I was wondering if you could provide more color on like any net -- the net customer adds in the U.S. and try to give us a bigger picture on how the U.S. customer is transacting, like if you're seeing any pullback in spend. I know you attributed the decline to that footwear component. So, I was wondering if that footwear component was largely in the U.S. or it also impacted international as well. Thank you.

Sure. Yeah. So, the decline in our U.S. business in Q3 was due to those specific issues that are fully within our control, but -- and we talked about. So, footwear inventory and positioning -- sorry, footwear inventory and pricing and the timing of our back-to-school promotion. I just want to give some context here. We're also one quarter removed from growth in our U.S. business. So, I think that's important to note. And we're very focused on looking at the U.S. business and really focusing on what's in our control. And the inputs are what's in our control. And if we do -- if we continue to execute as we know we will, the outputs will fall over time. And so, that's really the reason for the Q3 decline as it relates to the U.S.

Thanks so much.

Thank you.

Thank you. Our next question comes from Bob Drbul of Guggenheim. Bob, your line is now open.

Hi. Good afternoon. Two questions. I think the first one is just the branding -- the brand awareness levels from the marketing campaign. Do you have any data around sort of some of the progress that you've made with that campaign in terms of either implied brand awareness unaided, et cetera? And then I think the second question is just on the AOV pressure, can you just detail a bit more around what's driving it, and how can you start to grow AOV again looking forward?

Sure. Thanks, Bob. I can speak to the Olympics campaign and our brand awareness, and then I'll pass it over to Sarah to talk about AOV. So, as it relates to the Olympics, this was the biggest boldest campaign we've ever done in our history, and it exceeded our expectations. This was a win for the brand. And I want to just say this wasn't a short-term play. We've talked about this in the past. The goal behind the campaign is to drive long-term brand awareness and brand love that will pay dividends over the long run. We saw incredible data points that point to that. Over a billion earned media impressions. We had really strong increases in brand search and site traffic. Our TEAMS leads surged during the period. And so, I really feel good about the Olympics campaign. The product that we launched during the Olympics campaign sold out really quickly. It was actually one of the big lessons there was that we should have bought more because there was a lot more demand than we planned on. As it relates to looking at some of the work that we did pre and post the campaign, for those who saw our commercial, it takes hard to build bodies that break records. the purchase intent increased notably. And so, I really do feel like big win, definitely lessons in terms of buying behind big moments and really ensuring that we gain those benefits and capitalize on the benefit of top-of-funnel marketing over time.

And then, I'll take the piece on AOV. So, AOV was down. There's a few dynamics at play there. One of them is the reclassification of the duty subsidies, and we will annualize that in Q4, and that shouldn't be an impact into 2025. Another portion of it is the higher discounts and the dynamic within that is the higher discounts are driven partially by our TEAMS business. So, that has a higher discount rate, but that's more than made up for an expense for it to be an accretive business. So, as that portion of our business increases, we will continue to have that impact. And then, the other piece is really just on keeping our inventory clean. So, when need to work down certain pockets of inventory like discontinued items, we'll use the section of our website for Awesome Today, Gone Tomorrow, and that's just a normal part of our business. So, I think those are the main dynamics on AOV.

Thank you very much.

Thank you. Our next question comes from Brooke Roach of Goldman Sachs. Brooke, your line is now open.

Good afternoon, and thank you for taking our question. Trina, you mentioned the different engagement with the back-to-school promotion versus your initial expectation. And Sarah, you mentioned some higher discounts as well. Can you talk a little bit about the customer price elasticity of demand that you're currently seeing and your promotional plans for holiday 2024 and how you think about that into 2025? Thank you.

Sure. As it relates to the -- thanks, Brooke, for the question. As it relates to the price elasticity, we are seeing some inconsistency that we saw in the third quarter. We're being cautious as we go into the fourth quarter as we look at the promotional calendar. I do think we're actually seeing a lot of positives as it relates to non-promotional days. We're seeing engagement there that people are willing to come in and buy FIGS full price. And we saw that during the Olympics, and we saw that post Olympics. And so, that's really great to see. I think we are just being cautious as we look at the rest of the year. And the other key thing here that we talked about in the past, Brooke, is repeat frequency. Our customers are coming back to us more -- we're starting to see more wins on repeat, and we saw that in the third quarter, and we continue to see that going into the fourth. So, I do feel like that's a great indication of things to come, but are being cautious just given the environment and given what we saw in the third quarter.

