Good afternoon. Thank you for attending today's FIGS fourth quarter and full year fiscal 2022 earnings conference call. My name is Megan, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Jean Fontana, with FIGS. Jean, please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining today's call to discuss FIGS' fourth quarter and full year 2022 results, which we released this afternoon and can be found in our earnings press release and in the stockholder slide deck on our investor relations website at ir.wearfigs.com. Presenting on today's call are Trina Spear, our co-founder and 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. This 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 in the 10-K filed today, which we encourage you to review. Do not place undue reliance on our 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 these non-GAAP measures to their most comparable GAAP measures are included in the earnings release and shareholder deck we issued today. Now, I'd like to turn the call over to Trina Spear, chief executive officer of FIGS.

Thank you, Jean. Good afternoon, everyone, and thank you for joining us today for a discussion of our fourth quarter results and an update on the progress we are making across our strategic priorities. For 2022, our first full year as a public company, we delivered net revenue growth of over 20%. We saw strong performance in our nonscrubs business, which increased 59%. Additionally, international sales grew 50%, resulting from increased brand awareness and repeat purchases. In TEAMS, our B2B business grew 41%. With respect to profitability, the adjusted EBITDA margin for the year was 17.2%. For the fourth quarter results, we're ahead of our expectations, with net revenues up 13%. We achieved a record number of new customer acquisitions, leading to a 23% increase in active customers. On a last twelve months basis, net revenue per customer was down 1% to $221 due to lower frequency rates, partially offset by higher average order value. Fourth quarter adjusted EBITDA margin of 13.6% reflects better than anticipated gross margin, as well as disciplined expense management. While our fourth quarter results exceeded our expectations, extending our market share gains, a number of interrelated factors that we discussed last quarter led to decelerated growth from previous quarters. These include macro headwinds, lower frequency trends, and color launches that did not perform to the elevated levels we saw last year. While we cannot control the macro headwinds, we recognize that there are areas of our business where we can and will do better. We remain confident in our long-term outlook. And therefore, we will continue to invest in our business as the investments we make today will position us as an even stronger company in the future. We have identified opportunities and have initiatives underway that we believe will drive accelerated growth in 2024 and beyond. In the near term, we plan to remain prudent in managing our promotional activity while moving through current inventory and managing expense headwinds. Before I speak to our strategic priorities, I want to briefly discuss some of the highlights from the fourth quarter. Starting with product, we continue to deliver innovation in our nonscrubwear assortment, which grew 39% to reach 21% of net revenues. Orders that include nonscrubwear delivered a 14% higher units per transaction than scrubwear-only orders. We saw strength across several categories, including lab coats, FIGSPRO, footwear, outerwear, and underscrubs. In our scrubs business, we saw a deceleration in our sales trends, with color launches continuing to fall short of our expectations, which we will speak to shortly. On a positive note, we are very pleased with the launch of our extended sizes. Following extensive work behind our fit and product construction, we added 3XL to 6XL to our extended size offerings in a selection of core styles. Since our launch, these products drove 5% of new customers, and 2XL through 6XL reached double-digit sales penetration within the same selection of core scrubs offering. We were overwhelmed to see the joy of our healthcare professionals experience by having access to the comfort, functionality, and style that FIGS has to offer. Turning to marketing, we are highly encouraged by our growing brand awareness as we continue to support product innovation through our data-powered and targeted marketing engine. While word of mouth remains our biggest source of customer acquisition, we supplement this with best-in-class digital marketing and in-house creative to efficiently drive healthy new customer growth and retention. We invested in multiple digital and out-of-home channels to share brand moments and educate healthcare professionals about our mission and our purpose. For the holiday season, we kicked off our #GiftFIGS campaign, inviting our community, family, friends, neighbors, siblings, and strangers to join us in giving the healthcare community the best gift ever: FIGS. We had over 50 ambassadors, influencers, and celebrities help seed this sentiment globally. Moving to international, we saw 76% growth for the quarter and 50% for the year. Performance was led by strong results in Canada and in the U.K. In Q4, we localized our marketing strategies to optimize each market according to its customer needs and preferences. These strategies, coupled with the impact of beauty subsidies and other efforts to reduce barriers to purchase, resulted in significant acceleration in sales, driven by both repeat and new customers, while seeing continued improvement in marketing efficiency. Before I speak to our strategic priorities, I want to take a moment to recognize our 10-year anniversary. Throughout the last decade, we have remained steadfast in executing across the core tenets of our business. Maintaining a deep connection with the healthcare community, leveraging our authentic category-defining brand, and delivering industry-leading product innovation. As we advance our business to $1 billion in net revenue, we remain hyper-focused on executing solutions-based product innovation and building and deepening our connection with the healthcare community. Beyond these strategic priorities, we are embracing our more nascent growth areas to expand our presence and engage with more healthcare professionals through our international business, our TEAMS business, and by building out our retail strategy. While remaining confident in our long-term potential, we see 2023 as a year of foundational focus as we move through inventory and deploy strategies to accelerate growth. Starting with products, we are putting more firepower behind our innovation by embedding greater technical features and functionality into our products across our layering system to further differentiate FIGS as the leading and premium scrubwear brand. Within our scrubs business, we are optimizing design, standardizing features such as trims and waistbands, and determining how we can maximize productivity with the optimal breadth of styles in our offering. In addition, we will continue to inject limited edition styles, which generate strong engagement and evaluate which of these styles should be added to our core offering based on sell-through performance. The Rafael ScrubJumpsuit is a great example of a limited edition style that we transitioned to core. Color remains a key driver