Fixing + Flipping FIGS for $5B

TL;DR

- Fixing + Flipping FIGS for $5B

- Turning FIGS into Lululemon

🧠 The Takeaways

Today we’re buying FIGS to turn this cool scrubs biz into the Healthcare Lululemon and flipping this biz for $5B.

Create the LuluLemon of “Scrubs” riding the major women’s fashion wave.

Move into the Healthcare reseller market and finally tap into wholesale.

Pick a lane and move up or downmarket.

+ My 5 Hacks to survive this year.

LBAB Community -  My 5 Holiday Hacks

This week the DTCx team asked me to come back and speak at their holiday Virtual Summit DTCx8. It was great to be back after hosting and giving great talks on their platform over the years, and running the DTCx community for the past couple of years.

This year I wanted to talk about how to set brands up for success this Holiday considering all of the topics we’ve been talking about. Here’s the link to the deck I presented if you want to jump straight into it.

Here’s the outline to get the quick download: Big Insight: Topline Growth Stalled out. Focus on Profits.

5 Holiday Hacks to be more profitable w/ more cash:

Renegotiate terms to buy time.

Trade Margin points for more time.

Build Profitable bundles w/ High perceived value.

Use this profit calculator I use for all my promos to find the best promo for customers at the highest profit.

Hammer Holiday shopper segments.

Reawake the Holiday Zombies Hammer them in Email/SMS/Direct Mail w/ What’s New + OFFER OFFER OFFER

Run a 2nd Promo for all Holiday Shoppers.

Take everyone who bought and send them another slightly better offer. If they bought for themselves “Get a gift” and vice versa.

Don’t stop running offers until Mid-Jan. Hit Q5 Hard

At Christmas everyone will be flush with Gift + Return money. Tap into that and keep the jets going until Mid-Jan. Longer if you can tap into “New Year, New Me”.

Bonus Hack: It’s an election year. You can’t have all your eggs in the Meta basket. Have 2-3 dependable channels that if Meta has issues, And it’s had major issues that last 2 presidential elections I’ve worked in eCom. You have a backup channel just in case.

Worst case scenario you don’t need channel #2 or #3 (Which could be another social channel, streamer or direct mail) and you’ve tested a channel that you know works for you to launch next year.

Here’s the link again, if you want to go more in depth and get the visuals that I shared with everyone.

Let’s Examine This Biz

FIGS is fighting tooth & nail to stay afloat. And honestly, it’s a great representation of the average DTC brand this year.

Trading at $5.76/share with a $985m market cap, it’s -83% since its May 2021 IPO. This biz is doing okay, but it’s performance isn’t gonna blow anyone’s mind.

Financial Summary

TLDR Analysis: Treading water to stay alive 

COGS is outpacing Rev growth 😰

Sales & Marketing is collapsing while G&A growth is doubling Rev’s pace. 😰

FCF did a complete 180. 🫡

This is okay growth, but the costs you don’t want to see increasing are (COGS +11% and G&A +17%). FIGS clawed its way to maintain similar YoY performance.

Impressive in a tough year where a lot of similar brands posted losses, but not gangbuster performance that’ll blow investors’ socks off.

Let’s Scale This Biz!

Here are the 3 flips we’ll make so FIGS can live it’s best life and become the Lululemon for hospitals.

1) Arbitrage Women’s Fashion into “Scrubs”

FIGS needs to double down on its athleisure-workwear play. 

80% of medical professionals are women. FIGS identifies as a DTC Apparel brand. Essentially, they are the professional comfort outfitters for medical professionals.

The success of the entire biz will come down to new releases/styles. And how quickly FIGS can execute them. Their biggest opportunity is to convert popular fashion categories and turn them into Scrubs/what women would wear with Scrubs.

They've already done an amazing job making traditional medical wear stylish: Scrubs/Lab coats. 

Now, they’re expanding into Scrub-ifying popular women’s items like Leggings, Jumpsuits, and Workwear with strong, clear value props. Comfortable, anti-stain, breathable materials that will stand up in the toughest of medical environments.

FIGS sales follow the 80/20 rule very closely, 70% of Rev comes from a handful of core styles in 7 colors.

