Hello, everyone, and welcome to the FIGS Second Quarter 2022 Earnings Conference Call. My name is Victoria, and I will be coordinating your call today. I'll now pass over to Todd Maron, Chief Legal Officer, to begin. Please go ahead.

Hi, everyone. And thank you for joining today's call to discuss FIGS' second quarter 2022 results. We released our results earlier this afternoon, and they 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 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 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 on the call, 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 earnings press release and shareholder slide deck we issued today. Now I would like to turn the call over to Trina Spear, Chief Executive Officer of FIGS.

Thanks, Todd, and good afternoon, everyone. Thank you for joining us for our second quarter 2022 conference call. I would like to start today's call by thanking the entire FIGS team for their engagement, agility and impressive execution. I am especially grateful for their unwavering commitment to the health care community as we work each and every day to create products that help our Awesome Humans better serve their communities. Now on to our results. We delivered another strong quarter with continued advancements across our key growth strategies. In the second quarter, we delivered top and bottom line results that beat our expectations despite a challenging macro environment, with net revenue growth of 21% and an adjusted EBITDA margin of 18%. We continue to see a strong response to our product innovation in both our scrubwear and lifestyle offerings as well as the ongoing deep engagement amongst our customers. We are especially pleased with our strong performance during Nurses Week, particularly in light of the supply chain challenges we faced earlier in the quarter. Looking at our performance, net revenue was once again driven by growth in active customers, which increased 26% and reached over 2 million. Growth was also driven by higher average order value and revenue per customer. We expanded brand awareness globally, and our first order retention rate also remained strong at approximately 50%. We delivered strong adjusted EBITDA performance, and gross margin exceeded 70%, which was also ahead of plan. We are very proud of this performance in light of cost pressures in the supply chain and inflation. Now I'd like to provide a brief update on the supply chain, which we feel really good about. Overall, supply chain and logistics remain pressure points for the industry. However, we continue to navigate these challenges well. We are no longer using the sailing route that led to the rerouting delays that impacted our Q1 deliveries, and we are also seeing improvements in ocean transit times and schedule reliability. As you'll recall, due to the delays we previously were experiencing, we revised our product launch calendar to adjust for the new delivery timeline, and we remain very comfortable that the flow of incoming inventory will enable us to meet our calendar. I am very proud of our team's swift response to the challenges we faced last quarter. We acted early and proactively as we leaned on airfreight to ensure we have the product to meet the needs of our health care professionals. That is our top priority, and air has been very reliable with rates having decreased, at least for now. We will continue to enhance our supply chain capabilities and inventory flows to improve efficiencies and prevent any disruption to our business. Now I'd like to shift gears and talk about the demand environment and our observations. Data analytics is a core strength of FIGS. We have extensive information about our customers, including what they want, when they want it, the quantity they wanted and how they want to engage with us. We use this data in two primary ways, first of which is connecting with our community in personalized ways, like determining how and when to speak to our 26-year-old nurse in Boston versus our 56-year-old oncologist in Houston. Secondly, we use this data to deliver a continual stream of product innovation. We are always looking for new ways to address health care professionals' needs, both on-shift and off-shift through thoughtful, innovative solutions. This has garnered incredible brand loyalty with 70% of our sales stemming from repeat customers who keep coming back, not only for our core scrubwear, but also for our expanded lifestyle offerings. This is driving consistent year-over-year increases in average order value as existing FIGS customers increased their devotion over time, especially as we continually add new technology, functionality and innovation into our assortments as well as product extensions that make a difference. Our recent survey work shows that we are becoming a larger part of our most loyal