of excitement, and we are leveraging our data to fine-tune our launch strategy to drive greater frequency. Turning to nonscrubs, we intend to build upon proven categories, including outerwear, footwear, and performance underscrubs with a greater level of technical innovation. We will expand newer categories, such as our FIGSPRO offering, which is a healthcare office-ready collection that provides premium style and functionality. As part of our commitment to quality innovation, we are making our supply chain even stronger. We are working with existing partners while developing new partnerships with best-in-class manufacturers to enhance design capabilities to improve consistency across fit, construction, and speed to market. Ultimately, our goal is to create an even higher standard within the healthcare apparel industry. Today, we believe there is no close second to the quality we deliver. Tomorrow, I am confident all this work will further widen that gap. Turning to marketing, we remain focused on developing deeper engagement with our community through a diversified strategy. For our 10-year anniversary, we kicked off 2023 with our FIGS10: Iconic Series, 10 weeks, 10 iconic colors, 10 years of FIGS. It was very gratifying to see the very positive feedback we received as we brought back our fan favorite. Our 360-degree campaign, we are not done being the first, highlights FIGS as always the first brand to create products that redefine everything we know about the healthcare professional uniform. Our campaign and messaging will always have a fun and unexpected brand voice. And as we raise the stakes on product innovation, we will also inform customers about product functionality, technical features, and use cases to emphasize the value in our premium product. As we address the trends we've seen around frequency, we are focused on driving more consistent and personalized engagement within the healthcare community. As such, we are supplementing our launch campaigns with more evergreen strategies to drive higher frequency by speaking to different subsegments of our community. We will also continue to optimize our existing media channels while strategically investing in new channels to meet our customers where they are spending time. We have been more intentional in our communication, aligning our messaging with specific audiences across our diverse set of digital and out-of-home channels. With respect to our more nascent growth opportunities, we will start with international expansion. We believe there's a significant opportunity to grow our brand globally. As we expand into non-English speaking countries, localization in our international markets will be supported by translations across email, social, and our website beginning in the second quarter. We are also localizing around regional holidays and in our messaging and channel engagement. To fuel further discovery, we are building out our investor network with a focus on highly influential healthcare professionals who will not only stimulate brand awareness but act as boots on the ground to learn about individual needs and preferences within these communities. Importantly, we are committed to delivering growth internationally in a profitable way, just as we have grown the rest of our business. Next, we are expanding our presence through our TEAMS business. We are seeing a growing number of concierge clinics, med spas, fertility clinics, and other healthcare institutions wanting to elevate their teams' uniform. We can serve these institutions by helping to standardize and professionalize their employee base with FIGS. To support this initiative, we are creating a more robust technology platform to expand our product offerings, streamline the ordering experience, and offer additional payment and reporting capabilities. Turning to retail. Based on the overwhelming engagement we had from our previous market activations and past pop-up shop, we have learned that healthcare professionals really want to experience FIGS in person. We will test store formats, identify locations where we see the biggest opportunity. Our first location will be a store in Century City in Los Angeles, which is scheduled to open this fall. True to FIGS, this location will provide a customer experience unlike anything our healthcare professionals have seen before. Our stores will serve as a community hub where healthcare professionals can connect and build relationships. Importantly, we will take a measured approach to our retail strategy and how we test store formats and develop store economic targets and site criteria. As we continue to build our business for the future, we are adding talent to our team. We recently hired Steve Berube as our new chief operating officer. He will be responsible for overseeing distribution and logistics in addition to inventory planning and customer experience. Steve brings over 30 years of experience with some of the best brands, including Lululemon and Nike. And in his most recent role at Levi's, he helped to scale the company's infrastructure for long-term growth. With Steve joining, Devon Duff Gago now serves as chief business development officer. In Devon's new role, she will be responsible for overseeing our international TEAMS businesses, as well as developing our retail opportunity. Her strategic thinking, operational experience, and deep understanding of the FIGS community make her the ideal fit to lead the growth of these businesses. I want to take a moment to discuss our ongoing commitment to support our healthcare professionals. A leading priority for advocacy in 2023 will be advancing our often human bill focused on, among other things, providing fair pay, mental health support, workplace safety, and training. We have also partnered with the Lorna Breen Foundation, a leading organization promoting mental health services specifically for healthcare professionals. And we will be working directly with them to advance our policy goals. This includes advocating in Washington, D.C., where we aim to spearhead new legislation to further combat these challenges. In closing, throughout the last decade, we have remained committed to helping the global community of healthcare professionals look, feel and perform at their best, 24/7, 365 days a year. We branded a previously unbranded industry and decommoditized a previously commoditized product, elevating scrubs and creating premium products for healthcare professionals. Most importantly, we built a community and lifestyle around a profession. We are very proud of what we have accomplished to date. We have so much opportunity in front of us. We have identified areas in which we can get even better, and we have an action plan in place: to be better at the level of innovation we deliver, better at delivering consistent product, better at connecting with our community to keep them coming back, and better at operational excellence. Our strong business model is underscored by product innovation, community connection, and advocacy, and there is no close second. We have the scale and balance sheet to take our business to the next level. As we continue to grow and expand, we remain committed to investing in our business. We have seen tremendous growth over the last four years, and we believe now is the right time to make the investments necessary to double our revenue once again. With that, I will turn the call over to Daniella.