Great. And then, if I could just ask a follow-up for Sarah? Thank you so much for providing some of those initial 2025 guardrails. You mentioned that the extent of improvement of adjusted EBITDA margin will be dictated by investment opportunities and stabilizing the top-line. Can you provide a little bit more commentary around how you're thinking about the range of outcomes there and what the key investment priorities might be as you look into next year that could offset some of those recapture wins?

Yeah, definitely. So, I think we've outlined in some of our remarks where our opportunity is, and that's really around continuing to have premium product and innovation. I think there's opportunities to elevate our go-to-market strategy, and we're going to continue to invest into reaching our customer in new and diverse ways of connecting with them. So, I think those would be the areas that we continue to invest into to stabilize the business and return to growth. And we're not giving out 2025 guidance at this point. We'll give that out closer in February, but yes, I think that the key components that we've talked about is that the marketing expense should normalize as well as the $13 million in transitory costs should go away. And then, we're going to continue to work on setting up for 2025. And what's great is we have a large number of opportunities ahead of us and the rate at which we invest in those will impact how we set up for 2025.

Great. Thanks so much. I'll pass it on.

Thanks, Brooke.

Thank you. Our next question comes from Brian Nagel of Oppenheimer. Brian, your line is now open.

Hi. Good afternoon. So, I have a couple of questions just to understand better the third quarter results. So, first off, with respect to footwear, so, I guess, A, could you size the specific -- the footwear impact upon sales growth in the third quarter? And then, should we interpret that, was there, to some extent, an out-of-stock issue, or was it something else? And then, my second question on expenses. So, it sounds like once the new facility is now up and running, but it's running at a higher expense than you initially thought. So, I guess, is that what's happening? And how should we think about that expense going forward? And are there any type of like one-time events in there? Thank you.

Yeah. Great. So, in terms of footwear, there were several dynamics that were happening. We did exclude footwear from our promotional event this year, and we were up against quite a bit of footwear in our sample sale last year. We were also -- we delayed the launch of our 3447 so that impacted performance. And then, we were out of stock in a key style that we're looking to get back into stock in quickly. So, those are some of the dynamics that impacted footwear in Q3. And then, your next question, what was the last -- the next question?

The expense...

The expense question.

Yeah. I got it. Great. And so, outside of the transition costs, we did see some higher post-transition costs -- and some of that is really around learnings that we have on labor allocation as well as some inefficiencies in our returns processing. So, we think that those are things that we -- that are within our control that we can continue to go after. Another piece of the higher expense is also due to lower AOVs that's putting pressure on our cost per unit on shipping. So, those are the two dynamics there.

And Sarah, just a follow-up on that first one, and again, not to get too annoying here, but if you look at that footwear, could you say if you exclude the impact of footwear, sales for the company would have been here? Is there a way to kind of break out that footwear piece?

Yes. So, we don't give footwear-specific guidance. We were down year-over-year in footwear, and that is causing a lot of the decline in year-over-year for non-scrubwear. We do believe that with the -- if we didn't have the misses in footwear and the promo, we would have met our expectations for the quarter.

Okay. That's helpful. I appreciate it. Thank you.

Thank you. Our next question comes from Lorraine Hutchinson of Bank of America. Lorraine, your line is open.

Thanks. Good afternoon. You called out higher marketing as an outsized pressure on 2024. As we look to '25 and beyond, is there a dollar level or percentage of sales that we should think about as a more normalized marketing spend?

Yeah. I think we'll be able to come back with more details on specific levels of marketing for 2025 when we share our outlook in our next call. I think you can think of it that we've had pretty outsized and that we will return likely to normalized levels with some refinement based on where we see opportunity to invest in the business and continue to stabilize top line.

Thank you.