The beauty of this is that they can literally just rip the Crocs playbook where we create ~10-12 core products and cycle through different designs/patterns/add-ons to make the brand relevant.

We’re going to extend that into everything a woman would wear into the medical field, but FIGS needs to make 1 big decision in their strategy:

Then, “How do we handle those product line extensions?” A great ex of this:

Done Well: New Balance x FIGS Footwear Collab

Questionable: Launching Undergarments themselves

Footwear and Undergarments are great examples of product categories their customers already have strong feelings about, and if FIGS is honest with themselves, these aren’t categories where they’ll uniquely win.

But that creates the largest opportunity for FIGS to grow the fastest.

They can launch more new product categories through partnerships than by building themselves. To me, the decision framework can be made simply around 1 core question:

“Does this Apparel item need to look good, be worn for a long time, and be easy to clean off someone else’s bodily fluids?”

Once they determine which products fit into those 2 buckets it’ll be obvious what they should build vs. what they should collab on.

More Footwear partnerships: Crocs & Sketchers would be dying to sell to this community

Undergarments (including Shirts): Skims would crush here

Outerwear (including Sweatshirts/Jackets): North Face/Columbia are always logo happy?

Fragrances/personal care: P&G/Johnson & Johnson how many First Responder brownie points y’all looking to score?

Then, they could layer more style collabs onto their core products, like the Team USA collab.

The collabs create a storm of earned media + free attention that will continue to build FIGS’ brand. Keeping customers coming back to buy the latest new styles.

The true beauty of FIGS’ model vs. traditional Apparel brands is that FIGS’ customers have to come back + buy more. Scrubs & medical apparel go through significant wear & tear, and medical professionals have to wear a strict uniform at work.

The more core product options FIGS provides, the more other brands will build theirs + the more reason customers will have to come back and buy more. 

Takeaway: You don’t always need to build every product in house.

2) Enter the Medical Resell Market

The biggest mistake FIGS made is taking too much pride in their DTC approach. 

We've covered this plenty in other newsletters, but it's important to break down why FIGS needs to move into what it calls “the broken medical distributor supply chain.”

FIGS now spends 37% of its Rev on Sales & Marketing. Not out of bounds, but it’s high considering their stage of biz. 

S&M will continue to increase for 1 simple reason: not being in Retail. 

They’re missing THE key customer moment in their industry: When customers are told to buy their product.

When a new employee joins a hospital, there are employee programs to buy Hospital specific Scrubs/clothing they need to work there. 

My sister & wife both work in hospitals + buy the majority of their items through the hospital purchase program.

There's an established buying program with incentives + credits that hospitals provide employees.

My wife did decide to spend her own money on a pair of FIGS, but she did that on her own after she started, not with her hospital stipend.

It's mandatory workwear. FIGS is missing out on an enormous sales opportunity by not playing ball. No matter how hard they try, they won't win over this audience by not being an option at this crucial buying moment.

This has a double cost to it. The lost sale is only part 1. 

Part 2 is the additional Sales & Marketing cost they need to spend to convince customers to buy in other channels. Instead of giving the margin to a reseller, FIGS will spend it in Marketing & Sales.

Operating at a 69% Gross Margin, they have the profit profile, product mix + brand to move to a wholesale/resell model. There isn’t much more room in the P&L with Sales/Marketing at 37% of Rev to increase that DTC spend dramatically.

Considering FIGS has ~2.5m customers out of the estimated 15-20m healthcare workers in the US, they need to find a better way to penetrate the market.

We’re going to leverage FIGS’ Gross Margins to enter Retail and push this brand to the next level. They’ll net out at ~35% margins, about where the DTC biz is with Sales & Marketing expenses, but with a way bigger brand.

Instead of chasing their current owned Retail strategy, pursuing a Wholesale strategy will 4-10x the biz while creating profitable sales today. 

Vs. making the massive CAPEX investment that will take years to decades to pay back in owned Retail (sorry community hubs).

I'm not saying building Retail isn't important for FIGS long term, but by focusing on wholesale next, the biz will be significantly larger from a Top + Bottom line perspective + have way more resources to invest in owned Retail at a later stage.

