FIGS, Inc. Q4 FY2021 Earnings Call

Good afternoon, and thank you for standing by. Welcome to the FIGS Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from FIGS. And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, Carrie Gillard, Vice President of Investor Relations. Ms. Gillard, please go ahead.

Good afternoon, and thank you for joining today's call to discuss FIGS' fourth quarter and full-year 2021 results, which we released this afternoon and can be found in our earnings release and shareholder letter on the FIGS Investor Relations website at ir.wearefigs.com. Presenting on today's call will be Heather Hasson and Trina Spear, our Co-Chief Executive Officers; and Daniella Turenshine, our Chief Financial Officer. As a reminder, remarks on this call that do not concern past events should be considered forward-looking statements. These may include predictions, expectations, or estimates, including about our future financial performance, market opportunity, business plans, and operational capacity. Forward-looking statements involve substantial risks and uncertainties and actual results could differ materially from those mentioned. These risks, among others, are discussed in our shareholder letter and SEC filings, which we encourage you to review. You should not place undue reliance on any forward-looking statements, which speak only as of today and which undertakes no obligation to update or revise. Finally, this call will contain certain non-GAAP metrics, which we believe are useful supplemental measures for understanding our business. Reconciliations of these non-GAAP measures to their most comparable GAAP measures are included in the shareholder letter we released today on the Investor Relations portion of our website. Now, I'd like to turn the call over to Heather Hasson, Co-Chief Executive Officer of FIGS.

Thanks, Carrie. Good afternoon, everyone. We appreciate you joining us for our fourth quarter and full-year 2021 conference call. Before we get started, I just want to say how honored we are to serve our healthcare community every day. They are why we exist. Now for our results. Our financial performance demonstrates the incredible power of our business model as we delivered an exceptional combination of revenue growth, profitability, and free cash flow. In the fourth quarter, our net revenues were up 43% to $129 million, which was larger than our entire business in 2019. This is an amazing achievement that underscores the rapid growth and scale that we have accomplished in the past two years. For the full-year, our net revenues increased to $420 million, up 62% on an adjusted basis, driven by both strong acquisition of new customers and increasing annual spend from our existing customers. Across our key metrics, our active customer base grew 46% to 1.9 million. Net revenues per active customer increased $22 year-over-year and $39 over two years. We delivered a 12% increase in our AOV to $105. We increased our repeat customer revenues to 68%, up from 62% in 2020. Our nascent international business tripled, and we achieved this growth while also generating $105 million in adjusted EBITDA, a 25% adjusted EBITDA margin. We delivered this outstanding performance through product innovation, disciplined execution, and by leveraging our deep understanding of what our customers want and need from the 10 years of engaging with them every day. Our accomplishments are also a result of building a management team over the past 10 years that is not only committed to our community, but is world-class at running a high-growth business. From product design and innovation, supply chain, marketing, or any other aspect of our company. We are a team that delivers extraordinary results year-after-year that's driven by a clear mission to celebrate, empower, and serve those who serve others. And it is through this mission that we will continue to enrich the lives of healthcare professionals for years to come. I truly believe we are just getting started. What we are creating is more than just product; it's a movement within the healthcare profession. We have a long runway of growth ahead, and we're so grateful to be afforded the opportunity to inspire and create the world our Awesome Humans want to live in. With that, I will hand it over to Trina.