Thank you. Our next question comes from Matt Koranda of ROTH Capital. Matt, your line is now open.

Hey, guys. Just curious about the AOV headwind that you said is built into the fourth-quarter sales outlook. Is that related to footwear still being out of stock? Is that mix and promotions in terms of the down assumption? And then, what do we need to see to kind of get AOV back to positive territory?

Yeah. So, as we think about the Q4 guidance, unfortunately, Q3 did perform below our expectations. So, we are taking a cautious stance on the holiday period. Our guidance does reflect the footwear trends that we will expect to see into Q4, and it is also reflecting the inconsistent promotion from Q3. Connected to that, Black Friday is a really big portion of our business in the quarter. So, we do think it's prudent to be cautious. And all of those footwear trends are incorporated into our outlook for Q4.

Okay. And then, just on the brand campaign that you ran around the Olympics, I'm curious, Trina, maybe to get your take on how long that takes to translate into demand. Like, what's the length of time as a rule of thumb that we should think about between sort of awareness and that brand building, the exercise that you've done that turns into engagement and then conversion? Any thoughts there?

Yes. I think we've seen a lot of what -- I think we've seen a lot of that play out. We see that in our search is up. There's a similar number of searches for FIGS that they are for scrubs really showing that we own the category. Our traffic is up. I talked about our TEAMS leads being up. Our email subscriber list is up. All of those dynamics and what I would call leading indicators are up year-over-year. And we look to see the outputs of those -- of all of that work play out over time. And some people say top-of-funnel campaigns return results over six months. In many cases, they return results over years, right? The credibility of having this partnership being the first company ever to outfit Team USA's Medical Team, it's a really big deal. And many organizations have come to us now saying, we want to work with you, we want to partner with you. So, I think this is an incredible formalization of really who we are as a brand, how we show up in the world, who we're going to work with in the future. And I think it will accrue benefit and value over the very, very long term. Plus, we also are outfitting Team USA's Medical Team for 2026, Winter Olympics in Milan, 2028 in L.A. in our backyard, which we're super excited about. So, I think top-of-funnel marketing, combined with product innovation is our strategy, and it's the right strategy, and it will help us win over the long run.

Okay. I appreciate it, guys. Thank you.

Thank you. Our next question comes from Nathan Feather of Morgan Stanley. Nathan, your line is now open.

Hey, everyone. Thanks for the question. First off, given the performance of the Olympics marketing campaign, how are you thinking about balancing between some of these bigger brand-building events going forward and more kind of your traditional bread-and-butter marketing? And then, as we think about the marketing cadence over the next few years, does that mean things could be a little bit lumpier as you move through some of these larger campaigns and then more of a normalized level?

I think over -- we're going to continue to be opportunistic, right? I think having this type of campaign is an anomaly. We don't look to -- there is nothing -- well, that being said, 2026, 2028, we're going to be looking to also -- those partnerships are intact with the contract we have with Team USA. But marketing is about the full funnel, right, bringing customers to learn about the brand and have awareness of FIGS at the top of funnel to consider the brand mid-funnel to bottom of the funnel where they're converting. And so, the full funnel marketing has always been our approach. It is why we've been successful over the last 12 years and why we've been profitable. We've always been disciplined in our spend and how we acquire customers. We're going to continue to be disciplined and strategic in our spend, but also be opportunistic when we see exciting opportunities in front of us.

Okay. Great. That's helpful. And then, I want to talk a bit about the sample sale you ran in the quarter. I know you had originally only planned for one in the year. So, interested to hear what you were seeing in the business that drove that. And then, connected to the sale, how should we think about the magnitude of excess inventory you're carrying, if any, especially given the fit changes? Thank you.

Yeah. So, in terms of the sample sale, we led off last quarter identifying that our promo cadence in Q3 would be similar. And so, that did include a sample sale similar to what we did last year. And given the -- this is in our back-to-school promo, we did have the sample sale and extended that to try and offset some of that. We did end up still falling short. And so, those are some of the dynamics on the sample sales piece there.

Operator, can we take the next question, please?

Of course. Our next question comes from John Kernan of TD Cowen. John, your line is now open.

