FIGS, Inc. (FIGS) Q3 2025 Earnings Call Transcript

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Overview

The earnings call presents a mixed outlook. Positive factors include revenue growth projections, international expansion, and community hubs. However, tariff pressures, reduced promotions, and unclear management responses on key metrics offset these positives. The Q&A section reveals concerns about margins and inventory. Overall, the sentiment is balanced, leading to a neutral stock price prediction.

Key Financial Performance

Net revenues Net revenues increased 8% year-over-year to $151.7 million, ahead of the outlook of flat to up 2%. This growth was driven by scrubwear growth, U.S. growth, and strong performance during business-as-usual selling periods.

Average order value (AOV) Average order value increased 6% to $114, primarily driven by higher average unit retail due to product mix and a higher rate of full-price sales.

Active customer growth Active customer growth remained consistent at 4%, pushing the active customer count to a company record of nearly 2.8 million. This growth occurred despite the promotional reset.

Net revenues per active customer Net revenues per active customer grew 2% year-over-year to $209, marking the first positive inflection in three years.

Scrubwear revenue Scrubwear revenue grew 8%, representing 84% of net revenues. Growth was supported by impactful color stories, strategic positioning in key styles, and effective merchandising and marketing.

Non-scrubwear revenue Non-scrubwear revenue increased 7%, representing 16% of net revenues. Growth was driven by strong performance in underscrubs, shoes, and the launch of ArchTek socks.

U.S. sales U.S. sales increased 8% to $127.3 million, marking the strongest performance over the past 9 quarters. Growth was balanced across new and repeat customers.

International net revenues International net revenues increased 12%, led by strong growth in new customers. However, reductions in promotional days impacted larger markets like Canada and Australia.

Gross margin Gross margin expanded 280 basis points to 69.9%, driven by lower discounts, improved return rates, lower duties, and reduced freight costs. These were partially offset by higher tariffs.

Adjusted EBITDA margin Adjusted EBITDA margin improved by 900 basis points to 12.4%, supported by SG&A leverage, efficiency efforts, and tariff mitigation strategies.

Net income Net income for the quarter was $8.7 million, compared to a net loss of $1.7 million in the prior year. This improvement reflects better overall financial performance.

Inventory Inventory increased 23% year-over-year to $151.2 million, driven by strategic investments in key styles and earlier timing of in-transit inventory.

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Operating Highlights

New Fabric Solutions: Introduced FORMx and FIBERx fabrics, targeting specific needs like comfort, stretch, and durability. FIBERx will debut at the 2026 Winter Olympics.

Product Expansion: Launched ArchTek compression socks, the first patented medical-grade compression socks. Expanded head-to-toe solutions including outerwear, underscrubs, and footwear.

International Expansion: Expanded from 33 to nearly 60 international markets, including new entries in Japan, South Korea, and China (via Tmall). Focused on 'go broad' and 'go deep' strategies for market penetration.

Community Hubs: Opened 3 new stores in New York, Houston, and Chicago, with plans to accelerate store openings in 2026.

Revenue Growth: Achieved 8% year-over-year revenue growth in Q3, with U.S. sales up 8% and international sales up 12%.

Gross Margin: Gross margin improved to 69.9%, supported by reduced discounts, better returns processing, and lower freight costs.

Efficiency Improvements: Reduced SG&A expenses and optimized shipping and fulfillment operations, contributing to a 900 basis point improvement in adjusted EBITDA margin to 12.4%.

Promotional Strategy Reset: Reduced promotional activities to focus on full-price sales, leading to higher average order value and improved customer metrics.

Brand Engagement: Executed high-impact campaigns, including a viral Emmy Awards moment and global 'Where Do You Wear FIGS' campaign, enhancing brand visibility and emotional connection with healthcare professionals.

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Risk or Challenges

Tariff Headwinds: The company is facing growing tariff headwinds, particularly with added tariffs of 20% in Vietnam and 15% in Jordan, which are major production locations. This is expected to significantly impact gross margins in Q4 and beyond.

Inventory Management: Inventory levels have increased by 23% year-over-year, partly due to higher-than-planned in-transit inventory and deeper investments in key styles. This could lead to potential overstocking or inefficiencies in inventory management.

International Expansion Risks: The company is rapidly expanding into international markets, including Japan, South Korea, and China. While these markets present growth opportunities, they also carry risks related to localization, infrastructure investment, and market-specific challenges.

Promotional Strategy Reset: The company is undergoing a promotional strategy reset, which has impacted revenue growth in the short term. While the reset is expected to benefit long-term profitability, it poses risks to customer acquisition and retention during the transition.

Economic and Regulatory Uncertainties: The company operates in a global market and is exposed to economic and regulatory uncertainties, including potential changes in trade policies and healthcare regulations that could impact operations and costs.

Supply Chain Challenges: The company is working to optimize its supply chain, but higher tariffs and in-transit inventory issues highlight ongoing challenges that could disrupt operations or increase costs.

Emerging Growth Drivers: Investments in emerging growth drivers like community hubs, international teams, and new product categories carry execution risks and may not yield the expected returns in the short term.

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Guidance & Outlook

Q4 2025 Revenue Growth: Expected to be the strongest net revenue growth of the year, driving full-year estimate to approximately 7% growth.

Adjusted EBITDA Margin Expectation: Increased above the high end of the original outlook, back to low double-digit levels for 2025.

Product Strategy Enhancements: Plans to elevate the product portfolio in 2026 and beyond with improved function and fit, expanded head-to-toe solutions, strategic inventory investments, and stronger calendar alignment.

New Fabric Solutions: Introduction of FIBERx fabric, set to debut in Milan at the 2026 Winter Olympics, designed for durability in demanding environments.