Thank you, Heather. In 2021, we achieved $420 million in net revenue, over 60% adjusted revenue growth, more than 70% gross margin, $105 million in adjusted EBITDA, a 25% adjusted EBITDA margin, and $64 million of positive free cash flow, demonstrating the strength of our business and our commitment to operational excellence. We're consistently able to perform at such a high level because we've completely transformed the industry—from our products to the customer experience and our community, gaining even more momentum in 2021 as we continue to disrupt the market. Starting with our products, we introduced performance fabrics to scrubs, achieving an unparalleled blend of comfort, durability, function, and style, incorporating features like four-way stretch, moisture-wicking, and breathability. These innovations set a new standard that FIGS established. With over 80% of our business focused on 13 core styles, continuous innovation on these core offerings remains crucial to our long-term success. Therefore, in 2021, we made significant investments in enhancing our product innovation and design capabilities to ensure we have the best team to push boundaries and shape the future. One way we are expanding our scrubs business is by creating franchises around our core styles. In 2021, we launched the high-waisted Zamora and Yolo pants for women and the Camden slim pants for men. These new options cater to the specific needs and preferences of our growing customer base, with the high-waisted version accounting for about 40% of our Zamora sales in the latter half of the year. As we've noted before, healthcare professionals wear more than just scrubs tops and pants, so we've developed products that extend beyond scrubs, driving innovation across our layering system to address the evolving requirements of the healthcare community. This comprehensive approach, along with our nearly weekly product launches, has transformed how healthcare professionals engage with their uniforms, setting us apart from traditional scrubs companies. We introduced over a hundred new styles across all categories in 2021 with strategic shallow buying to create excitement and increase traffic, leading our healthcare professionals to eagerly check out our latest releases. This behavior was previously unseen in scrub wear. Our merchandising strategy encourages higher average order value and revenue per customer as healthcare professionals frequently return to replenish, explore new styles, and enjoy our lifestyle products. This dynamic is unique to our brand. Given the physical nature of healthcare work, long shifts, and the importance of time, we improved the shopping experience by eliminating the friction of outdated distribution channels through direct online sales. As e-commerce accelerates and demand shifts online, we're well-positioned to leverage this trend as the leading direct-to-consumer company in our sector. No other company in our industry possesses our digital scale, speed, or data insights regarding healthcare professional needs. Most competitors operate through wholesale models without a connection to the end customer, while the few direct-to-consumer players are much smaller than us. Consequently, our data network is far more comprehensive than that of our competitors, enabling us to foster stronger customer loyalty through precise targeting, personalization, and engagement. As we scale, our data becomes increasingly detailed and effective. For instance, in the fourth quarter, we updated our website to showcase more personalized content. This allowed us to segment the site so that different customers, like Kelly, a nurse in Houston, experienced entirely distinct imagery, content, and product offerings from Jacob, an oncology resident in Boston. As a result, the conversion rate for these personalized experiences in the fourth quarter nearly doubled compared to previous rates. Now, turning to operational excellence, I want to emphasize that our consistent ability to deliver results is no coincidence. It stems from our intense focus, discipline, and the strength of our team. Our Chief Operating Officer, Devon Duff Gago, who has been with the company for six years, and her team have executed flawlessly in an unprecedented environment, scaling our business by more than four times in just two years. Our unique business model features several key differentiators that enable us to navigate macro supply chain challenges effectively. Nearly 90% of our products are made from a single fabrication, providing our manufacturers with large, consistent capacity. Additionally, about half of our revenue stems from our 13 core styles in essential colors, allowing us to produce significant volumes in advance and maintain higher inventory levels with minimal risk compared to traditional apparel companies. These differentiators are critical, especially as transit times fluctuate, freight costs increase, and labor shortages continue. Our business model allows us to endure these short-term pressures while still achieving best-in-class annual gross margins over 70%. Most importantly, we provide healthcare professionals with the products they require to do their jobs. Our outstanding products, exceptional experience, and operational excellence have enabled us to cultivate a deeply loyal and passionate community. We have transformed how healthcare professionals engage, shop, and feel about their uniforms, as shown in our loyalty metrics. About half of new customers purchase from us a second time within one year, and over 95% of customers who are active in their second year stay with us into their third year. As they return repeatedly for scrub replenishments, their