Most importantly, Wholesale would move the cost of building the FIGS brand off their balance sheet and onto their resellers.

Takeaway: Wholesale is a Revenue-driving brand builder.

3) Pick a Lane: Go Up or Downmarket

FIGS needs to make the existential decision. Are they moving up or downmarket?

When you look at the overall workwear professional market, FIGS has essentially captured the top 10% of customers. ~2.5m customers out of ~20m Healthcare workers. They’ve already extended into Veterinarians, but there are only ~126k Vets in the US.

FIGS needs to decide if they'll remain the premium product/price points brand or become a mass market product, similar to Dickies (their largest competitor). The challenge there is that Dickie's has an incredible stronghold in the lower price point of the market.

Will FIGS remain the premium luxury/smaller scale brand? It won’t extend into the majority of the market, but at high prices & no discounts, it would extract as much margin as possible.

Or will it go mass market and significantly drop prices? It would need to scale Rev + volume aggressively, at much lower margins.

I’m incredibly biased here. 

Staying upmarket is always my preference, but long-term, the best solution is to keep FIGS at a premium + go for scale by rolling out a lower price point brand that is owned by FIGS, but operates completely independently. (The Lexus/Toyota playbook.)

The 2 different brands operate in each market, for each segment. FIGS is 5 years out from executing this, but today they need to decide which brand FIGS is going to be.

They seem to be lost at the crossroads of the premium brand but bringing pricing down/discounting more frequently.

That's a dangerous situation their P&L is starting to reflect. In 2023: 

Rev: +8% YoY

COGS: +11% YoY

Gross Margin %: -1% YoY

OPEX: +0% YoY

Net Income: +7% YoY.

Despite increasing overall Rev by $40m YoY, Net Income only increased $1m. If this biz was operating at 10-15% Net Income Margin, the $40m increase should have created $4m - $6m in additional profits. $1m is a big shortcoming.

A biz with a clear direction, even in a tough economic year, will see that strategy reflected in their P&L.

Takeaway: Staying premium (Profits > Rev) means selling less in tough markets.

Final Thought

FIGS is actually a great microcosm of DTC industry. Barely growing (+8% YoY) biz with costs continuing to rise (COGS +11%, G&A +17% YoY) and basically net out where they started the year.

What are easily reversible costs?

What’s the new standard? 

FIGS noted they weren’t able to attract as many new customers and have seen a decline in repeat purchase frequency as well.

In English: fewer new & returning customers made a purchase. OR softening consumer demand.

If we dive deeper into FIGS’ numbers, they saw a Net Rev/Customer -5% YoY w/ an AOV increase by +3% YoY. The combo of factors indicates (and I know a lot of brands followed this pattern):

Couldn’t acquire as many new customers.

Repeat customer purchases slowed as well.

Discounted products to incentivize more purchases from both groups.

Reduced Marketing spend because orders weren’t coming in.

Still hired more team members to hit the topline goal.

While this will be accepted in a tough economic year, the problems that creep into a biz from these decisions need to be corrected.

Can we get back to our previous Gross Margin Profile?

In FIGS’ case, can we reduce what it costs to produce the product?

Can we convince customers to buy at full price? 

Can we slow down our SG&A costs + return to spending more in Sales & Marketing?

FIGS increased the Sales & Marketing budget by 39% going into 2022. Then only increased +3% YoY in 2023.

Eventually, FIGS will need to get back to a 70%+ Gross Margin biz that sees Sales & Marketing YoY increases at more than 3%. Untangling where they can cut costs + where they need to continue to invest will be the painful and unenviable tasks all brands need to undertake this year.

Every biz will have a different answer to this question, but some general principles to follow from looking through the best & worst P&Ls:

To grow, you will eventually need to invest more in Sales & Marketing.

Keep G&A as a % of Rev as low as possible.

Gravity always pulls Gross Margins down. Always optimize this side of the P&L.

Be cash ready if sales slow. There’s little point in pushing more products at deep discounts to have the same/no net margin.

Aim to have a 10% buffer between your Gross Margin -> OPEX.

It’ll be difficult to execute all 5 of these at the same time, but the brands that can will be rewarded as the best of the best.