International Expansion: Rapid expansion from 33 to nearly 60 international markets by the end of 2025, with plans to debut in China through Tmall later this quarter.

Community Hubs: Three new stores planned for Q4 2025 in New York, Houston, and Chicago, with an accelerated cadence of openings in 2026.

Emerging Growth Drivers: Investments in international markets, teams, and community hubs expected to scale in importance in the years ahead.

2026 Revenue Growth: Commitment to growing the business in 2026, supported by strong current momentum and ongoing process improvements.

Tariff Mitigation Strategies: Plans to optimize costs across inbound and outbound shipping, fulfillment centers, and supplier negotiations to address tariff headwinds in 2026.

2026 Adjusted EBITDA Margins: Opportunity for adjusted EBITDA margins to be within range of current 2025 expectations despite ongoing tariff headwinds.

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Shareholder Return Plan

Dividend Program: No specific mention of a dividend program was made in the transcript.

Share Repurchase Program: The company did not repurchase shares this period and has $52 million available for future repurchases under the current share repurchase program.

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Key Q&A

Q:Can you discuss the gross margin performance this quarter and its outlook for the next several years?

A:The gross margin for the quarter was 69.9%, higher than usual due to improved discount rates from a pullback in promotional strategy, better refurbishment rates with a new returns partner, and optimized inbound rates. However, some of these improvements are unique to the quarter and will moderate as the promo strategy normalizes next year. Tariffs remain a significant factor, with a 440 bps total impact expected next year, but the company is working on offsetting these through efficiencies.

Q:Can you expand on the demand during business-as-usual days without promotions and the potential for revisiting pricing next year?

A:Demand during business-as-usual days has accelerated each quarter, driven by broad-based performance across geographies and product categories. Pricing remains consistent, with no plans to increase prices in 2025. The company is focused on tariff mitigation efforts, including optimizing the supplier base and driving efficiencies. Any future pricing decisions will prioritize healthcare professionals.

Q:What are the trends in AOV and customer engagement, and how do they contribute to revenue growth?

A:AOV increased by 6% this quarter due to product mix and reduced promotions. The company sees further opportunities for AOV growth through product assortment expansion. Customer engagement trends are positive, with increased repeat frequency, reactivations, and strong performance across income levels. The post-COVID overhang is easing, and the company is operating in a more normalized environment.

Q:What is driving the acceleration into Q4 despite tougher year-over-year comparisons?

A:The acceleration is driven by broad-based healthy trends, positive new customer acquisition growth, and strong performance on business-as-usual days. Promotional efforts will focus on Black Friday and Cyber Monday, with a pullback compared to the prior year. The company is confident in its product and marketing setup for Q4.

Q:What is the potential for growth with community hubs, and how are they set up for success?

A:The company is expanding its community hubs, with new locations in New York City, Houston, and Chicago. These hubs are strategically located near major medical institutions and are designed to enhance customer engagement through improved formats, inventory, and customization options. Early results show strong incrementality and omnichannel customer behavior.

Q:How are new product introductions contributing to sales growth, and what is the outlook for EBITDA margins?

A:Sales growth is primarily driven by core products and colors, with new products and innovations creating a halo effect. The company aims to maintain adjusted EBITDA margin rates within the 2025 guide despite a 330 bps tariff headwind next year. Long-term, the company sees opportunities for both top-line and bottom-line growth.

Q:What are the plans for the Winter Olympics marketing and the growth of the non-scrubs business?

A:The Winter Olympics marketing will build on lessons from Paris, with a focus on impactful campaigns, a new FIBERx fabrication, and balanced marketing spend. The non-scrubs business showed sequential improvement, driven by consistent attachment rates and category performance, despite tough comparisons to last year.

Q:What are the next steps for scaling international markets, and can international revenue sustain double-digit growth?

A:The company is expanding to 60 markets by year-end, with a two-pronged strategy of going broad and deep. Key markets like Canada, Mexico, the U.K., and Australia are reaching scale, allowing for deeper brand investment. The company is optimistic about sustaining double-digit growth in international revenue.

Q:How did return rate improvements impact margins, and are there other cost savings?

A:Return rate improvements, driven by better fit and returns processing, provided a meaningful margin benefit in Q3. However, this benefit will not be as pronounced in Q4. The company is also achieving cost savings through improved vendor negotiations, multi-carrier shipping, and reduced restocks.

Q:What are the expectations for Q4 margins and the overall P&L profile?

A:Q4 margins will face headwinds from increased tariffs, a higher mix of lower-margin non-scrubwear, and the absence of a one-time duty drawback benefit from last year. Selling costs are improving, but marketing expenses will rise to support the Olympics. G&A expenses will continue to decline due to lower stock compensation.

Q:How is the company managing elevated inventory growth while pulling back on promotions?

A:The company is investing in inventory to support demand and improve in-stock levels, with higher in-transit inventory due to improved supply chain efficiency. Inventory unit growth is expected to moderate, and dollar growth will increase due to tariffs. The company is addressing older inventory through targeted promotions and write-offs.

Q:What is the strategy for the Teams business, and how does it contribute to margins?

A:The Teams business is focused on outbound strategy and upgraded technology to support healthcare teams. The new platform will offer more flexibility and functionality, including international support. While Teams has a lower gross margin due to discounts, it is accretive to the bottom line due to efficiencies in shipping and marketing.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the magnitude of return rate improvements and their exact impact on margins. Additionally, they did not quantify the cost savings from fewer restocks and reverse logistics activity. The response on Q4 margin expectations was also somewhat vague, with general mentions of headwinds without precise figures.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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FIGS, Inc. (FIGS) Q3 2025 Earnings Call Transcript