brand loyalty grows along with their overall spending and lifetime value. Our business is distinctive: it is non-discretionary and driven by replenishment, resulting in greater predictability and consistency. This gives us a significant advantage over other consumer brands, as nearly 75% of our revenue is retained for the following year, providing a solid foundation for growth. As we acquire new customers and convert them into repeat buyers, this dynamic amplifies. Reflecting on our impressive performance in 2021 and our achievements over the last decade, I feel increasingly confident in our roadmap and our capacity to capture and grow the $12 billion U.S. market—a figure supported by research from a reputable consulting firm we engaged for our IPO. The healthcare industry has compelling fundamentals; it represents a mandatory, non-discretionary sector that is resilient to economic downturns and characterized by strong replenishment dynamics since healthcare professionals must wear uniforms daily. Even amid the challenges our community has faced, it's projected that U.S. healthcare jobs will be the fastest-growing segment over the next decade, adding nearly 2.6 million new positions. We ended the year with 1.9 million active customers, representing less than 10% of the over 20 million healthcare professionals in the United States and under 2% of over 115 million healthcare professionals globally. Thus, there is significant growth potential for years to come as we continue to welcome more Awesome Humans into our community. We have only scratched the surface. Let’s break down the $12 billion figure from a spending perspective: it includes scrub wear, lab coats, medical footwear, scrub caps, and compression socks. It is estimated that healthcare professionals spend about $570 annually across these categories, with approximately $330 allocated to scrub wear. Our data indicates that first-time customers spend nearly 10% more than that $330 in their first year and they continue to increase their spending with us over time. Our top customers spend almost 2.5 times that $330 on scrubs alone. As we convert first-time customers into brand advocates, our premium pricing, effective merchandising strategy, and commitment to innovation will drive this spending even higher. Regarding categories outside of scrubs, our offerings in lab coats, medical shoes, scrub caps, and compression socks are not only revolutionary, but we are also still significantly underpenetrated in these areas. We are actively addressing this gap, as these products have historically been overlooked and created without considering the end customer. No company is better positioned than FIGS to tackle this. Furthermore, we are innovating within those categories and completely changing the landscape beyond the $12 billion industry. Many of our lifestyle products, from under scrubs to outerwear, did not exist for healthcare professionals before FIGS and are clearly resonating with our community, with lifestyle products constituting almost 17% of our revenue in Q4. We are not only redefining what a uniform means but also expanding and growing the overall market. Let me be clear: we believe FIGS is in an advantageous position to continue capturing market share, but more importantly, we are creating the market by innovating our products, enhancing the experience, and providing our community with what they desire and need, including offerings they may not have realized they wanted. 2021 was a remarkable year for us. In our inaugural year as a public company, we met our goals and exceeded expectations, and we are eager to build on this success in 2022. We will continue to invest in our core strengths. We are committed to advancing innovation, increasing brand awareness, incorporating more Awesome Humans into our community, strengthening our connections to drive loyalty, and expanding our international and lifestyle businesses. Let’s briefly discuss our international strategy. We tripled our international sales in 2021, confirming that healthcare professionals worldwide are seeking better products and experiences. We demonstrated our ability to expand beyond the U.S. while maintaining strong fundamentals, including robust average order values, retention, and gross profit margins in Canada, Australia, and the U.K. In 2022, we will continue building on our international growth. We plan to enter new markets this year, applying a disciplined approach to market selection and leveraging our site traffic and insights into market dynamics to guide our launches. With international sales representing only 7% of our business in 2021, we have a substantial growth trajectory ahead. We are excited to bring even more Awesome Humans into FIGS. In conclusion, we are more confident than ever in our ability to reach $1 billion in annual net revenue by 2025. We have just begun to tap into our potential, and we will continue to grow by remaining dedicated to our mission: serving our healthcare community. Now, I will turn the call over to our CFO, Daniella Turenshine, who joined FIGS in 2018. Daniella has intimate knowledge of our company and has been instrumental in the unique combination of revenue growth and profitability we have achieved. In every aspect necessary for a CFO, Daniella is perfectly positioned. Her profound understanding and passion for the brand, along with our analytical and data-driven approach, facilitated FIGS' growth from less than $55 million in revenue when she joined to over $400 million today. We are thrilled to have her as our CFO, and I am confident she will continue to guide us in achieving our long-term goals and growth ambitions. Daniella?

