FIGS, Inc. Q1 FY2022 Earnings Call

Welcome to the FIGS First Quarter 2022 Earnings Conference Call and Webcast. My name is Felicia, and I will be your operator today. I will now hand over to Carrie Gillard, Vice President of Investor Relations. Please go ahead, Carrie.

Good afternoon, and thank you for joining today's call to discuss FIGS's first quarter 2022 results which we released this afternoon and can be found in our earnings press release and in the shareholder slide deck on our Investor Relations website at ir.wearfigs.com. Presenting on today's call are Trina Spear, our Co-Founder and Co-Chief Executive Officer; and Daniella Turenshine, our Chief Financial Officer. As a reminder, remarks on this call that do not concern past events are forward-looking statements. These may include predictions, expectations or estimates, including about future financial performance, market opportunity or business plans. Forward-looking statements involve risks and uncertainties, and actual results could differ materially. These and other risks are discussed in our shareholder slide deck and SEC filings, including 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, which we believe are useful supplemental measures for understanding our business. Reconciliations of non-GAAP measures to their most comparable GAAP measures are included in the shareholder slide deck and earnings press release we issued today. Now I'd like to turn the call over to Trina Spear, Co-Chief Executive Officer of FIGS.

Thanks, Carrie, and good afternoon, everybody. Thank you for joining us for our first quarter 2022 conference call. Before we start, I want to mention that today is International Nurses Day. It wraps up Nurses Week, one of our most important events, where we go above and beyond to celebrate our nursing community. Here at FIGS, we are committed to celebrating, empowering and serving our Awesome Humans every single day. Our health care professionals are the reason we exist, and we try to give back to them every chance we get. Now let's talk about the business. FIGS delivered strong Q1 performance with 26% revenue growth year-over-year and an adjusted EBITDA margin of 23% as we further advanced our product innovation and broadened our reach. While these results were lower than our expectations, our ability to deliver outsized growth and strong profitability in Q1 is a testament to our team, our business fundamentals and our incredibly loyal customer base. This is especially true given the supply chain and macroeconomic headwinds that ramped up significantly during the quarter. Health care professionals are at the center of everything we do, and we approach every decision with them in mind. We're also building FIGS for the long term. Using these guideposts and the inherent strength of our business model, we remain confident in our ability to continue to achieve strong results despite these challenging conditions. Let's focus in on our key performance metrics. Net revenues were up 26% to $110 million, led by a significant increase in average order value and continued growth in revenue per customer. Our active customer base grew 31% over the last 12 months to nearly 2 million by the end of Q1. Our trailing 12-month net revenues per active customer increased $13 year-over-year to $226. We delivered a 16% increase year-over-year in our average order value to $116. Our Lifestyle business grew 81% year-over-year to 18% of our net revenues, up from 12% in Q1 of last year. And our international business grew 59%, representing 8% of net revenues, up from 6% in Q1 of last year. Now I'd like to share more about what we're seeing with our supply chain and customers since we last spoke to you in early March. As you may remember, beginning in Q3 of 2021, we began implementing mitigation strategies to help us get ahead of port congestion and longer transit times. We adjusted our transit time assumption, increased our weeks of supply for our core styles and core colors, and when necessary, utilized additional air freight. We built our 2022 plan based on these mitigation strategies and believe we were positioned well to navigate these challenges effectively. We also expect to have less reliance on air freight in 2022 than we had at the end of 2021. However, since early March, we've seen an intense and persistent surge in the volatility of ocean transit times for receiving our products, largely due to vessels being unexpectedly rerouted by carriers while in transit. Shipping times began to vary, ranging from as fast as 30 days to upwards of 120 days, and it's difficult to see this unpredictability ending soon. The lack of reliability has reduced our visibility into when our products will arrive, and without predictability, we are less able to mitigate these issues with longer lead times alone. This has impacted our ability to keep core products in stock and execute our color and product launches that fuel our growth. As a result, our Q1 revenue growth was lower than expected as we had to shift our planned color launch out of the quarter, and we're limited in our ability to keep in stock 2 of our most popular core franchise styles. For the rest of the year, we plan to significantly increase our use of airfreight to reduce our exposure to these unpredictable transit times. While this will create additional gross margin pressure for the year, this is the right thing to do for our business and for our health care professionals. We have readjusted our product launch calendar to further mitigate these impacts and to more reliably deliver the innovative products our customers want and need. In addition to these supply chain challenges, as March progressed, we also began to see trends soften due to macroeconomic factors such as high inflation and shifts in consumer spending patterns. While our largely nondiscretionary replenishment-driven business model is enormously resilient in the current environment, we are not completely immune to these factors in the near term. So to summarize, supply chain disruptions have intensified significantly since the beginning of March, and macroeconomic trends are probably having some impact on our customers. As a result, we are revising our full year outlook, which Daniella will say more about in a moment. That all said, I want to remind everyone that we have a deep connection with our health care workers who live in their uniforms, and the demand for our brand remains strong. Our leadership position, our incredibly strong brand and our passionate community gives us considerable advantages in this climate. For example, in Q1, searches for the term scrubs grew 3% year-over-year as compared to 7% for the fourth quarter. In comparison, searches for the term FIGS grew 44% year-over-year in Q1 compared to 40% in the fourth quarter. Data like that is why we remain confident in our ability to achieve at least $1 billion in annual net revenue by 2025. Now let's go into more detail on how we are advancing our key strategic priorities to drive to that $1 billion number. Our key areas of focus are product innovation, deepening the connection to our customers and growing brand awareness. Let's start with