customers' wardrobe, with closet share of scrubs increasing from 55% to over 70% in the past year. The more FIGS becomes embedded in our customers' lives, the more we grow. Our data also helps us monitor shopping behavior, such as frequency of visit. During COVID, we saw an increase in frequency, which we attribute to several factors, including an increased need to replenish scrubs, stimulus checks, and a pronounced shift to online shopping across the board. While digital companies like ours have also seen frequency moderate from peak COVID levels, we continue to see exceptional growth in our business. Last twelve months revenue has grown 4.2 times since 2019, driven by a greater than three times increase in active customers and higher spend per customer. All of these metrics are moving up and to the right. Beyond our existing customer base, we have a tremendous opportunity to extend our reach by developing product solutions to fulfill the needs of health care professionals in every category. For example, we recently launched our dental lab coat with thoughtful features like stain-resistant Nanotex technology to repel liquid and ribbed cuffed sleeves for dental procedures. Our dentists loved it with over 80% sell-through on day one. This quarter, we also launched FIGS PRO, which is a great example of how we can leverage our deep knowledge of health care professionals and product innovation to broaden our reach within the health care community. FIGS PRO is our business casual scrubwear collection that we created for the office. This collection serves the needs of a wide variety of health care providers, including concierge medicine, medical office personnel, hospital administrators, telemedicine, and med spa practitioners. This collection enables us to further expand our share of wardrobe among those who already wear our core FIONx scrubs. FIGS PRO is extremely well received with better-than-expected sell-through, and its early success further illustrates the enormous market opportunity ahead of us. Similarly, our recently introduced lifestyle offerings continue to perform above our expectations. Our layering system is focused on outfitting our community from head to toe, and underscrubs, our functional base layer, has become an important component of that. This category grew over 60% year-over-year as we expanded within our performance underscrubs, including a body suit for the perfect top 10 in lock. We have so much opportunity to expand within this category as we think about all the layers health care professionals wear beneath their scrubs, and we are excited about what's to come. Finally, as we have said in the past, our product launches drive demand and new customer acquisition, which is a dynamic in our business that we lean into. We actually see two to three times more new customers on a launch day than an average day. Our company is built on innovation. We have an incredible pipeline of product launches that we believe will drive further engagement and extend our reach. We look forward to sharing more details on a number of exciting product introductions, updates of beloved silhouettes and highly anticipated color launches that we have planned for the rest of the year. Now I'd like to touch on our key marketing moments from the quarter, including another successful Nurses Week, which delivered growth of 41%, and it was our largest volume week ever. We launched four new colors of scrubwear, in addition to a limited edition Crocs collaboration during Nurses Week. These launches were supported by marketing efforts and brand activations across key cities that led to strong engagement from both our existing and new customers alike. Growing brand awareness is an important part of our growth strategy, and we saw an untapped opportunity to expand our presence within the United States. We targeted four cities with dense concentrations of health care professionals, including Seattle and Houston in May, and we'll hit Philadelphia and Chicago later this year. Our launch in Houston was a great success. When we rolled out our Houston pop-up truck during May, we had lines around the corner, averaging about 600 guests per day. We also sponsored a YouTube Masthead Takeover, with 7.7 million users watching the video. We saw signals continuing grassroots momentum for our brand. We also recently held our ambassador immersion after a hiatus due to COVID. This annual event is just one of the meaningful ways we support and care for our ambassadors. This gives them the opportunity to recharge so they can return to serving others. Throughout the event, they shared their experiences with their broader social media networks, which led to 2.3 million impressions collectively. Our ambassadors are an integral part of our success, and we are always eager to support them. I want to take a moment to reiterate the importance of our