Thank you, Trina, and good afternoon, everyone. I want to first say thank you to Heather, Trina and the Board for the opportunity to serve as FIGS Chief Financial Officer. It has been an honor to help grow and scale this inspirational brand over the last several years, and I could not be more excited to continue to serve our community of Awesome Humans in my new role. FIGS' full-year financial results exceeded our expectations, driven by continued robust demand for the brand across both new and repeat customers, the strength of our lifestyle expansion across categories, and strong holiday sales. We delivered an outstanding Black Friday Cyber Monday week that grew 54% year-over-year on top of an incredibly strong 2020 season while concurrently being less promotional. Looking at Q4, we successfully executed against our pricing strategy, selling more product at full price with almost no impact on our demand. This strategy resulted in almost 300 basis points of discount rate improvement year-over-year and was a big contributor to our exceptional growth and profitability for the quarter. And as a result of the strong demand that we saw our net revenues for the quarter exceeded our previous guidance by $10 million. Now let's dive into the financial results. Net revenues for Q4 were up 42.7% to $128.7 million compared to Q4 last year. Our performance was driven primarily by strong order growth from both new and existing customers. We acquired more new customers in Q4 than ever before, growing our active customer base to almost 1.9 million. And despite the exceptional growth in new customers, almost 70% of our revenues in the quarter were still from repeat customers. Net revenues also benefited from a 15% increase in average order value to $113 in the quarter compared to $98 in Q4 2020. We drove record lifestyle adoption, partly driven by expanding the breadth of our outerwear offerings, including our new flutter knit and popper jackets. This strategy helped drive higher AOV in the quarter through higher price points and increased units per transaction as customers wanted to complete the full layering system. Perhaps more importantly, it provides a clear indicator of the greater demand for our brand beyond our core scrubwear and our ability to further grow our existing categories by building depth within our collections. Finally, in addition to the improvement in AOV for both the quarter and full-year, net revenues per active customer increased to $224 in Q4, up $22 or over 11% year-over-year. This is an important metric that we are focused on because it shows us how much our customers are spending with us, not just in one transaction, but over the course of an entire year. And as that number continues to grow, it means our customers are more engaged and spending more with us over time. Gross margin for Q4 decreased 110 basis points to 69.9% compared to Q4 2020. This change was primarily due to higher use of airfreight as well as higher freight rates, offset in part by better product costing. Gross margin was considerably better than expected, primarily due to our strategic decision to reduce discounts during the quarter. As a result, we were able to use this pricing power to help offset our elevated airfreight spend. Additionally, while airfreight expenditures were still elevated compared to the prior year, our actual spend came in much lower than expected, approximately $6 million in the quarter versus our previous expectation of $8 million to $10 million. Moving to operating expenses. Selling expense for Q4 was $25.6 million, representing 19.9% of net revenues compared to 20.2% in Q4 2020. We experienced increases in shipping rates from our carriers and higher fulfillment expenses in the quarter. However, we were able to offset these headwinds, primarily due to the solid increase that we drove in AOV. Marketing expense for Q4 was $16.6 million, representing 12.9% of net revenues compared to 14.5% in Q4 2020. This decrease was primarily related to efficiency of performance marketing spend and lower-than-planned brand spend. On the digital marketing side, we continue to see efficiency and return on advertising spend as the proportion of net revenues driven by repeat customers grows over time. As we think about building our brands for the long-term, we will continue to invest these gains back into growing brand awareness through top of the funnel marketing initiatives. General and administrative expense for Q4 was $31.3 million representing 24.3% of net revenues compared to 22.2% in Q4 2020. This increase was primarily driven by noncash stock-based compensation, the incremental capabilities we have built over the past year in key areas such as product innovation and merchandising and increased costs from being a public company. As we look ahead into 2022 and beyond, we will look to balance investments into key capabilities across product innovation, digital experience, and talent while scaling our operating expenses to continue to drive profitable, sustainable long-term growth. Taking this to the bottom line, our net income was $12.6 million or $0.06 in diluted EPS for the quarter. Adjusted net income was $18.6 million. And diluted EPS, as adjusted was $0.09 in Q4 compared to $0.08 in Q4 2020. The increase in diluted EPS as adjusted was primarily driven by the increase in adjusted net income year-over-year as our operations grew and we scaled efficiently, partly offset by increased dilution. Finally, our adjusted EBITDA for Q4 was $31.9 million, and adjusted EBITDA margin was 24.8% for Q4 compared to 23.7% in Q4 2020. This change was primarily driven by efficiencies in marketing and selling as we have scaled, offset by lower gross margin due to freight and investments in talent. Most importantly, we are incredibly proud of our huge milestone of delivering over $105 million of adjusted EBITDA for the full-year. The discipline and execution required to deliver exceptional top line growth paired with profitability is fundamental to our business model. We continue to produce substantial cash flows while ensuring we deliver against our long-term growth ambitions. Moving on to the balance sheet. Our cash position at quarter-end was strong with cash and cash equivalents of $195.4 million. For the full-year, we generated free cash flow of $63.7 million, up from $19.5 million in 2020. The 227% increase in free cash flow year-over-year demonstrates our ability to significantly scale our net cash from operating activities through high top line growth, coupled with best-in-class execution. Moving on to our outlook. Following an exceptional financial performance in 2021, we are incredibly excited to continue to deliver strong top-line growth and are confident in our strategic roadmap for 2022 and the years ahead. Based on our current visibility, we expect 2022 net revenues to be approximately $550 million to $560 million, representing growth of 31% to 33% compared to 2021. From a quarterly flow perspective, we expect our growth rates to be relatively consistent throughout the quarters. From a gross margin perspective, we are monitoring the dynamic macro volatility being experienced by every company. While we continue to navigate these challenges effectively, we are not immune to them. As a result, we expect 2022 full-year gross margins to be down slightly year-over-year. This is a result of higher freight rates coupled with the use of airfreight to combat increasingly unpredictable transit times on the water. The pressure from elevated freight cost in the near-term is more than offsetting the continued benefits we are seeing in our business from lower discounts and improvements in product costing. We feel confident that we will continue to navigate these short-term pressures with best-in-class execution and over the long run, be able to realize efficiencies and margin as we scale. As a high-growth company, we will continue to make the necessary investments to support our strategic roadmap and long-term expectations. We remain confident in our ability to deliver a 2022 full-year adjusted EBITDA margin rate in line with our long-term target of 20-plus percent, which is truly amazing for a company of our size and scale with our growth expectations. When looking at the factors that drive our adjusted EBITDA expectations for 2022, first, as I mentioned above, we do expect some pressure from gross margin. Within operating expenses, selling is expected to de-lever slightly from increasing shipping rates due to COVID-19. And marketing and G&A is expected to stay relatively consistent as a percentage of net revenues compared to 2021 as we continue to grow our brands and make critical investments in technology, systems, and innovation to support our long-term growth. For the first half of 2022, we will also be comping a period with no public company costs, which have a material impact on our G&A. Our business model, coupled with a best-in-class team have enabled us to deliver a unique financial profile, where we can continue to invest in our business to support our high-growth expectations while still delivering a 20-plus percent adjusted EBITDA margin. As we say here at FIGS, if it was easy, everyone would do it. It is not easy to deliver this level of performance, and we will continue to push ourselves to do so. We see tremendous opportunity ahead of us on top of our strong results today. We are underpenetrated in the U.S. Our lifestyle business is just getting started, and our international opportunity is essentially untapped. It's been an incredible journey so far, and I look forward to building on our momentum into 2022 and beyond.