Good afternoon, everyone. We are pleased to have exceeded our expectations in the fourth quarter, although we recognize these results are below what we believe is sustainable for our business longer term. As Trina outlined, we believe that the actions and investments we are making today will set us up to achieve our growth potential in the future. I will begin my discussion with a review of our fourth quarter financial results, followed by our outlook for the first quarter and 2023. Beginning with the top line. For the fourth quarter, net revenues grew 12.6% to 144.9 million, compared to 128.7 million in Q4 last year due to an increase in orders from new and existing customers. We were pleased with the strong sales for Black Friday and Cyber Monday, with promotional levels better than what we saw in 2020. Active customer growth of 23% was fueled by ongoing initiatives to expand brand awareness globally, which led to the highest number of new customer adds in our company's history. We also continue to see record reactivation rates among lapsed customers as we see purchase cycles elongate. For the quarter, average order value across the business was down 1% to $112 due to lower average unit retail. As Trina noted, we continue to see a year-over-year decrease in purchase frequency in the quarter, and we are taking actions by both increasing intention behind our product innovation and refining our strategies focused on existing customers. Gross margin for Q4 was above our expectations at 68.2% compared to 69.9% in Q4 2021. The 170 basis-point decline compared to Q4 last year was primarily due to the higher mix of promotions, as well as product mix and higher ocean freight expense due to the sell-through of previously shipped inventory. This was partially offset by lower airfreight utilization. Moving to operating expenses. Selling expense for Q4 was 37.6 million, representing 26% of net revenues compared to 19.9% in Q4 2021. This 610 basis-point increase was primarily due to higher costs within fulfillment, largely due to warehouse storage necessary to house inventory we pulled forward. To a lesser degree, selling expense was impacted by higher shipping rates and duty subsidies compared to Q4 last year. Marketing expense for Q4 was 21.4 million, representing 14.8% of net revenues, compared to 12.9% in Q4 2021. This 190 basis-point increase was primarily due to increased investment in brand marketing initiatives, including commercials and our GiftFIGS campaign. Last year, we saw lower brand spend due to the timing of marketing initiatives. We continue to drive efficiency and spend on both new customer acquisition and retention, maintaining our focus on positive first order contribution margin with marketing spend on an annual basis roughly consistent at 15% of net revenues. General and administrative expense for Q4 was 36.5 million, representing 25.2% of net revenues, compared to 24.3% in Q4 2021. The 90 basis-point increase was due to legal fees, accrual for inventory donations, and costs associated with the implementation of Sarbanes-Oxley 404. Last year's inventory accrual was essentially nonexistent due to the high fuel price sell-through and low inventory due to supply chain disruptions. These higher costs were partially offset by reduced bonuses and lower stock-based compensation expense. Our net income was 3.4 million, or $0.02 in diluted EPS, for the fourth quarter. Adjusted net income was 8.2 million, and diluted EPS as adjusted was $0.05 in Q4. This compares to adjusted net income and diluted EPS as adjusted of 18.6 million and $0.09 per share in Q4 2021, respectively. Finally, our adjusted EBITDA for Q4 remained strong at 19.8 million for an adjusted EBITDA margin of 13.6%, compared to 24.8% in Q4 2021. Briefly touching on the full year. Net revenues were 505.8 million, an increase of 20.6% year over year. Gross margin was 70.1%, a decrease of 170 basis points year over year, primarily due to a higher mix of promotional sales and, to a lesser extent, an increase in freight and costs related to elevated ocean freight costs and product mix shift. Operating expenses were 316.8 million, an increase of 9.1% year over year. As a percentage of net revenues, operating expenses decreased to 62.6% from 69.2% in the prior-year period. Adjusted EBITDA margin was 17.2% as compared to 25.1% in the same period last year. Touching on our balance sheets. We finished the quarter with cash and cash equivalents of 159.8 million. Inventory totaled 178 million at the end of the fourth quarter. As a reminder, earlier this year, we made the decision to increase weeks of supply of our core styles to ensure we could adequately fulfill customer demand. We also decided to bring in limited edition colors and styles earlier to support the planned launches. This, combined with lower-than-expected demand for our color launches, led to heightened inventory levels. Breaking down inventory on hand. Over 60% is in core styles and classic colors, which we sell all year round and remained always in-stock, leading to low risk of obsolescence. An additional 15% of our inventory balance is in upcoming styles and colors that we brought in earlier. We will continue to work toward getting inventory aligned with sales growth as the year progresses. However, due to the aforementioned factors, we expect inventory to peak in the first quarter before getting closer to more normalized weeks of supply by the end of the year. We will continue to take measures to move through product. However, we'll maintain discipline around the level of discounts we offer, given the replenishment nature of the assortment. We have also updated our core purchase orders to bring down our weeks of supply over time and have taken steps to improve processes and controls to manage the quantity and flow of inventory in the future. A