product. Product innovation is our foundation. We are changing the definition of a health care professional uniform, our holistic approach focused on driving innovation across our layering system from base layer to outer layer remains at the heart of our product design and development. This starts with our scrub wear products, which represent over 80% of our revenue. In Q1, we released our reimagined FIONlite line collection, now known as FREEx. FREEx is a sustainable functional fabric engineered with 92% recycled poly and a mesh lined interior for breathable warmth. This unique fabrication is both fur and liquid repellent, which makes it perfect for our veterinarians and dentists. The collection is just one of the many ways we are innovating with specific professions in mind as we continue to serve the needs of our customers and drive brand loyalty. We're also seeing tremendous success in the franchises we are building around our 13 core styles. In Q1, we launched new slim styles like our slim pattering and scrub top, a fresh look on a timeless favorite with a more tapered fit. And just like we've seen with our high-waisted pants, this style is resonating with our customers. In the less than 3 months since it launched, the Slim style already makes up 21% of core Catarina scrub tops sales. Outside of scrubs, we are excited by the continued strong growth in our lifestyle offering, which were up 81% in the first quarter. On shift, off-shift, head-to-toe, we are outfitting the medical community through our innovative layering system and driving increasingly higher purchases of complete looks with our complementary color-coordinated products. Our lifestyle products like underscrubs, outerwear and footwear are specifically designed with the needs of the health care professional in mind. These categories did not exist before FIGS. It's a market we created and we are expanding it every day. Let me say a bit more about footwear. In Q1, we upped our footwear game, debuting a new style with even more color that strategically aligns and complements our full layering system, and it's working. Our footwear revenue in Q1 alone was larger than all of our footwear revenue in 2021, indicating significant progress we have made in this key category as well as the ability of our brand to extend beyond scrubs. Our strategy of deepening and expanding our product is resonating with our community. As of today, we officially have over 2 million active customers. This is an important milestone for us as we continue to build a truly iconic brand. And as a reminder, this growing community comes back to FIGS again and again, with almost 70% of our revenues coming from repeat customers. These individuals are our brand evangelists. They stay up until midnight to see our latest release and buy it before it sells out. And they spread the word to colleagues that the latest color and style has launched. This dynamic is incredibly difficult to replicate, and it motivates new customers to try FIGS. Our brand and the loyalty it drives transcends beyond making great products. And our engagement on social reflects the deep connections we have made. For instance, across our almost 1.2 million followers on social with an engagement rate of over 3% compared to the industry standard of approximately 1%, which means our health care professionals are interacting with our brand 3 times more frequently, and we continue to grow this relationship through unfiltered, authentic, honest conversation. We also look to build deeper connections with our customers through localized experiences. After a 2-year hiatus due to COVID, we're very excited to be returning to our roots of in-person community building. In just a few days, we will be bringing almost 200 of our Awesome Humans on a retreat filled with yoga, meditation and reflection. These are some of the most influential voices in health care, voices that deeply believe in our mission and absolutely love our products. And their authentic connection to FIGS further drives meaningful engagement with our community. While word of mouth remains our primary source of new customers, investing behind top-of-the-funnel marketing strategy is a key focus for us in 2022. It was only 2 million active customers today, out of the 21 million health care professionals in the U.S. alone; we have so much room to grow. This year, we are targeting select cities, such as Seattle, Houston, Philadelphia, and Chicago, with powerful integrated marketing campaigns and activations, beginning with our pop-up experience in Houston that kicks off Nurses Week. We've intentionally chosen markets with a dense concentration of medical professionals where we are under-penetrated. Our active customer count in these markets represents less than 12% of health care professionals in the area. And similar to the successful penetration these out-of-home strategies have driven in key cities like New York and Los Angeles, we are confident these brand activations will bring more Awesome Humans into the FIGS family. And our focus does not stop with the U.S. Health care professionals around the world are underserved by the legacy products and buying experiences available to them. That's why we are continuing to build out the FIGS experience in our international markets. Learning as we go, inspiring those Awesome Humans outside of the U.S. just as we have done domestically. In the quarter, international grew 59% year-over-year, and we are continuing to develop the experience with site-specific assets and promotional strategies, greater localization, and an increased ambassador presence. Additionally, we are excited to announce that in April, we soft launched in 7 new countries in the EU: Belgium, France, Germany, Ireland, Italy, Netherlands, and Spain. While we have a lot of work to do to scale overseas, we're seeing great early results. I'm incredibly proud of the work the team has done to expand our international presence as this remains a massive area of untapped potential for FIGS. I'll close by saying this, FIGS continued to grow significantly in the first quarter despite the headwinds created by unprecedented supply chain issues and macroeconomic uncertainty. Year-over-year, we grew revenue, users, average order value, and all other aspects of our business. We remain on track to reach at least $1 billion in annual net revenue by 2025. And I want to stress that because of the nature of our business, we believe our growth will be less impacted by the macroeconomic environment than others in the consumer space. FIGS is incredibly well positioned to continue to be the brand for health care professionals. Our business model is based on a largely nondiscretionary replenishment-driven core product. Health care occupations are projected to add more jobs than any other occupational group through 2030, and the industry dynamics remain as strong as ever. Our management team is best-in-class. And through innovative products, a superior user experience and a deep connection with our community, we've created a formidable moat as the clear D2C leader in the space. With that, I will hand the call over to our CFO, Daniella Turenshine.