Thank you. Our first question is from Adrienne Yih with Barclays. Please go ahead.

Good afternoon. Good job navigating what is just an extraordinarily difficult backdrop. A question for each of you. Heather, can you talk about the attachment rate of non-core products via product extensions to the core purchases that you've been seeing lately? For Trina, can you talk about February month-to-date trends? And Daniella gave color on kind of an equally measured growth rate over the four quarters, but just how are you thinking about whether you were impacted by stimulus and how you're thinking about that? And then for Daniella, can you talk about inventory purchases? I know you're not doing as much there, but give us a little bit more help in Q1 and Q2, the impact of kind of ongoing supply chain over $100 oil, those types of new developments since we last heard from you on January 10. And what have you embedded into both the demand forecast and the cost forecast? Thank you so much.

Thank you, Adrienne. It's great to hear from you. Regarding our lifestyle offering, it's been amazing to see how our healthcare professionals are really making use of the complete layering system. Our lifestyle business accounted for 17% of our overall business in Q4. Looking at the attach rate, 30% of our customers own a product outside of scrubs, which is impressive. As for our February trends, I can't disclose too much, but we aren't experiencing any decline due to current global events and we feel confident about the year ahead. Daniella provided insights on our outlook, and we are very excited about the momentum in our business. We anticipate that 2022 will be another record year for us. Now, I'll hand it over to Daniella to discuss inventory.

Thank you, Trina. As it relates to supply chain, we are navigating some very fluid and evolving dynamics as it relates to inbound. As we said in our prepared remarks, we do expect it to impact us in 2022. So we're seeing rates both for ocean and air are going to be higher. And that increasing transit times and the lack of reliability that we're seeing in the ocean freight market is resulting in the need for complete air freight. We're able to offset some of this near-term pressure through driving more sales at full price, but also continued product costing benefits as we scale. I think most importantly, we believe we can continue to deliver on our best-in-class gross margins of 70-plus percent despite these near-term challenges. And we feel very confident in our ability to achieve the revenue guidance that we provided.

Great. Thank you very much and best of luck.

Thanks, Adrienne.

Thank you Ms. Yih. Our next question comes from the line of John Kernan with Cowen. Please go ahead.

Excellent. Thanks for taking my question. Good afternoon Trina, Heather, and Daniella, congrats on a real nice quarter right out of the gate.

Thank you, John.

Could you discuss the revenue guidance, which appears to be quite strong? I'm interested in more details regarding the leverage on the operating expense line. While I understand the EBITDA margin outlook for the year, I would appreciate further insight into how we should consider G&A and OpEx in light of the top-line growth and the dollar growth there. Thank you.

Thank you, John. As we mentioned, we are expecting the G&A line to remain relatively consistent as a percent of sales year-over-year. And as we said in our guidance, our adjusted EBITDA margin floor is 20%. And I think it's really amazing that our floor is a place where other companies in our space have probably never contemplated reaching, especially in the near-term. And so as you think about 2022, you can expect us to do what we've always done, which is effectively deploy capital in strategic ways and smart investments to really deliver on our long-term growth plans. So you're going to see us continue to do that across marketing, product innovation, within G&A and technology and talent to ensure that we're continuing to build a strong foundation for us to grow. As you've always seen, we've invested in our business with great returns, and we're going to continue to do so. And I think it's really rare, right? There's a few companies that can do this to invest meaningfully in their business, while simultaneously sustaining a best-in-class adjusted EBITDA margin profile and growing at 30%. The one thing I would highlight is in G&A, we had a significant amount of stock-based compensation that was non-ordinary associated with our IPO. So I wouldn't expect that to reoccur in 2022, and it was about $56 million.

Got it. That's very helpful. Thanks. And maybe a follow-up for either Heather or Trina, you both sounded extremely confident in the addressable market. And particularly, it sounds like diversification beyond scrubs in the core. I think you talked about half of revenues or core styles and colors. What's the margin profile look like in lifestyle, which I think you mentioned is now 17% of revenue? And just can you reiterate your confidence just in what you're seeing in terms of the addressable market particularly in the core scrubs business? Thank you.

Thanks, John. What we've observed is that all our metrics indicate a sustainable growth trajectory and the ability to not only penetrate the $12 billion market but also capture significant additional opportunities beyond that. As I mentioned earlier, our customers are spending approximately 10% more than the industry average, which is above $330 on scrubwear, and our top spending customers are investing up to 2.5 times that amount on their scrubs. Regarding lifestyle, as you pointed out, that's a tremendous opportunity that we feel we have just begun to explore, currently making up 17% of our sales. Our offerings, such as underscrubs, underlayers, outerwear, sweater knits, puffers—some introduced in Q4—compression socks, and scrub caps, are resonating strongly with our community. While we are selling into a defined market, we are also expanding that market. We believe that while lazy companies might only sell into existing markets, innovative companies are focused on creating new ones, and that's our goal every day.