key priority is to maintain healthy inventory levels to optimally manage our working capital and maintain our strong balance sheet. Before turning to our guidance, we would like to provide some of the assumptions incorporated into our outlook. First, we assume that the macro environment remains challenging throughout the remainder of 2023. Second, as we continue to work through inventory, we expect to deploy more promotional strategies compared to last year. However, with the discipline we have consistently employed in the past. And third, as we discussed, we have a plan in place to drive increased frequency and deepen customer engagement. But the impact of these changes is expected to be more evident in 2024 and beyond. Looking at our profitability, we will continue to make investments, including fulfillment enhancements, that will enable us to scale our business for long-term growth. In addition to this, we will be working through certain temporary cost headwinds, in part due to macro and supply chain challenges we faced early last year. Now, moving to guidance. As a result of the factors I just talked about for 2023, we expect net revenues to increase in the mid single digits. We expect growth in our active customer base to moderate, given the lapping of the strong growth we have seen over the last several years. We expect frequency rates to continue to be impacted by macro uncertainty and high inflation rates. And we expect average order value to be flat to slightly up for the year after a down Q1. We expect units per transaction to continue to increase, largely offset by lower average unit retail, as we expect to see a higher mix of promotional sales as we move through inventory. Keep in mind, average order value increased 18% since 2020, so we are coming up against meaningful growth. Gross margin for the year is expected to be similar to our Q4 2022 gross margin rate, as we move through inventory and navigate what we anticipate will be a more promotional environment. The second and fourth quarters are expected to see more pressure due to the timing of promotional events around Nurses Week and the holiday. In addition, despite tailwinds in inbound freight costs we are seeing, we are factoring in higher ocean freight expenses due to the sell-through of previously shipped inventory. Turning to selling expense, we expect some pressure as a result of incremental storage facility costs to house additional inventory. We are assuming greater impact in the first and second quarters of approximately 250 basis points and 180 basis points, respectively, with a smaller impact in Q3. We plan to invest in our fulfillment capabilities to increase reliability, flexibility, and efficiency, as well as improve order delivery times as we scale our business for growth. In addition, these investments will enable us to gain leverage within selling expenses over time. The costs associated with the implementation and execution of this initiative are currently expected to range between 16 million and 18 million, with about half falling into 2023, mostly in Q4 and half in the first quarter of next year. We are in the process of finalizing our project plan and will provide any updates to expected costs and timing once we have completed our plan. We expect marketing expenses to be approximately 15% of net revenues with fluctuations from quarter to quarter due to the timing of events. G&A is expected to deleverage for the full year, in part due to investments in software, personnel, and resources associated with growing our international and TEAMS businesses, as well as in product innovation. We also expect an increase in stock-based compensation and our accrual for future inventory donations, partially offset by lower legal expenses and professional fees. As a result, the adjusted EBITDA margin for the full year 2023 is expected to be between 11% and 12%. This reflects approximately 300 basis points of cost headwind from the storage of excess inventory and fulfillment enhancements. To the extent that our projections for the fulfillment project change, we will adjust our outlook accordingly. In terms of Q1 2023 outlook, we expect net revenue growth to be in the low single digits. We expect new customer growth will be partially offset by the continued softening of frequency trends, as well as a decrease in average order value. Last year's average order value of $116 reflected an elevated mix of nonscrubwear associated with one of our largest New Balance shoe launches, as well as supply chain disruptions causing out of stocks on our core scrubs product. In addition, promotions are planned higher in 2023 versus 2022, given the macro environment and our efforts to move through inventory. We expect gross margin to decrease in Q1 due to the proportion of promotions and product mix, as well as higher ocean freight expense due to the sell-through of previously shipped inventory. We expect these headwinds to be partially offset by lower airfreight utilization year over year. Looking at operating expenses, we discussed selling expense earlier. Moving to G&A, we expect more deleveraging than in other quarters due to the increase in stock-based compensation costs being more heavily weighted in the first half of the year. An increase in our accrual for inventory donations and the continuation of stock implementation costs. As a result, we expect first quarter adjusted EBITDA margin to be between 9% and 10%. In conclusion, our growth outlook for 2023 is not representative of the growth we believe we can achieve longer term. That is why we plan to continue to invest while managing our business prudently through near-term macro and cost challenges. We remain a distant leader in healthcare apparel, and we believe that we will deliver accelerated growth and adjusted EBITDA margin expansion in the future.