Thanks, Trina, and good afternoon, everyone. I want to reiterate what Trina said. We are immensely proud of the performance we delivered in the first quarter and our ability to continue to navigate the evolving and dynamic supply chain challenges we are experiencing today. Now let's dive right into the financial results. Net revenues for Q1 were up 26.4% to $110.1 million compared to Q1 last year. Our unique financial model was driven, in part, by a robust customer dynamic, which despite a challenging backdrop, continues to strengthen. Our net revenues per active customer increased to $226, up 6% from $213 the prior year. Average order value, or AOV, grew 16% from the prior year to $116 this quarter. This result was due to a substantial increase in lifestyle adoption driven by continued growth in footwear and outerwear. As we expand our layering system offering, our customers are increasingly purchasing a complete head-to-toe look, and we see this in our metrics. In Q1, customers who purchased a lifestyle item had over 20% more units per transaction than their scrubs-only counterparts. AOV also benefited from lower discounts through strategic reductions in our promotional strategy. Our Q1 revenue growth came in lower than planned, primarily due to the supply chain challenges affecting our scrub wear products that Trina discussed earlier. As a result of these impacts, primarily a color launch that moved out of the quarter and a delay in 2 of our most popular franchises, the high-waisted Zamora and Yola, which we transitioned to a new yoga weight fan, our repeat frequency and order growth was lower than anticipated in the quarter. Despite these headwinds, we are proud of our team's resilience and agility and still achieving 26% net revenue growth. Gross margin for Q1 decreased 40 basis points year-over-year to 71.2%. This decrease is primarily due to higher use of air freight as well as higher freight rates across both ocean and air. Partially offsetting these gross margin headwinds, we saw continued improvements in product costing and scale, and lower discounts that enabled more full-price sales in the quarter. Moving to operating expenses. Selling expense for Q1 was $22.1 million, representing 20% of net revenues compared to 19.7% in Q1 2021. As we mentioned previously, we experienced increases in shipping rates from our carriers, partially offset by the increase in AOV. Marketing expense for Q1 was $15.4 million, representing 14% of net revenues compared to 12.4% in Q1 2021. As we discussed last quarter, in 2022, we are focusing our investments on top-of-the-funnel marketing initiatives aimed at driving brand awareness. As a result, we have higher brand spend in Q1 compared to the prior year. The increase was largely driven by spend on creative projects as well as expenses related to the launch of our localized offline brand activations later in the year. Within marketing, we have built a diversified media mix that is not overly dependent on any single channel. As a result, we do not believe we are significantly impacted by Apple's privacy changes. However, the efficiency of our performance marketing was negatively impacted by our inventory strength in Q1. We continue to believe that fundamentals related to customer acquisition funnel remain strong; and we were able to maintain high efficiency even in a challenging environment by driving most of our acquisitions through word of mouth. General and administrative expense for Q1 was $27.2 million, representing 24.7% of net revenues compared to 21.1% in Q1 2021. This increase was primarily driven by non-cash stock-based compensation, the incremental capabilities we are building in key departments, like product innovation, merchandising, and marketing, as well as public company costs, which did not exist in Q1 2021. Taking this to the bottom line, our net income was $9 million or $0.05 of diluted EPS for the quarter. Adjusted net income was $10.5 million, and diluted EPS, as adjusted, was $0.05 in Q1 compared to $0.08 in Q1 2021. As expected, the decrease in diluted EPS, as adjusted, was driven by a decrease in adjusted net income year-over-year due to investments in the business. We believe these investments in marketing, talent, and innovation are essential for our long-term success and position us well to capitalize on the long runway ahead. Finally, our adjusted EBITDA for Q1 continued to be strong at $24.9 million or an adjusted EBITDA margin of 22.7% compared to 28% in Q1 2021. This change was primarily driven by increased investments in brand marketing and talent as well as incremental expenses related to now being a public company. Despite a softer-than-expected top line, we continue to execute with discipline at the highest level, leveraging the strength of our financial model to deliver high revenue growth coupled with strong profitability. Quickly touching on our strong balance sheet. We finished the quarter with cash and cash equivalents of $189.4 million. Our cash on hand and cash flow generative business model enables us to strategically deploy capital to fuel our growth and operations over the long term. Turning to inventory. We ended the quarter with $102.8 million on our balance sheet. We continue to use our strong balance sheet to ensure we can meet future demand. The increase in our balance is being driven by our decision to increase weeks of supply on our core scrub wear