All right. Thanks for taking my question. Sarah, you've had more time to look through the numbers. I know there's been a lot of investments in the last several years on selling and fulfillment expenses. How does that carry over into fiscal 2025? What type of returns can you expect to see on some of these investments? Thank you.

Yeah. So, we would have been investing into our new fulfillment center this year, and that's absolutely what was needed in order to be able to give ourselves the flexibility to scale in the future to continue to provide our customers with great reliability. And so, we are set up from that perspective into next year. I think we'll continue to look at expanding out those logistics network to better serve our customers. So, we will be looking for a Canadian distribution center next year that will provide great value to our Canadian customers. That won't have the same level of investment that we've done this year because we won't -- we'll be using a third-party provider. So, you won't be seeing a high degree of transition costs like you did with the facility that we operate in Arizona.

Got it. Follow-up is just on marketing. I think the dollars were up 50% year-over-year. How does that -- how do we think about the fourth quarter holiday season and then the right long-term rate of marketing as a percent of sales?

Yeah. So, we will give more detail specifically around marketing for 2025 as we share our results in our expectations on our February call for 2025. But the outsized investment on the year was really all in Q3. So, we are expecting a more normalized level of marketing in the quarter for Q4 and then going into 2025 as well. And keeping in mind that we're going to continue to look at what opportunities are available for us to continue to drive top-line. We can share more about that in our next call when we share more details in 2025.

Got it. Looking forward to seeing everybody in Philadelphia.

Great.

Okay. Thanks, John.

Thank you. Our last question comes from Ashley Owens of KeyBanc Capital Markets. Ashley, your line is now open.

Great. Thanks so much. So, first, I just want to zoom out and focus a little more broadly. International is probably one of the bigger long-term drivers going forward. So, just how are you thinking about the markets that you're most focused on? How brand building and awareness is going there? And just curious to hear about the nuances in some of those, maybe ones that could be focused around B2C or B2B.

Sure. Thanks so much for the question. So, international continues to grow and scale. We're now in 33 markets. Canada was our first and by far, in a way, our largest international market. Australia and U.K. were two of our other early entries, and they remain relatively large. As we mentioned, Mexico and the Philippines, they've emerged quickly and continue to do great. And then, we're really focused on building out Asia. Right now, we're only in the Philippines and Singapore. Japan is a clear focus for us, given some of the things we outlined, 5 million-plus healthcare professionals, highly concentrated and aging population, and a high focus on technical product and function. And so, really, that -- we think is a really will help us springboard into other Asian markets going forward. We believe we can leverage our work as we look at opportunities in South Korea and in Hong Kong and in other countries over time. So, we're really excited to share more, but much more to do as we continue to localize market by market from a product standpoint, from a storytelling standpoint, language, currency, et cetera, but really excited to continue to bring FIGS to healthcare professionals around the world.

Okay. Got it. And then just quickly, I wanted to circle just back a little bit on marketing, not so much on the cadence of rate, but just curious following the success of the Olympics campaign, I would love to hear thoughts on how that's shaping go-forward marketing campaigns and the strategy around that. I think you mentioned being more inspiring and less transactional.

Yeah. I mean, I think it's about telling stories. It's about telling stories about our Awesome Humans. It's about telling stories about our product, and we're going to continue to do that. There're so many more stories to tell. And so, I really do think we have the right strategy in place, telling top-of-funnel big brand campaigns at the same time as our day-to-day business, coupling launches and what are we launching as it relates to product and telling those stories, partnering with the most incredible healthcare professionals in our community and telling their stories. And so, all of that is really exciting, and seeing the Olympics and the success of the Olympics campaign is shaping how we think about broadening the aperture around our marketing and how we connect and communicate with our community.

Got you. Appreciate the color, and see you next week in Philly.

Great. Thanks. Thanks, Ashley.

Thank you. That will conclude our Q&A session. So, I will pass it back over to Trina for any further remarks.

Thank you all for joining our third quarter call. We'll see you hopefully in Philly next week.

Thank you. That concludes today's call. Thank you for your participation. You can now disconnect your lines.