Our first question comes from Michael Binetti with Credit Suisse. Your line is now open.

Thank you for taking our questions. The first thing I'd like to ask is if you could help us understand the longer-term EBITDA margin targets we've discussed in relation to the 11 to 12 figure you just mentioned. Daniella, could you provide insights on how we can think about the path back to a target margin like 20 that we aim for in the long run, assuming it's still the correct target? Additionally, on a near-term basis, when do you expect the ocean freight situation to provide a reliable indication based on the current inventory levels on the balance sheet?

Thanks, Michael. So, for your first question on EBITDA margin, based on what we see today, we believe we have the opportunity to drive EBITDA margin expansion beyond 2023. In 2023, we're seeing some margin pressure from a few factors, about 300 basis points from excess storage fees combined with fulfillment enhancement costs. Secondly, in 2023, we're going to be impacted by higher promotions, a couple of hundred basis points when we close out through the P&L. So, just adding those, that gets us to the high teens in 2023. Looking to the future as we accelerate growth, we do expect G&A to leverage from where it is today. We're really focused on setting the right expectations for the go-forward. If we deliver high teens adjusted EBITDA, we are still very profitable. We do believe we have a path back to 20%. But our goal is to ensure we're making the right decisions for the long-term health of the business, and we're going to continue to do that.

And I would just add, you know, we really want to grow our business in a healthy way like we always have. We really focused on growth, not for growth's sake, but for doing it in a disciplined and profitable way. And that's never going to change. So, our goal right now is investing strategically to support our scale and resources and people and technology, systems, really to make us stronger for the future. We have no debt. We have a really strong balance sheet. So, we are excited to make these investments and plant the seed today so that we can bear fruit in the future.

And just circling back to your question on ocean freight. So, in 2023, net-net freight is likely to be neutral to a slight tailwind as we continue to sell through previously purchased inventory at higher ocean freight rates. And that's going to be offset by less usage of air freight. Looking into 2024, we should start to see a benefit, a tailwind from the ocean freight as well.

Thank you. Our next question comes from the line of Ed Yruma with Piper Sandler. Your line is now open.

Do you think that the lack of or the dampened interest in some of the new color drops has been a function of just the colors being off? Or is it more symbolic of maybe some saturation within your core customers' closet for the core scrub? And then, I guess, you know, you've outlined a number of investments you're making on innovation. How much of the innovative product is kind of baked into this year's guide? And kind of how should we think about how that layers in both this year and next? Thank you.

Thanks, Ed. We have seen significant demand for our colors over the past few years, and we have responded by meeting our customers' needs. Our healthcare professionals have changed, and we are adapting alongside them by shifting focus from colors to technical features and functionality related to specific use cases. We are returning to our roots by providing essential foundational items that healthcare professionals require in their work. Our current focus is on managing our inventory and ensuring our customers receive fresh, innovative products. This year, we will introduce exciting new items, albeit with a more measured approach in terms of volume. A distinguishing aspect of our business is our ability to launch new products while connecting them back to our core scrubs and integrating them with existing inventory. This year, we are not prioritizing a broader assortment but rather concentrating on simplifying our offerings to create moments of newness that will generate revenue across various categories. Looking ahead to 2024, we aim to enter a more optimal state where we can effectively move forward, emphasizing this foundational year.