offerings as well as higher in-transit inventory due to extended lead times and the impact of higher inbound freight costs. Moving on to our outlook. Based on the challenges that Trina discussed, we now expect 2022 net revenues to be approximately $510 million to $530 million, representing growth of 22% to 26% compared to 2021. This change is primarily driven by the increased supply chain disruption that began in late Q1 and that we expect to impact us for at least the remainder of the year. Specifically, this is making it more difficult for us to bring product enhancements to market quickly and plan and launch our color-coordinated launches, which feature multiple colorways with products from facilities around the world. For example, in April, we had to split a tricolor launch that was fully merchandised and campaigned together into 2 completely separate launch dates. It led us to move the largest volume colorway weeks later, leading to a suboptimal experience for our customers and met demand opportunities. While these inventory constraints are the primary factor affecting our outlook for the full year, we also recognize that our consumers are facing pressure from macroeconomic factors, particularly inflation as well as shifts in their spending patterns. The Salesforce Q1 shopping index recorded the first drop in the 9-year history of the index. We continue to grow significantly in Q1 despite the decline in this index. But as a completely digital company that is properly scaled during this time, we understand this could be having some impact on FIGS, and we are adjusting our expectations accordingly. To be clear, our business fundamentals have not changed, and our growth will continue to be driven by the largely nondiscretionary replenishment-driven nature of our core product portfolio combined with increased adoption of our complete layering system. With respect to gross margin, flexibility is critical to operating in this challenging environment, and we are committed to making the right decisions for FIGS' long-term success. Given the increased unreliability of ocean freight, we are shifting more of our freight mix to air to ensure timeliness and consistency for our launches. As a result, we are now anticipating our gross margin to come in between 67% to 68%, which is below our previous outlook of over 70%, but remains a leader in the apparel space. We believe these headwinds are temporary and do not structurally change our long-term margin profile. While we anticipate these challenges to continue throughout the year, we believe they will ease in the future, and we will return to our long-term target. For adjusted EBITDA, high growth and balance of profitability are key tenets of our business model. And in this environment, we must adapt to maintain the correct equilibrium. As a result of the near-term pressure we see in top line growth and gross margins, we are now anticipating our 2022 full year adjusted EBITDA margin to be in the range of 16% to 18%, which is below our previous outlook of over 20%. FIGS's future growth ultimately depends on making smart investments in product innovation, marketing, and community to support our long-term ambition. That means that while we will remain disciplined, we will not prioritize short-term profitability at the expense of our future. As always, you will find ways to drive efficiency so that all of the pressure we see in revenue and gross margin does not flow through to the bottom line, enabling us to continue to deliver strong profitability in spite of the near-term challenges. We believe we can return to higher profitability once these challenges pass. Moving to tax. We expect our full year tax rate to be approximately 36% to 37% as a result of several nondiscrete items driving our effective rate higher. We also expect capital expenditures to be in the range of $8 million to $12 million for the year, with the increase primarily driven by our fulfillment expansion. Now I'd like to give you some perspective on our quarterly flow. As it relates to the top line, we expect our second quarter revenue growth rate to be less than 20% as we continue to be impacted by supply chain challenges and macroeconomic factors, including the rephasing of our product launch calendar, which means more launches to the second half of the year. As it relates to gross margin, based on what we see today, we anticipate our second quarter gross margin rate to be at the high end of our full year range. Finally, within operating expenses, we are planning higher marketing spend in the second quarter to support our efforts around Nurses Week and our ambassador retreat that Trina described. Additionally, within selling, we expect higher one-time costs in Q2 associated with the expansion of our existing fulfillment center. And finally, we expect higher G&A expenses in the second quarter, primarily due to comparing a period with no public company costs. Given these factors, Q2 adjusted EBITDA margin is expected to be in the low teens. In closing, we are incredibly excited about the long runway of growth ahead of us. And despite the near-term challenges, we remain confident in our ability to achieve at least $1 billion in net revenues by 2025. We have a strong business model, a world-class management team, and a dedicated community we're passionate about. We cannot wait to deliver on all of our plans to support FIGS' Awesome Humans.