Got it. Thank you. Best of luck.

Thank you, Mr. Kernan. Our next question comes from the line of Bob Drbul with Guggenheim. Please go ahead.

Hey guys. Good evening. Just a couple of questions for me. First, on active customers, when you think about the growth that you've had, can you just give us an idea of your assumption in '22? And then repeat customer growth went from 62% to 68% of sales. Can you just talk about the drivers there and sort of the initiatives and where you think you can take that number? Thanks.

Thanks, Bob. In terms of active customers, so we're really excited to continue to see this grow, and we plan to expand it even further in 2022. We can't get into the specifics, but in 2022, we are planning to acquire more new customers than we did in 2021. On the repeat customer side, really proud of our ability to expand that from 62% to 68% in 2021. And we're going to continue to drive that with the same model that we've been doing, right, really focusing on engaging with our community in thoughtful and meaningful ways on exciting product innovation and also really building out our lifestyle and continuing to drive really higher attach rates there.

Great. And just a follow-up question. On the replenishment side, are you seeing any change in behavior on your customers' timeline, states of the replenishment purchases?

So looking at our cohort dynamics, we've seen it remain really steady over time. And I think you can see in our net revenues per active customer, that's a metric that we're really focused on, because it shows us not just our customers how often they're coming back or how much they're spending, but really how much they spend over the course of an entire year. So we're excited to see that increase $22 to $224, and we're continuing to drive the same strategies to increase it even further.

Thank you.

Thank you, Mr. Drbul. Our next question comes from the line of Brian Nagel with Oppenheimer. Please go ahead.

Hi, good afternoon. Nice quarter. Congratulations.

Thanks so much, Brian.

I have a question regarding the supply chain and the ongoing pressures. You mentioned some offsets that help maintain gross margins despite these challenges. Considering that these pressures might persist for a while, particularly with new challenges emerging, is there a plan to raise product prices to more permanently counter the increased supply chain costs?

As of now, we don't see a need to raise our prices. Our aim is to ensure that our prices remain affordable and accessible for all customers and healthcare professionals. We believe we are providing great value for our product. Our margins have remained stable, so there is really no immediate need for a price increase, and we do not have plans to do so given the current market conditions. In the past, when we have raised prices, we have not experienced a decline in demand, so we feel our brand strength allows us to make such adjustments if necessary. This is how we are considering various factors within the industry.

That's perfect. Then my follow-up question is about the supply chain disruptions. Are you moving forward with your planned product launches for '22?

Yes. I think one of the remarkable aspects of how we've handled the supply chain is that we successfully receive our products, store them in our warehouse, and deliver them to our customers. Over the past two years, we've demonstrated this ability. I don’t know of another company that has tackled the supply chain challenges as effectively as FIGS. The results reflect this effort, showcasing the incredible team we have. Occasionally, there are slight shifts in timing, but we can adjust our schedule because we operate as a direct-to-consumer business. This gives us a significant advantage; we aren’t dependent on a purchase order from a retailer. As a result, we can adapt our timeline and execute amazing campaigns. Last year, we launched over a hundred new styles and products, and we will continue to surprise and engage our community in remarkable ways. Our business model provides us with the flexibility to do so.

Thank you. Congrats again.

Thank you, Mr. Nagel. The next question comes from the line of Michael Binetti with Credit Suisse. Please go ahead.

Thank you everyone for taking our questions. Congratulations on a great quarter. I have a quick question about the model. Can you provide any numbers to quantify the benefit you experienced in gross margin from the reduced promotions and product sourcing efficiencies you mentioned? I’m trying to understand how much of this will be part of your plans for next year, especially as the industry outlook remains uncertain. With two full years of financials from a scaled-up company, EBITDA has consistently been in the mid-20s. Looking back, one important metric we've monitored is maintaining gross margins above 70%, which extends beyond the high-margin core business in scrubs. You've expressed confidence about this, which is reassuring. If grocers are expected to maintain margins above 70%, what do you believe are the inputs or investments that could potentially lead EBITDA into the lower 20s? Conversely, what factors could positively influence performance to sustain another year in the mid-20s in light of current industry pressures on margins?