Thank you. Our next question comes from the line of Lauren Schenk with Morgan Stanley. Your line is open.

Great. Thanks. I wanted to ask one on inventory, about 107% year over year. I guess, you know, we sort of saw slowing demand trends in the fourth quarter, and we knew that things were getting a little bit tougher from a macro perspective. So, maybe why weren't you a little bit more aggressive in cutting back orders at the back half of the year? And why not now be a little bit more aggressive on promotions in order to clear through that? Thank you.

So, in hindsight, we recognize that there are things we could have done differently. You know, first, we did start to build inventory levels to avoid airfreight with longer lead times. And second, as visibility and supply chain started to get a bit more nebulous, we built more inventory. And that, coupled with a lower sales outlook, created an inventory build, especially around our color launches. And this was coming off a year of really elevated demand for color. So, it is a priority for us to get our inventory levels back in line from here. As a reminder, 60% of our inventory is in core. So, we are able to reduce future purchase orders to rightsize. And we're going to move through the remainder at a higher promotional rate, but still reflecting the discipline that we always do to protect the brand over the long term. So, going forward, we put processes in place to increase flexibility and be more disciplined around our inventory buys. And we, you know, we're going to return to a more normalized inventory position by the end of this year.

Can I just follow up? I mean, when you say normalized inventory, where would you expect inventory to be growing year over year by the end of the year? Thanks.

So, our ideal state is around 16 to 20 weeks of supply, and we're expecting at the end of the year to be around 25 weeks of supply.

Thank you. Our next question comes from the line of Brian Nagel with Oppenheimer. Your line is now open.

Hi. Good afternoon. I have two questions regarding sales and sales growth. We've noticed a slowdown from Q3 to Q4. Given your guidance for Q1, as we approach Q1, do you see declining frequency as the main factor contributing to this reduced sales growth? Additionally, could you provide more insight into the frequency trend? Has it reached its lowest point, or is there a possibility that it will worsen?

Yes. We expect that the macroeconomic environment will remain challenging in 2023 and may even deteriorate from the current state. We are factoring this into our assumptions regarding frequency trends. We are implementing strategies in our marketing to enhance engagement through personalized messaging by customizing our content for our customer channels. However, these initiatives are still in their early stages. Given the uncertain macroeconomic conditions, we are being cautious in our forecasts. We anticipate that the average order value will remain flat to slightly increase over the full year. This represents an 18% rise since 2020, indicating significant growth. We believe there is potential to elevate the average order value in the long term, as we continue to see an increase in units per transaction. However, we acknowledge that in 2023, there will be pressure from increased promotions, impacting average unit retail in the short term. Additionally, we are comparing against a 20% growth in active customers, so we are being conservative in our growth expectations.

So, Daniella, we discussed your comments regarding promotions and your efforts to reduce inventory. How is your consumer responding to these promotions? Does that help to enhance overall sales dynamics?

I think we're continuing to be really disciplined in our promotional strategies. And so while I think just given the macro environment, we are seeing more of a reaction to our promotions, we're really focused on protecting the long term of the brand. And so, could sales be higher if we lean into promotions more? Potentially. But we're really focused on doing this the right way over the long term.

Thank you. Our next question comes from the line of Brooke Roach with Goldman Sachs. Your line is now open.

Good afternoon, and thank you so much for taking our question. Trina, I was hoping that you could elaborate a little bit more on the growth of the TEAMS business that you're seeing today. And then, maybe for Daniella, as you contemplate the mid single-digit growth outlook for the year, can you contextualize the growth contribution that you expect between international, the TEAMS business, and the nonscrubs business relative to your core scrubs business that's sold to individual customers? Thank you.

Thanks, Brooke. You know, I think the TEAMS opportunity is an incredibly exciting one that we've discussed a bit. But as we move forward, you know, this is an area that is about 15% of the market, but it's a lot smaller as a percent of our total business. So, what is TEAMS? TEAMS is our B2B platform where healthcare institutions want to outfit their employee base, right? They're looking to standardize and professionalize their teams and kind of working with FIGS to do that. And so, right now, we have a small team dedicated to this, and we have a big opportunity in front of us. You know, this is a primarily inbound sales process today, where people are coming to us because they're learning about us in other ways. And they're reaching out to us to outfit their teams. Right now, we're looking to build a bigger platform to enable them to get access to more of our assortment. We're looking to create more features to have the process be as easy as possible to order, you know, hundreds, if not thousands of sets of scrubs for your team and make the process super easy as it relates to embroidery, putting your logo, putting your name, so that you can show the world who you are and what you do, which is a big part of why people choose FIGS. So, super excited about TEAMS. It's really early days. And the other piece I'll just mention is, you know, we launched 3XL to 6XL. So, our extended offering really gives us an ability to partner with some of the largest institutions who said, 'You know, we have a number of people within our institution that can't wear FIGS today.' So, you know, I think we're one of the few companies that, you know, we can outfit 10, 15, 20 people. We'll lose, you know, million dollars, if not more, in terms of contracts. So, this is a big opportunity. We're really excited about it, and we're just getting started.