ambassador program and to emphasize the authenticity of the relationships we have built with our ambassadors over the years. Our ambassadors are an enormous driver of word-of-mouth marketing, which is our primary method of new customer acquisition. The program currently consists of 300 relationships, half of which are exclusive with some of the health care industry's most prominent voices. Each week, we receive thousands of applications from health care professionals around the world wanting to join our effort. FIGS was the first company to bring together the most influential voices across health care and encourage a social flow of ideas and experiences. While these conversations can be about a lot of issues, they're often about FIGS and the passion people feel for our products and our values. As a result, FIGS stays top of mind within our ambassador community. We're incredibly grateful that we have built our business alongside our ambassadors. The bond we created with them is impossible for others to replicate and gives FIGS a big competitive advantage as millions of people discover our brand through our ambassadors. Additionally, it is amazing to see how our reach on social media continues to grow. Just as we created a medical influence on Instagram, TikTok is massively growing our reach and has become a larger part of our focus. As a data point, there are currently over 400 million views of videos on TikTok that our health care community has organically created using the #wearfigs. It's clear that health care professionals not only love FIGS, they love talking about FIGS and sharing their stories. And with that, let me touch on international, which we believe is an untapped growth opportunity for FIGS. We have spent the first half of this year focused on building the fundamentals to accelerate future growth internationally. In the second quarter, our priority has been creating an exceptional localized experience with site-specific assets, tailored messaging and an increased ambassador presence. We also began exploring initiatives that will enable international customers to have the same level of accessibility to our products that our U.S. customers enjoy by covering their duty and shipping costs as well as providing free returns. As we focus on these initiatives, we also decided to keep most of our marketing spend in the U.S. Even with minimal marketing, International grew 18%. In April, we soft launched in new countries in the EU, including Belgium, France, Germany, Ireland, Italy, Netherlands, and Spain. We have been extremely pleased with the early results. Everything we've seen so far gives us great confidence in the potential for FIGS outside of the U.S. We are extremely proud to have delivered revenue growth in excess of 20% and an adjusted EBITDA margin of 18% despite a challenging macro environment. Our performance speaks to the resilience and strength of our brand and our business model as well as the operational excellence of our teams. We have incredible brand affinity and a very loyal customer base, industry-leading product innovation, replenishment-driven products and an extremely effective word-of-mouth marketing strategy. There is no other brand that has the data, innovation, and powerful connection to the health care community that comes even close to FIGS. This is what gives us the confidence in our ability to deliver outsized growth, both in the U.S. and internationally. We are more excited than ever about the long-term growth potential of our business, and we continue to advance our growth strategy. Before I turn it over to Daniella, I want to take a moment to discuss the change in management titles announced earlier today. As you saw, Heather and I decided to transition from our titles of co-CEOs to Heather as Executive Chair and myself as sole CEO. Over many years, including since we've become public, Heather and I are frequently asked how a co-CEO structure works and who does what. For us, it's always worked seamlessly because we bring complementary skills and experiences to our leadership team, and we also have a tremendous amount of respect for each other. Now that we've gone through our first year as a public company, we feel it's a good time to formalize the division of responsibility that's already informally been in place. As Executive Chair, Heather will continue her work innovating on product, where she has delivered enormous value to FIGS and will continue to do so. As FIGS' sole CEO, I will continue to manage the company's strategy and day-to-day operations, working with the rest of our leadership team to make sure that FIGS continues to thrive. As a result of my ongoing partnership with Heather, the way that business is done at FIGS will continue very much in the same way it always has. And with that, I'll turn over the call to our CFO, Daniella Turenshine.