The first question comes from Bob Drbul from Guggenheim Securities.

I have a couple of questions. First, regarding your customer spending changes, could you elaborate on whether some of it is related to the COVID pull forward versus just a tougher macro environment? It would be helpful to understand the priorities impacting your overall business. My second question is about your outlook for 2022. Can you provide some details on air freight, particularly what's included in your new numbers regarding gross margin? Additionally, it would be useful to have more information on the dollar amounts you’re spending overall as we consider the full model, along with insights on the second quarter rates.

Thank you for the question. I will address it in a few parts. From the demand perspective, we are primarily facing supply chain issues we've previously discussed. We're experiencing some impact from inflation and changes in consumer spending, but the main challenge lies in the supply chain. We are making every effort to ensure our products reach healthcare professionals for the remainder of the year. We still expect to achieve a growth rate of 22% to 26% for the year, and we believe we can accelerate our growth once supply chain issues are resolved. This market opportunity is still substantial, and we are the clear leader in this sector. Daniella, would you like to discuss the outlook?

Yes, I'll take gross margin and the outlook. So we're navigating some very fluid and evolving dynamics as it relates to inbound, really seeing unprecedented challenges that are impacting almost everyone out there. And so a reminder on gross margin, we were already expecting to be down relative to 2021 due to ocean and air freight generally being higher and also increasing transit times resulting in the need for continued air freight. We've been able to offset some of that near-term pressure through driving more sales at full price and also continued product costing benefits at this scale. That said, we're anticipating an additional 300 to 400 basis points of impact due to the increase in air freight spend that we're planning for the back half of the year. Now most importantly, our underlying business model is not changing. We believe that these pressures are temporary, and that when these supply chain disruptions ease, we'll be able to return to our long-term gross margin target. We're making the right decision for our business, and we're doing what's best for our business and our customers for the long term.

The next question comes from Adrienne Yih from Barclays.

Trina, my first question is about pricing. In previous calls, you've mentioned the importance of maintaining your pricing. Has that position changed? Additionally, what does your average unit cost look like within your inventory? I've heard that the general industry average unit cost has increased by around 10 percent. Are you reconsidering your strategy regarding price increases, especially given the current macroeconomic pressures? That's my first question.

Thank you, Adrienne. It's essential for us at FIGS to ensure our prices are based on advantageous gross margins established from the very beginning. We’re not experiencing a significant need to adjust our costs, aside from the strategic decisions we’re making regarding air freight. The positive aspect of our business is that over 80% of our products come from one fabrication, and our 13 core styles represent the majority of our sales. We will continue to monitor the situation and make the best decisions for our community to meet the high expectations of the healthcare professionals we serve.

Yes, Adrienne, regarding your question on average unit cost, we are somewhat different. While we are experiencing higher air freight costs and increased air and ocean rates, we are actually countering this with improved costing overall, driven by our core scrub wear. For our top-selling styles like Catarina, Casma, and Zamora, we have managed to offset raw material increases through ongoing efficiencies as we grow and scale. Although we are seeing some increases in average unit costing, it is not as significant as what others in the industry might be facing.

Our next question in the queue comes from Lorraine Hutchinson from Bank of America.

This is Alice on for Lorraine Hutchinson. We wanted to get an update on sourcing. Since the majority of fabrics are sourced out of China, did the recent lockdowns impact your ability to get inventory for later this year? And if there are any impacts, can you give any guidance on how we can try to quantify that? And then also maybe elaborate a bit on how you're navigating them.