And to address your second question, Brooke, you know, we're not providing targets, but we do expect international, teams, and nonscrubwear to continue to grow at an accelerated pace of the business and make up a larger proportion of our net revenues looking into 2023. I think as a result of that, you know, we are anticipating lower frequency to impact our scrubs business. But there's a lot that we're focused on today to drive that higher in the future. More intentional product innovation, which we discussed. You know, the impact will likely be more so in 2024 and beyond, but also, our marketing strategies and really focusing on the retention, focusing on evergreen messaging, and really setting the stage for accelerated growth in 2024.

Great. Thank you. And if I could just ask one more. As you contemplate that answer, I was wondering if you could help us understand what needs to happen, whether that's a change in the macro environment or just actions against your initiatives to reaccelerate your top-line growth toward your long-term outlook.

Yeah. I mean, I think, you know, a lot of people are talking about the macro environment, but at FIGS, and I think the best brands don't use the macro to cover their sins, we're focused on what's in our control. And we're focused on what we can do from a product standpoint, from a messaging standpoint, from an advocacy standpoint. You know, our healthcare professionals have been through a lot over the last few years as they led us through this pandemic, and they're dealing with the same macro issues as well. And their behaviors are evolving. And I think we're in a really interesting spot, just given the scale, given all this information and data that we have on our healthcare professionals, to understand them in a really unique way. And so, we're utilizing that information and evolving with them to reaccelerate as we move forward in '24 and beyond. And it comes down to these three areas, in addition to others, but innovation of product; messaging and really being segmented in our messaging, personalizing to people's needs; and advocacy, showing up for them and having their backs.

Thank you. Our next question comes from the line of Lorraine Hutchinson with Bank of America. Your line is now open.

Hi. It's Alice Xiao on for Lorraine Hutchinson. Thanks for taking our question. Can you elaborate a little bit more on the higher promotions you're going to plan in 2023? What types of promotions can we expect? Like, will there be more days of promotions, or sitewide, percentage off, or, you know, categories that are on sale? And then, I have one quick follow-up.

Yes. So, it's not necessarily that we're going to do a greater number of promotions or even at a higher discount rate. But what we are seeing is that in this macro environment, we are seeing customers react more to our promotional times. And so, while our schedule and our cadence may look similar, a lot of this is just mix shift in our consumer base. Outside of that, we are moving through inventory by having more evergreen promotional strategies like our Awesome Today Gone Tomorrow, which has been really effective in helping us tailor to different customer segments and really meet the consumer where they are.

Thank you. And then I have a quick follow up on the mid single-digit sales guide component. It sounds like between all the customer metrics, you think AOB can be an area of opportunity for maybe growth to accelerate higher than that. Was there anything else?

So we're expecting average order value to be flat to slightly up over the course of the year. We're also expecting to continue to grow our active customer base. We're just being mindful that we're coming off of 20% growth in 2022. But that's still an area that we expect to grow over 2023. And that will be offset by lower frequency rates.

Thank you. Our next question comes from the line of Dana Telsey with Telsey Group. Your line is now open.

Hi. Good afternoon, everyone. As you think about the investment spend that you're doing and, obviously, the hiring of Steve Berube, given the growth of the business that you're looking for going forward, what enhancements to operations or processes are you looking for that you're making that we should see, whether it's better inventory management or how you're thinking about expenses or marketing? How do you think about that dynamic as we go through '23 into '24? Thank you.

Hey, Dana. We're really excited about bringing on Steve Berube. He has 30 years of experience in distribution and logistics, and he is here to help us develop our urban infrastructure. He has been a strong leader at top brands like Nike, Lululemon, and Levi's, so we’re thrilled to have him on board. We are also looking forward to making the necessary investments to scale to over $1 million in net revenue. Regarding enhancements, we are focused on developing our facility network and incorporating different technologies and systems to automate our processes and increase efficiency. While we are making these investments, we are committed to building in a disciplined manner and being mindful of our expenses, managing them deliberately and sustainably. You mentioned inventory management; getting back to a more ideal state is indeed one of our priorities, and we aim to achieve that by the end of this year.

Thank you. Our next question comes from the line of Bob Drbul with Guggenheim. I do apologize. We got disconnected; give me just a moment. Your line is now open, Bob.