Thanks, Trina, and good afternoon, everyone. We are pleased with our second quarter performance as we successfully navigated supply chain headwinds and delivered results ahead of our expectations. Now looking at our financial results. Net revenues for Q2 increased 21% to $122.2 million compared to Q2 last year, driven by an increase in active customers as we continue to expand our reach globally and maintain strong retention as well as higher average order value. Average order value grew 6% from Q2 2021 to $109 this quarter as we increased deposit share. This growth was driven by both higher units per transaction and average unit retail as we continued strong adoption of our lifestyle offerings, led by growth in footwear, outerwear, and underscrubs. We continue to find that our lifestyle pieces are additive as orders containing these items had a 27% higher average order total in the second quarter than orders without lifestyle pieces included. Net revenues per active customer increased to $227, up 4% from Q2 2021, driven by the growth in average order value. As Trina discussed, frequency was slightly down year-over-year, but has since stabilized from Q1 levels as we return to a more consistent product launch calendar in the second quarter. Gross margin for Q2 was 70.6% as compared to 73.3% in Q2 2021, above our expectations due to lower-than-expected freight costs. The 270 basis point decrease as compared to Q2 last year was primarily due to a higher freight expense for both air and ocean in addition to shifts in our product mix. This was partially offset by improved product costs in scrubwear as we continue to scale. Moving to operating expenses. Selling expense for Q2 was $26.8 million, representing 21.9% of net revenues compared to 19% in Q2 2021. The increase was due to higher shipping and fulfillment expenses as our transportation partners passed along fuel inflation and higher labor costs. These higher costs were partially offset by the increase in new customer transactions. Selling expense came in better than our expectations, largely due to the timing of our fulfillment expansion moving into Q3. Marketing expense for Q2 was $20.8 million, representing 17% of net revenues compared to 15.3% in Q2 2021. As we told you we would do, in 2022, we are focusing more of our investments on brand initiatives to expand awareness. We believe this is important now because of the large opportunity in front of us, given our low market share, particularly in the select cities we are targeting. This year-over-year increase was driven by our dynamic marketing activations in Seattle and Houston, in addition to the return of our first ambassador immersion post-pandemic. This was partially offset by cost efficiencies we achieved in performance marketing. We continue to believe that fundamentals related to our customer acquisition remain strong with new customer acquisition, mainly driven by word-of-mouth. General and administrative expense for Q2 was $29.3 million, representing 23.9% of net revenues compared to 70.7% in Q2 2021. This decrease was primarily driven by non-cash stock-based compensation associated with our IPO last year. This was partially offset by higher public company costs year-over-year. Taking this to the bottom line, our net income was $4.9 million or $0.03 in diluted earnings per share for the quarter. Adjusted net income was $6.3 million and diluted EPS, as adjusted, was $0.03 in Q2. This compares to adjusted net income and diluted EPS of $14.3 million and $0.08 per share in Q2 2021, respectively. Finally, our adjusted EBITDA for Q2 continued to be strong at $21.5 million for an adjusted EBITDA margin of 17.6% compared to 26.5% in Q2 2021. This change was primarily driven by macro pressures related to higher freight expenses and outbound transportation costs. Touching on our balance sheet. We finished the quarter with cash and cash equivalents of $170.2 million. In the second quarter, we grew our inventory balance to $127.6 million. As we have discussed, we are strategically utilizing our strong balance sheet to ensure that we have the supply needed to hit future demand. We are able to increase inventory with little selection risk due to the seasonless nature and soft nature of our uniform products. Over 30% of this balance is in inventory in transit, which has continued to rise with the increase of lead times on the water. Of the remaining inventory in our warehouse, approximately 50% is in core styles and core colors, products that live on our site year-round and are always available, and almost 20% is in future color and style launches, scheduled early to ensure product arrives before their launch date. We feel comfortable with this increased use of working capital given our healthy balance sheet and confidence in our ability to sell through this additional inventory. Moving on to our outlook. Based on what we can see right now, we continue to expect 2022 net revenues to be approximately $510 million to $530 million, representing growth of 22% to 26% compared to 2021. While we are managing supply chain challenges well and the fundamentals of the business remain strong, we recognize that there are significant macroeconomic forces pressuring consumer spending and making it more challenging for us to forecast with the same degree of certainty as we have done in the past. Overall, we continue to believe in the resiliency of our business, given our revenue forecast of 22% to 26% growth. But if macro pressures continue to worsen, we could come in at the lower part of our range. While we have a number of upcoming product launches, promotions, and marketing campaigns, we feel it's prudent to acknowledge the uncertainty in the economic environment and the impact it could have on our business. With respect to gross margin, our priority remains the long-term success of FIGS. As discussed last quarter, given the increased unreliability of ocean freight, we shifted more of our freight mix to air to ensure timing consistency for our launches. Since our last call, we have seen some improvement in freight rates, although there continue to be fluctuations in transportation rates and freight costs are typically higher during high-volume periods, such as back-to-school and holiday. As a result, we are maintaining our back half 2022 gross margin outlook. While profitability flow-through was better than expected this quarter, some of that benefit was related to a timing shift for our fulfillment center expansion into the third quarter. Additionally, we have identified opportunities to reinvest back into the business, in areas such as marketing and international expansion that will drive long-term growth at an attractive return. Therefore, we continue to expect our 2022 full-year adjusted EBITDA margin to be in the range of 16% to 18%. We expect the tax rate for Q3 to be in excess of 50% and for Q4 to be in excess of 40% based on assumptions for stock-based compensation expense. We remain incredibly optimistic about the opportunities in front of us, and we'll continue to balance our tenets of high growth and profitability through effective capital allocation. From a flow perspective, we expect our gross margin rate to be similar in the third and fourth quarters. Within operating expenses, we are planning higher selling expenses in the third quarter to support our fulfillment center expansion that shifted between periods. Given these factors, we expect third quarter adjusted EBITDA margin to be in the mid-teens. In closing, we remain excited about the long-term growth opportunities ahead of us, and are proud of the team's ability to navigate through these short-term supply chain challenges. We are committed to reinvesting in our business and making the long-term investments required to work toward our goal of $1 billion in net revenues by 2025. We cannot wait to deliver on all of our plans. With that, I will turn it over to the operator to kick off our Q&A session, first with our analyst community addressing their questions. We will then answer a handful of questions received from our shareholders through the Say platform.