Sure. So I think for us, the main impact that we're facing from the supply chain side is on the transit side. As it relates to our manufacturing partners, we have had no shutdowns, and we are fully operational across our supplier network, but it is a fluid situation that we're evaluating as we move forward here. So we're working with all of our partners. We're seeing where the delays are, and we've been able to navigate quite fluidly across our supply chain, but we'll keep you updated as we go.

The next question comes from Michael Binetti from Credit Suisse.

Maybe I just want to make sure I understand what you guys are referring to when you say you saw some changes in consumer spending patterns. The first question. And then I would love to know, just given how dynamic the situation is right now, I guess you reported and guided us on March 8, and revenues obviously ended lower than planned for the full quarter. Can you help us think about a little bit more about the cadence that you saw through the quarter, the exit rate? Must have been a fairly significant downturn at the end of the quarter. And then just sorry for the multipart here, but I'm wondering how much cushion you have below the gross margin line to defend that EBITDA margin. You gave us if sales or inventory flows worsen from here, again, knowing how volatile the environment is right now.

Sure. I think what we're seeing from the consumer side, along with the macroeconomic changes, includes the pandemic, supply chain volatility, high inflation, shifts in consumer spending, and other significant macro issues. There’s a lot of uncertainty in the world. However, I want to emphasize that while we are not completely immune to these factors, their impact on us is relatively less severe than on others. I feel confident in our business model and our long-term prospects. What remains consistent is our ability to navigate this uncertainty by focusing on what we can control. We are air-freighting products to meet the demands of our healthcare professionals. Additionally, we offer nondiscretionary products that healthcare professionals need, which are generally resistant to economic downturns. As we continue to move forward, we feel optimistic about the industry we are in and the replenishment-driven nature of our business. Regarding the other part of your question, Daniella, would you like to address that?

Yes. So I'll start, Michael, with cadence through the quarter. So as of our last earnings call, our trends were on track with expectations, and we had our sample sale in the first week of March that did really well on fewer promotional days year-over-year, which gave us a lot of confidence in our plan. We began to experience impacts on our business in early March. We started to really see an increase in reliability and volatility around transit times. And the biggest impact for the quarter was a color launch that was planned for the end of the quarter that actually moved into Q2. So that had the largest impact for what we saw in Q1. As it relates to adjusted EBITDA margin and gross margin. So I want to start by saying that we're really proud of our ability to deliver a 23% adjusted EBITDA margin despite lower than planned revenue in the quarter. I think that's really a testament to our business model and our management team's commitment to high growth and strong profitability. So when we think about the full year, we're going to continue to invest in places that are really essential to building a strong foundation for long-term growth like marketing and product innovation and technology. So, within marketing, it's critical for our long-term growth and brand awareness. So we're going to continue to invest here. We think it's going to stay consistent as a percentage of net revenues. Selling, we're expecting to deleverage slightly because of expanding in our fulfillment with higher shipping rates that we've been seeing. Finally, within G&A, this is the biggest area where we think we can really drive efficiency and where we have flexibility if revenues are to be higher or lower than we anticipated. So we'll continue to look for ways here to really balance investment as the year progresses. And so very few companies at our stage that are able to really invest meaningfully in their business while simultaneously being really disciplined and sustaining a best-in-class adjusted EBITDA margin profile, and we're going to continue to do just that.

Our next question comes from Lauren Schenk from Morgan Stanley.

I was wondering if there's any dollar amount you can put around the color launch in the first quarter to just help us triangulate how much of the disappointment is relative to that launch relative to macro. And then in terms of the back half of the year, how are we thinking about third and fourth quarter? Should third quarter be essentially better than the second quarter? Or is there going to be more like a bell curve with the fourth quarter being better?

Yes. In the first quarter, we faced some supply challenges related to the color launch, which was delayed, and we also experienced stock shortages of key products like our high-waisted Zamora and Yola. While I can’t provide exact figures, the majority of the impacts we encountered stemmed from supply chain issues, with macroeconomic factors affecting us to a lesser extent. We anticipate this trend to continue in our outlook for the full year. Regarding the third and fourth quarters, we are not providing specific guidance for these periods, but due to changes in our product calendar, we have shifted more product launches to the second half of the year. Overall, we feel optimistic about our outlook and believe we can achieve our goals for both the third and fourth quarters as well as meet our full-year expectations.

The following question comes from Brian Nagel from Oppenheimer.

I apologize for repeating my question as it builds on some earlier inquiries. I'm focusing on the top line dynamics for Q1. My question is whether the delays in the color launch contributed significantly to the sales shortfall in Q1. Has that product now been delivered? If it is available in Q2, will those sales compensate for the losses in Q1, or are there other factors involved?