Thank you, Mike. That was a long question. So looking at the gross margin, we're not going to get into exactly the specifics, but there were several things that really drove it to be higher than anticipated. The first of which, as you called out is, strategically selling more product at full price. And that was a big driver of the success that we saw, and it's something that we're continuing in 2022 and plan to see the benefit going on through the year. The second was improvements in our product costing, especially across our core scrubwear that helped offset. And then finally, airfreight just being better than expected as we negotiated better rates and were conservative in forecasting. So those are the main puts and takes, and a lot of those we expect to see continue in the year ahead. Just want to reiterate, though, that this is a fluid situation that's highly dynamic. So we'll be sure to keep everyone up-to-date as things change and continue throughout the year. Going into your second question, so yes, as we mentioned, gross margin, we're seeing a lot of headwinds still feel really confident in our ability to be above 70-plus percent. As that flows through to adjusted EBITDA, we're really focused on continuing to make investments, particularly in the operating expenses so that we can ensure that we're really building this company the right way and continuing to build the infrastructure to really support our long-term growth. So I think we walked through each of the segments in the call, but we are really going to just do the same things that you've seen from us before, which is invest back in the business at really amazing returns.

Is there any evidence regarding the lifestyle categories you are developing, specifically concerning how much of that relates to health care workers versus non-health care workers?

The vast majority, over 98%, is going to healthcare professionals. This isn't just a general fleet; it's a specialized on-shift fleet designed for use indoors, as hospitals can be quite cold. It features pockets for stethoscopes, allowing healthcare workers to move efficiently during their 12 to 16-hour shifts. All our products, including this example, are designed specifically for healthcare professionals to wear while on duty and during their time off, from head to toe. We have changed the game by providing a real layering system for healthcare professionals, enabling them to look good, feel good, and perform at their best. That's our focus moving forward, and we will continue to expand these product categories.

Great, thanks a lot guys. Congrats again.

Thank you, Mr. Binetti. The next question comes from the line of Lorraine Hutchinson with Bank of America. Please go ahead.

Hi, this is Alice on for Lorraine. Thanks for taking our question. You mentioned entering new international markets this year. Can you elaborate on that opportunity a little bit, maybe which geographies you're targeting? Will there be elevated marketing or region-specific launches or any investments in distribution capabilities?

Thank you, Alice, and great to connect. So I think as we said, international is a massive opportunity, right? Only 7% of our business in 2021 is from the three countries that we're in today, Canada, U.K., Australia. And so we're going to be launching a number of new markets this year. I can't say exactly which ones yet, but we're excited. And what we've seen in the countries that we're already in is that the financial profile is very much in line with our U.S. business. And so we look forward to seeing that continue in new markets. That being said, it's kind of like what we've done in the U.S., right, where we gain efficiency as we evolve and our markets mature and then we're able to put those gains into newer markets. So similarly in the new markets we're entering, we'll be investing more, investing more behind obviously people and marketing and building out those businesses, with the goal of reaching tipping points within those markets so we can continue to evolve and grow into other markets. So we couldn't be more excited. We are building a long-term global brand for the next 100 years. And the truth is like whether a healthcare professional in Kentucky or in Munich or in Istanbul or in Mexico City, you have a pretty similarly horrible experience prior to FIGS. So they want a better product; they want a better experience, and we are here to give it to them.

Thank you.

Thank you, Ms. Hutchinson. The next question comes from the line of Matthew Egger with Piper Sandler. Please go ahead.

Yes, just one quick one for me. Given that you all are a digital business, can you expand upon what you all have done or what you are doing to mitigate your outbound shipping costs?

Yes. Sorry, go ahead, Daniella.

Definitely, and so what we've seen over the past year, so in 2021, we've seen higher rates due to COVID-19. And the way that we've mitigated it to-date, is by continuing to drive an increase in average order value. And that's really helped to offset some of the pressures that we're seeing on the outbound supply chain. And we're going to continue to look to do that as we comp 2021.

Thank you, Mr. Egger. The next question comes from the line of Brooke Roach with Goldman Sachs. Please go ahead.

Good afternoon and thank you so much for taking our question. Trina, Heather, I'd love to hear a little bit more about your efforts to take that first time FIGS customer and recapture them to turn them into a long-term brand loyalist, what efforts are you implementing to improve that recapture rate to well above 50%?

Sure. Over the past few years, our revenue per customer has increased by more than $50 in the last 2.5 years, which is what we want the investment community to focus on. Once our customers purchase from us, they tend to return frequently to replenish their uniforms. This is largely due to the exceptional quality of our products. After trying FIGS, there's little reason for customers to look for alternatives. We don't rely heavily on retention marketing, but we do engage our community with new product launches, which happen weekly, and through active engagement on our social media and events organized by our brand team. Ultimately, when you create a great product that resonates with people, they come back for it, and that's what we have achieved at FIGS.

Thank you. And if I could just ask a follow-up on that. AOV has been a great contributor of growth as you built up that lifestyle business this year. Do you anticipate the growth momentum in AOV will continue at the same double-digit pace of contribution into 2022 that you saw in 2021?