Thank you. We will now start our Q&A session. Our first question comes from Edward Yruma at Piper Sandler. Please go ahead.

Hey guys, good afternoon. Thanks for taking the question and congrats on the quarter. Two questions from me. I guess, first, on the quarter itself, a lot of your other peers saw the curating sales trends in the quarter. I know you guys provided the kind of proviso that macro could weigh on results, which would drive you to be the lower end of the guide. I guess did you see any change in your trend during the second quarter? And then Trina, a bigger picture question for you. You and Heather have been very successful at managing the business together. I guess, first, congrats to both of you. How does this management shift change the way that you guys run the business, if at all? And does this allow you to maybe be more nimble or grow faster? Thank you.

Thanks, Ed. I'll take the first question. So in response to trends that we saw in the quarter, as we discussed, we did see an acceleration in frequency during 2020 to 2021 due to COVID, elevated stimulus, stay-at-home orders and other macro factors. Since then, it came down a bit in 2022, partly due to supply and has since settled slightly ahead of 2019 levels. On the flip side, we have seen continued gains in average order value as customers are buying more overall when they shop. So we're really excited to see continued growth in revenue per customer. Despite the macro environment, it shows that our customers are still continuing to come and spend more over time in aggregate. In the beginning of the quarter, we were still dealing with more supply chain challenges, so it was really great to be able to see trends improve throughout the period as we continue to manage through those issues.

It's great to hear from you, Ed. Heather and I have distinct roles; Heather is an expert and a creative genius in product development, which is where she brings the most value. She will concentrate on product innovation, while I will focus on the strategic direction and daily operations of the business. This structure will benefit the company, enabling us to act swiftly and maintain clarity both internally and externally. It represents a natural progression for us at this stage.

Thanks so much.

Thanks for your questions. Our next question comes from Adrienne Yih at Barclays. Please go ahead.

Hello, everyone. Congratulations on successfully navigating through these challenging times. Trina, my first question for you is about consumer behavior. You chose not to raise prices this year and made a deliberate decision not to pass on some of the inflation costs you are experiencing. How have customers responded to this? Do they view your product as a good value while everything else is becoming more expensive? Also, what is happening with the replenishment length? It sounds like customers are returning and purchasing more, but is the frequency of their replenishment extending, perhaps because they are not working as much? Daniella, could you provide some insight on the economies of scale you mentioned, particularly what that would look like without the impact of inflation as you reach new benchmarks? Thank you very much.

Sure. In terms of pricing and what we offer, we have consistently aimed to deliver real value with affordable and accessible products for our health care professionals. Our pricing process is quite thorough. Regarding frequency, we've noticed a slight moderation, but in the second quarter, our repeat frequency has improved compared to the first quarter. Daniella can provide more details on that. Our main focus isn't just on how often customers return, whether they come back less frequently but spend more or visit more often but spend less. We're really concentrating on revenue per customer, which continues to trend upwards. Even though customers are visiting a bit less often, when they do come, they are spending more, and we haven't observed any significant shift towards cheaper alternatives. People aren't looking to revert to less comfortable options; they prefer FIGS. So, when they shop for scrubs, they choose FIGS.

And as it relates to your second question about the economies of scale that we see in our product costing, so we're really excited to continue to see those offsets in gross margin in product costing as we scale, particularly within our core scrubwear. Within that, we have seen some inflation in materials, but it's been great to see that our growth has really outstripped that increase. A lot of what we do within core scrubwear. Over 50% of our business is in core scrubs and core styles, so we're able to get really strong efficiencies from such a big base, and we expect to see that in the future.