Yes. The launch we planned for the first quarter actually took place in the second quarter. However, there are additional launches in the second quarter that are now being pushed to later in the year, which is why we are adjusting our guidance for the second quarter. This situation is dynamic. We have developed a strategic plan to time several product launches this year to coincide with specific events important to our community. For example, Nurses Week is a significant period, and we aired our products to meet the demand during this time. It has been a very successful week. We also have other events scheduled throughout the year where we intend to promote our products to address demand. Many of these decisions have already been made and will impact the latter half of the year.

Okay. For my follow-up question, Daniella, we discussed the supply chain disruptions that have been occurring over time. It seems that the ships are now spending more time at sea. Is this a new trend related to the supply chain disruptions, or is it just a continuation of what we've been experiencing?

So it's really changed significantly towards the beginning of March. And previously, we were seeing ships being on the water for longer, right? Lead times as long as 120 days. And what we're seeing now is a lot of unpredictability and volatility. So we're seeing some of our ocean transit times exceed 120 days and be much longer than that, and it's creating a lot of unpredictability in our color launches in our calendar. And so we extended our lead times to really account for the longer transit time. But what we haven't been able to account for is this unpredictability and volatility, and that's what's causing a lot of the issues in the first quarter that we've seen.

The next question comes from John Kernan from Cowen.

So just on active customer growth, to get to the second quarter guidance that sequentially, there's a big deceleration in just the sequential add implied in the guidance, it has to ramp pretty significantly as we get into Q3 and Q4. Is there anything from a seasonal perspective from Q3 and Q4, understanding Q4 is usually a much bigger quarter than the rest of the year, that gives you the confidence in those customer adds as we go into the back half of the year given you have cited some concerns over consumer spending?

What we saw in Q1, as it relates to new customers, is that really the same things that drive repeat and loyalty and retention also drive new customers. So when we have fewer color launches, that impacts our new customers. We actually see 2 to 3 times more new customers on a launch day than an average day. And so we do believe that our numbers in Q1 were impacted by the supply chain challenges that we saw in the quarter. But we have a lot of confidence in the year due to the strategies that we have in place. So core products like our high waisted are back in stock, and we have mitigation strategies to limit that in the future. We've reflowed our product launch calendar, so that there are more launches in the second half of the year, which gives us confidence in that as well. And we're also increasing investment in top-of-the-funnel, worldwide brand activation and brand awareness strategies. So we're going to continue to do all of those things. Sequentially, we also see strength in Q4 because of Black Friday, Cyber Monday, and holiday. So we have room to grow. We only have 2 million active customers today, out of 21 million health care professionals. And so we feel really confident in our outlook and the active customer numbers for the back half of the year.

Got it. Daniella, just maybe one more question for you. All the IPOs from last year in Consumer Tech are trading much lower than more of the IPO and deals happen. Any changes to stock-based comp and those figures in any equity compensation plans? And how do we think about share count for the full year? It looks like the share count came down quite a bit from Q4. So just curious on how to think about those factors.

Yes. We haven't had any changes to how we're thinking about stock-based compensation. We continue to think it's an important tool to motivate and incentivize our employees. As it relates to share count, it's going to be impacted by the stock price. So we're expecting it to stay relatively consistent throughout the year, with a little bit of growth from where we are today.

The next question comes from Brooke Roach from Goldman Sachs.

I wanted to follow up on John's question regarding net new customers and how you're thinking about the demographics of those customers. As you dig into the new customers that you acquired this quarter, what did the demographics look like among those new customers this quarter or the past 2 quarters relative to prior year cohorts? Did you see any change in customer behavior among some of the lower-income customers within the customer base?

So we're not seeing anything particularly in our data. We see similar income levels in our new customers and also our existing ones and also a similar mix of professions that we've seen in the past. I think it's been an incredibly challenging time for all of us, especially our health care community. But we're not seeing anything in the data to guide us one way or the other on the demographics. I think it's important to note, right, health care professionals are not going away. So we still believe that once supply chain challenges subside, the opportunity in front of us is massive and we really believe we can accelerate from here.

Got it. And then just one final follow-up on the freight and transit times. As you look into the back half of the year, is there an optimal number of weeks of supply that you're looking to plan ahead for, given the very uncertain environment to potentially go back to using more ocean freight rather than air? Or is that something that's just still TBD at this point?