So we're incredibly happy with our ability to drive AOV over $100. However, just as Trina said, I really encourage you to look at net revenue per active customer because that shows us what our customers are spending over the course of an entire year, not just in one transaction. And so our ability to really grow this key metric is a better reflection of how engaged our customers are and our ability to get them to spend more with us over time. Going back to AOV though, we've been executing on our strategies that have drove it higher and we're going to continue to do so. So the first of which is the continued adoption of our layering system, as we've discussed. So driving higher average unit retails through higher price points but also increasing the units per transaction per customer as they really want to shop the full look. We're adding more personalization and features to our e-commerce experience, and we're driving customers to purchase more through smart bundling opportunities like kits. And finally, we're going to plan to drive more sales at full price, which will help further increase AOV.

Thank you so much, I'll pass it on.

Thank you, Mr. Brooke. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please go ahead.

Hi, guys. Nice to see the progress and congratulations, Daniella. You've done a lot of new product initiatives this year in terms of the holiday gift shop, the kits how are those taking hold in driving either repeat purchases or what new innovations should we look for this year to continue to drive AOV? And lastly, how are you planning the discounts going forward? What was typically the timeline discounts and the cadence as you went through the year and the reduced discounts in the fourth quarter, do you see that occurring going forward? Thank you.

Thank you, Dana. Our primary focus at FIGS is to innovate, especially in our product offerings. We create functional, high-quality products for healthcare professionals from head to toe. In 2021, we introduced a remarkable 100 new styles, and our pace of product innovation sets us apart from many companies. We're building on this momentum in 2022, as you've seen with our lifestyle expansion. We're committed to developing various categories, including outerwear, underscrubs, and our compression sock line, all of which have significant growth potential. However, we shouldn’t overlook our scrubs business, which still constitutes over 80% of our operations. Enhancing these core categories with high-waisted styles, yoga waistbands, and double draw cords is essential for our progress. The men's line also presents a large opportunity as we have not fully tapped into that market yet and will keep innovating there as well. Additionally, we're focused on inclusivity in sizing, planning to offer more sizes and fits to better serve a diverse range of healthcare professionals globally. We feel incredibly fortunate to create such amazing products for remarkable people and will continue to pursue this mission. Now, regarding the discounts, Daniella?

Yes, I'll take the discount question. So a couple of items related to our discounts in Q4 and how we're thinking about them going forward. So the first of which is more Q4 specific, we really changed our Black Friday, Cyber Monday strategy to have more dynamic pricing and give us better control over the inventory that we sold and that resulted in a lower discount. And so we're probably not going to see that benefit into the next quarter. However, we also drove lower discount usage in non-promotional times, and we're expecting to continue that strategy and continue to drive that in 2022 and see those benefits.

Thank you. Before we conclude our call today, we want to take some time to address a few of the most popular questions from our shareholders via the SAFE platform. Several questions came in regarding Heather and my share sales, so we'll begin with that topic. First, I want to emphasize that nobody is more dedicated to this company than Heather and myself. After nearly a decade of building this company and not selling any shares during the IPO, we each sold a small fraction of our shares during our September follow-on. Heather sold about 13% of her holdings, while I sold 5%. It is common for founders to sell shares after their company goes public, and we remain two of the largest holders of FIGS stock, which shows our significant stake in the company. We want to express our strong commitment to this business, our confidence in the future, and our eagerness to continue engaging with you all, assuring that we will keep delivering. Next, we received a question from John H. concerning stock price movements. He posed a great question about why potential investors should choose FIGS. In the short term, as you may have heard, the stock market behaves like a voting machine. But in the long run, it acts as a weighing machine. The stock market is currently very volatile due to macro factors that are unrelated to our company, causing stock price fluctuations that do not reflect the fundamentals of our business. Now, let’s discuss why FIGS is a compelling choice. In terms of our fundamentals, it’s quite rare to find a company with our financial profile. We have a distinctive combination of revenue growth, adjusted EBITDA, and free cash flow all happening simultaneously, which is truly unique. Our industry is recession-resistant and non-discretionary; healthcare professionals need to wear uniforms to work every day, and we help them look good, feel good, and perform at their best. Approximately 70% of our business comes from repeat customers, reflecting our strong replenishment-driven model. We create innovative products and have a loyal community that continuously returns for them. The healthcare job sector is projected to be the fastest-growing segment in the next decade, with the market size being substantial at $12 billion in the U.S. and $79 billion overall. We believe we are creating market share every day at FIGS, with significant growth opportunities across all areas of our business. Our operational execution is top-notch, delivering impressive margins even in difficult economic conditions. We have an extraordinary team and a clear vision, and we are committed to making things happen every day. Lastly, we believe that the best companies are authentic and purpose-driven, which is exactly what we have at FIGS. Thank you all for your time. We are excited to share our results with you, and I wish you a wonderful rest of your day.

That concludes the FIGS fourth quarter 2021 earnings conference call. I hope you all enjoy the rest of your day. You may now disconnect your lines.