Very helpful, best of luck. Thank you.

Thanks, Adrienne.

Thank you. Our next question comes from Lorraine Hutchinson at Bank of America. Please go ahead.

Thanks, good afternoon. I wanted to follow up on some comments you made last quarter about trends softening due to macro factors. It sounds like things have improved since then. And I guess as you look at it in hindsight, was this simply just the supply chain issues? Or do you think something has changed with your underlying customer?

I mean we don't really see any real change in our underlying customer, right? Our business is resilient, recession-resistant, replenishment-driven health care professionals. They need our uniforms to go to work and do their jobs. We're not completely insulated from what's happening in the broader economic environment from an inflation standpoint, but we do feel like we're more resilient than others, and the health of our consumer is strong.

Thanks. And then I wanted to follow up on the product launches. Are you back on track at this point? I know you moved one out of 1Q into 2Q. Is that completely caught up?

Yes, so we had a product launch that shifted into the second quarter. Similarly, we've had a few things that shifted out of the second quarter into the third quarter. But we made the decision at the beginning of the year to utilize more airfreight to bring stability to this product launch calendar, and that's mostly going to impact Q3 and Q4. We feel really good about the back half and the decisions we made and our ability to hit our calendar for the back half of the year.

Thank you.

Thank you. Our next question comes from Bob Drbul at Guggenheim Partners. Please go ahead.

Hi, good afternoon. Just two questions. Number one is on the lifestyle offerings in the non-scrub items, can you just talk a little bit more on sort of the appetite for the lifestyle? Have you seen any change in regards to the appetite for the non-replenishment type products? And then, Trina, can you just spend a little more time just what you've learned on the International side, maybe just prioritize which markets have been the most receptive to your entry and sort of how you might sell from where we are today? Thanks.

Sure. Thank you, Bob, for the question. We feel very positive about our lifestyle offerings. Many categories within lifestyle have significant potential for growth. For example, underscrubs is a substantial category that has grown 60% year-over-year, while lifestyle overall has increased by 70% year-over-year. Our layering system and the way we merchandise our products online with our kits are resonating well with our community. There is a lot more potential in what healthcare professionals can wear beneath their scrubs and on the outer layers, both at work and outside of work. We're eager to introduce more options to this industry. Regarding international markets, we have been operating in Canada, the U.K., and Australia for a few years and they are performing well. Recently, we launched in seven new countries and have seen impressive results early on, despite minimal marketing efforts in these regions. Our focus is on establishing a solid foundation to enable long-term sustainable growth. Essentially, we believe in taking a measured approach to ensure we can achieve profitable growth for many years to come.

Great, thank you.

Thank you. Our next question comes from Brian Nagel at Oppenheimer. Please go ahead.

Hi, good afternoon. Congratulations on a strong quarter and effectively managing the macro challenges. My first question pertains to product launches. As mentioned in the last conference call, some product launches were delayed or staggered due to shipping issues. Now that you're observing that supply chain challenges are becoming more manageable and airfreight costs are decreasing, are you considering reaccelerating product launches, or have you found a more suitable approach?

I think just based on what we've aired in, there's going to be a higher cadence around how we're launching products through the back half of this year, and that's really exciting. We're not looking to do anything beyond that. We made the strategic decision to airfreight those products, and so they're going to be launching in a really nice flow throughout the rest of this year. There's so much that we're doing not only within scrubwear, but also to the question earlier around underscrubs and outerwear. We also have extended sizing coming later this year at FIGS PRO. It's a huge innovation that we're going to continue to build on. Product innovation is everything to us. Even with having Heather focused a lot of her time and doubling down in innovation, we're so excited about what's to come going forward.

Got it. And then my second question is regarding the macro environment. If I understand you correctly, you're acknowledging a more challenging macro backdrop. It doesn't seem like you're indicating anything particularly noticeable in your business that is solely related to macro factors. So my question is, as you consider your marketing strategies, are there initiatives you are implementing that could help to mitigate or cushion the impact of a more challenging macro environment?