So it depends on what type of product, right? So within our core colors in our core styles, we are increasing our weeks of supply so that we're better positioned to meet the customer demand that we see. With a lot of what we're planning to air in the back half of the year is related to our product launches. So these generally drive a lot of hype and excitement and engagement on the site, but they live for a short period of time. So it's not really about increasing weeks of supply. It's more about being really decisive in our air choices and making sure that we are doing what we need to do to have the product here to meet the demand and to sustain our launch calendar and to grow at the rates in our outlook.

The next question comes from Dana Telsey from Telsey Advisory Group.

As you think about your product assortment and also the expansion into lifestyle, how are you thinking about the marketing with the inventory delays in being able to continue to capture more customers, spend marketing dollars and not disappoint them? How are you thinking about the framework of how you're going to market, what you're going to market and the ability to convert?

Thank you, Dana. That's a great question. We're constantly evaluating how much product we have, the demand we're experiencing, and our marketing expenditures to engage our community across various platforms. One unique aspect of FIGS is our ability to balance growth and profitability, largely due to our strong marketing efficiency. We will maintain a disciplined approach regarding our spending to ensure we connect with our community effectively, providing them with both the products they need and the ones they want. Even though our launch calendar is undergoing some changes, our priority remains to engage our community with the right products at the right time. Additionally, we're consistently expanding our lifestyle business, which has seen an 81% growth, and there's much more to come in that area. We aim to balance our product offerings, our launch cadence, and our spending, and we will continue to be disciplined in all these aspects.

Got it. And one last thing. You've strengthened the team. I think you've added a new team on the product side, strengthened the Board. Anything that we should be looking at there? Are there people that you need to add? Or how do you see the teams developing?

Yes, we have made significant additions to our team. Jami Pinto, our Chief Product and Sustainability Officer, joined us from Under Armour, and she is exceptional. Our new Board members, AG Lafley, Jeff Wilke, and Ken Lin, are all highly respected figures in their fields, and we are honored to work with them. We are very confident in our management team, which we believe is best-in-class, and our Board is outstanding. Overall, we feel good about our current position and will continue to execute our plans.

We have no further questions on the telephone line, so I will now hand back to Trina Spear, Co-Chief Executive Officer.

Thank you. Okay. Before ending our call today, we would like to take some time to answer a few of the most upvoted questions from our shareholders through the Say platform. So the first question asked about our stock price performance and whether there are any plans for stock dividends or buybacks. So first of all, with respect to the stock price, as I said before, in the short run, the stock market is a voting machine. And in the long run, it's a weighing machine. We have a very unique financial profile with an impressive combination of revenue growth and profitability. Our business model is based on a largely nondiscretionary and replenishment-driven core products, and we're in a recession-resistant industry. This industry actually grew in both 2008 and 2009, and we are serving the fastest-growing job segment in the country. As a result, we do believe we're significantly undervalued right now. And with the continued growth and execution, our true value will be reflected over the long run. In terms of dividends or buybacks, we don't have any plans for those at the moment because, as a high-growth company, we believe the best return on our capital is investing back into our business to support our long-term growth. That said, as the stock continues to be undervalued, we will evaluate other options like share repurchases if we believe that is the best near-term return on our capital. The second question is about whether we're planning on expanding into markets outside of health care. We definitely believe that there are a number of other workwear segments beyond health care that are dramatically underserved. And over the long run, there's an opportunity for us to innovate in these categories. However, we're 100% focused on health care for the foreseeable future. The opportunity within health care is massive, and we are going to grow it further before we expand into other segments. Finally, we got a couple of questions about our team's business and specifically about partnerships with university nursing programs in large academic hospitals and whether we offer embroidery or color matching for colors that are required at those institutions. So as you all know, our team's business is where we partner with schools, health care institutions and medical practices to supply things directly to them. On the student side, we partner with many of the biggest universities, such as USC, NYU and many others to outfit medical, dental and other students. Many of these partnerships are initiated by students who love FIGS and take it upon themselves to coordinate large group orders. We also work with a large number of hospitals, concierge clinics, med spa chains, and other institutions and practices to outfit them in FIGS. As for embroidery, we have our own fixed tech-enabled embroidery workshop that we offer logo and text embroidery, and it allows our health care professionals to tell the world who they are and what they do. And as for color, we're leading the charge when it comes to colors we offer with our innovative drop strategy, between our core and limited-edition styles we offer just about any color you can imagine. But what we actually think is most notable is how hospital departments and medical offices have switched to FIGS colors as their standard colors, like what we've seen over and over again with the group swapping out their old gray for FIGS graphite as an example. So I think that should cover all the questions from the Say platform. Operator?

Thank you. With that, ladies and gentlemen, the call is finished. Thank you all for joining. You may now disconnect your lines.