I have a couple of questions. Regarding the long-term outlook, has your perspective on the market size or category size changed at all? Additionally, is your revenue anticipating any significant shifts in the competitive landscape or among competitors?

Yeah, I think in terms of the market, you know, it continues to be what we've discussed in the past. I think, from a competitive standpoint, we've seen a number of copycats. And, you know, that's to be expected, given when you have a successful business, people do come after you and they try to copy you. But, you know, where we are is that, you know, there's one original, right? It's FIGS, and we are focused on delivering product innovation and continuing to connect with our community. But from a total addressable market perspective, we're really focused on continuing to create the market, right, as the originals, continuing to bring and expand the categories that we're in, and enter new categories to really enhance the layering system that we have today.

Yes. Some of our later-stage markets like Canada, we are seeing really similar behavior to the U.S. They're engaging with our layering system. They want new styles and colors. And so, it's really interesting to see that those markets are really similar. I think we're in really early stages in some of our newer markets. And so, there, we're really about building the brand and growing the customer base, and we're excited to see where it evolves from here.

Thank you. Our next question comes from the line of John Kernan with Cowen. Your line is now open.

Good afternoon. This is Krista Zuber, excuse me, on for John. Just one question for us. Just from a cash flow perspective, kind of with the efforts you're making to rightsize your inventory position this year. You know, there's the assumption that working capital metrics should improve at some point. How are you thinking about your cash flow generation in 2023 versus your capex needs? Thank you.

Following the first quarter, we do expect to generate cash for the remainder of the year, and this is largely a function of reduced inventory buys and also sell-through of our current inventory.

Thank you. Our next question comes from the line of Rick Patel with Raymond James. Your line is now open.

Thank you. Good afternoon, everyone. Question on what's embedded in the first quarter guidance. Just given the magnitude of upside in the fourth quarter relative to your guidance for that quarter, can you speak to what you might be seeing in the first couple of months of the year that would drive a low single-digit revenue increase? I'm just curious to what extent we should think about macro uncertainty versus an element of conservatism.

Yeah. And so the first quarter guidance is not necessarily reflective of our growth rate quarter to date, but it's an expectation of our quarter in aggregate. The biggest driver of the deceleration from Q4 is average order value. And so, we're expecting average order value to be down more than it was in the fourth quarter for a couple of factors, mainly lapping the higher penetration of nonscrubs in Q1 of last year. That generally carries a higher average unit retail and units per transaction. We're lapping a really strong New Balance shoe launch, which boosted average order value through higher average unit retail. And also, as a reminder, last year, we were out of stock on some of our core scrubwear due to supply chain challenges, which boosted our nonscrubwear proportion. Frequency time is expected to remain challenged similar to what we're seeing in Q4 in part due to macro. But that's what's incorporated into our first quarter assumption.

Can you also provide color on the new customer adds? Like, for the new customers coming in to buy FIGS who have a similar profile as the ones you acquired during the height of the pandemic, I'm just curious if you're seeing changes in terms of demographics or geographic region as we think about where the new customers are coming from?

We're not seeing a lot of changes in terms of demographics or geography. We are continuing to add a lot of new customers to the FIGS fold, which is great to see. We've spoken about, you know, recent cohorts just having slightly different purchasing trends, where they're elongating their purchase cycles and buying more when they do come back. But other than that, they look, you know, really similar to other customer cohorts.

Thank you. Our last question comes from the line of Noah Zatzkin with KeyBanc Capital Markets. Your line is now open.

Hi. Thanks for taking my question. You know, forgive me if I misheard, but I think you mentioned there's an L.A. store slated to open in the fall. So, if you could just, you know, provide any color on how you're thinking about a potential, you know, omnichannel approach to the business with kind of a physical footprint, or just how you think about an omnichannel approach to the business presently would be helpful. Thank you.

Thank you for your question. We've had previous activations like our pop-up shops, which taught us that healthcare professionals want to experience FIGS in person. They want to interact with our products and discuss their technical functionality with us. We are very excited about our first store opening in Century City this fall, and we plan to progress in retail by carefully evaluating store formats and selecting the right locations while being strategic about our expansion. This store will be the first of many. Regarding our other channels, we discussed TEAMS, international, and retail as three growth drivers that will complement each other. No channel operates in isolation; they will all support one another. As we expand beyond digital, word of mouth will be influenced not only by our online efforts but also by our offline initiatives. We are enthusiastic about the different aspects of our business working together to foster long-term growth.

Thank you. There are no additional questions waiting at this time, so I'll pass the conference back over to Trina Spear for closing remarks.

Thank you all for joining us, and we look forward to speaking again soon.

That concludes the FIGS Fourth Quarter and Full Year Fiscal 2022 Earnings Conference Call. Thank you for your participation. I hope you have a wonderful day.