In terms of the macro environment, we feel confident about the health of our business, but we also acknowledge the current uncertainty, which makes it difficult to predict the future. Regarding marketing, our perspective remains unchanged since our last call. We still expect marketing expenses to represent between 14% to 15% of total sales for the year. It's important to highlight that our growth is primarily driven by word-of-mouth, allowing us to use our marketing budget efficiently. We benefit from customer loyalty, as our customers return because they love our product, which minimizes our need to spend heavily on retention. We are constantly balancing growth with profitability and plan to continue this approach. We are aiming for a cap that is reasonable for the business. This strategy is fitting for our current position, and we believe it's crucial to keep investing in marketing as we have significant potential for growth.

Okay, well thank you and congrats again.

Thanks, Brian.

Thank you. Our next question comes from Rick Patel at Raymond James. Please go ahead.

Good afternoon and congrats on the strong execution. I'm hoping you can expand upon your guidance for gross margins in the back half. You had some nice upside in the second quarter despite the headwinds related to freight, which seem to be showing signs of improvement. So I'm hoping you can provide additional color on what your expectations are for the gross margin for the back half relative to three months ago? Just curious what's changed for the better and what you might be incrementally more cautious on?

So as we discussed on our last call, we do anticipate gross margin being lower in the back half of the year than in the first due to a few factors. So first of all, we decided to airfreight more product in the second half than we did in the first to ensure that we hit our calendar and that we could fulfill demand in a timely manner. While we have seen rates come down more recently, they're still much higher than pre-COVID levels. We're being cautious about the potential for continued volatility, especially as we begin to enter high-volume back-to-school and holiday season. So we want to make sure we're encapsulating everything and also giving ourselves room for the situation to change as we've seen it just be really dynamic in the past.

Thanks very much.

Thank you. Our next question comes from Brooke Roach at Goldman Sachs. Please go ahead.

Good afternoon and thank you so much for taking our questions. Trina, I'd love to dig into the outlook that you have for average order value, given several moving pieces here with product mix shifts, the promotional backdrop, and also new product innovation that you have planned for the back half. Can you help us understand where you think that might move as you continue to build out your lifestyle portfolio?

Thanks, Brooke. Daniella, do you want to take that?

Yes. With average order value, it's the same trends that we've been seeing for several quarters. So lifestyle mix drives higher average unit retail as our lifestyle products are generally higher priced. We also saw a higher average unit retail within lifestyle. So increasing shoes and outerwear, which are higher-priced products in the portfolio. And again, units per transaction increasing as customers add the full look to their cart. Really excited to see orders with the lifestyle piece had 27% higher units per transaction than their scrubs-only counterpart. In the future, we're going to continue to execute on the same strategies that have driven average order value up to date. So continuing to focus on product innovation and really building out the full layering system and also continuing to focus on the digital products and make improvements there. So we're excited. We think it's going to continue to grow year-over-year, and we're excited to see it from here.

Great, thank you. And just as one quick follow-up. Trina, I think I heard you talk about size expansion as an opportunity for new innovation into the back half of this year. Can you talk to us a little bit about that opportunity and what you see its impact on the FIGS brand and the business overall?

Yes, we're very excited about this. We've been discussing it for quite some time, and we feel that we're nearing completion. In terms of extended sizing and inclusivity, it's always been a key aspect of our mission and the community we serve. Currently, we offer sizes ranging from extra, extra small to 2XL for women and extra small to 2XL for men, as well as petite, tall, and regular sizes. We just launched our petite top, which is thrilling. Inclusivity has always been integral to what we do. We plan to launch sizes 3XL to 6XL later this year, which is fantastic and will certainly resonate with our community.

Thanks so much. I'll pass it on.

Thank you. Our next question comes from John Kernan at Cowen and Co. Please go ahead.

Congratulations on a strong quarter, and thank you for addressing my questions. Daniella, regarding inventory, it appears that the dollar amounts and the growth rate improved moving from Q1 to Q2, which is a trend we've observed in softlines retail. How should we consider inventory dollars as we approach the second half of the year, and what are the overall costs associated with this inventory on the balance sheet compared to last year in terms of average unit cost?

Definitely, so we're seeing shipments come in faster than anticipated as port congestion clears and some of the inventory planned for 4Q will actually be arriving in Q3. So visibility in the supply chain has meaningfully improved, and we made the decision to airfreight and bring goods in sooner to ensure we were positioned to hit our product calendar. As I mentioned in my prepared remarks, approximately 50% of our inventory is in core styles and core colors, products that live on our site year-round and are always available. Another 20% is in future launches that we brought in earlier. We feel really good about our ability to sell through this with little risk.

Got it. And then just looking into next year. Obviously, some of the supply chain and freight costs have normalized, at least on a spot base system. I'm just curious, do you have any thoughts on the recovery potential from a margin standpoint and what you were hit with on a trade perspective this year?

So there remains considerable uncertainty in the macro environment today. We do believe that if we return to a more normalized supply chain environment, and this kind of is the continued path, that we can return to our long-term target. So we're going to continue to monitor what we're seeing in the supply chain and keep everyone updated on what that means for 2023.

Got it, thank you.

Thank you for your questions. Our next question comes from Noah Zatzkin at KeyBanc Capital Markets. Please go ahead.

Thanks for taking my questions and congrats on a great quarter. Just really quickly want to make sure I'm understanding. So your commentary around improving the supply chain improvement quicker than expected, did that shift anything in terms of product launches into the second quarter that were previously expected in the back half? And then just a follow-up, many of your peers have called out headwinds from fuel surcharges from carriers, just wanted to see if you were experiencing any of that?

So as it relates to the second quarter, we did see a product launch moved from the first quarter into the second quarter, and we've seen one moved from the second quarter into the third quarter. But nothing has shifted forward as it relates to things that were originally planned for the back half moving into the second quarter. As it relates to fuel surcharges, it's definitely something that we have seen, and it is one of the reasons we see selling deleverage. I think it's important to note that we've been able to really offset some of these increases from fuel surcharges by the leverage that we get in average order values and able to keep some of our margin and profitability that way.

Thank you.

Thank you, Noah, for your question. At this time, there are no further questions, and I would like to pass back over to Trina.

Thank you, operator. We have received several questions from our Say platform. I appreciate everyone writing in; it's exciting to see your inquiries. The first question is about why FIGS stock has decreased since the IPO and what steps FIGS is taking to enhance profit margins. Regarding the stock price, as I've mentioned in previous calls, in the short term, the stock market acts like a voting machine, but in the long term, it behaves as a weighing machine, which is where our focus lies. We are dedicated to building a long-lasting company and an iconic brand for the next century. The stock market's volatility is influenced by numerous macroeconomic factors that are widely discussed in the news and other calls. However, our attention remains on the fundamentals of our business and our daily execution. Currently, the market is not accurately reflecting our business fundamentals. Even now, we are prepared for significant growth and strong profitability. This was demonstrated in the last quarter, where we achieved a 21% growth and maintained an adjusted EBITDA margin of 18%, which we are proud of. Given our growth and profitability, combined with our largely nondiscretionary replenishment-driven business, we are serving the fastest-growing job segment in the country. We believe our true value will be recognized over time. The second question is about concerns over companies selling knockoffs of our products at lower prices. At FIGS, we focus on our own execution and product innovation rather than what competitors are doing. Companies selling knockoffs do very little business and are a small fraction of our size. Because of our unique designs and our position as the first to offer innovative products to healthcare professionals, we hold multiple design patents and have extensive IP protection for our products, which we take very seriously. We are prepared to take enforcement action against any company trying to wrongfully replicate our offerings. It's crucial to keep innovating and connecting with our community, which is our ongoing strategy. The third question, which I've referenced in previous responses to analysts, is about when FIGS will offer extended sizes. We're thrilled to announce that we're working on introducing sizes 3XL to 6XL for our community. This is an important initiative for our brand to serve all community members, and we are fully committed to providing best-in-class fits across a broad range of sizes. We look forward to launching this later this year. Thank you for your questions, and thank you for joining us for the second quarter 2022 call. Have a great day.

Thank you, everyone, for joining today's conference call. You may now disconnect.