FIGS, Inc. Q2 FY2024 Earnings Call

Afternoon. Thank you for joining today's FIGS Second Quarter and Fiscal 2024 Earnings Conference Call. My name is Cole, and I'll be the moderator for today's call. I'd now like to pass the call over to Todd Maron. Please go ahead.

Thank you. Good afternoon, and thank you for joining today's call to discuss FIGS second quarter 2024 results, which we released this afternoon and can be found in our earnings press release and in the stockholder presentation posted to our Investor Relations website at ir.wearfigs.com. Presenting on today's call are Trina Spear, our Co-Founder and CEO; and Kevin Fosty, our Interim CFO. 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 in the 10-Q we filed today, which we encourage you to review. We 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 and key performance indicators, which we believe are useful supplemental measures for understanding our business. Definitions and reconciliations of these non-GAAP measures to their most comparable GAAP measures are included in the stockholder presentation we issued today. Now, I would like to turn the call over to Trina Spear, CEO of FIGS.

Thank you, Todd. We delivered solid second quarter results with revenue growth at the high end of our expected range and adjusted EBITDA margin above our expectations. Our U.S. growth inflected back into positive territories, driven by better repeat frequency trends. Our international growth accelerated and scrubwear also returned to year-on-year growth. Our balance sheet is in stellar shape with a healthy inventory position and we have the financial flexibility to scale our brand and our business. We are particularly pleased that alongside these Q2 results, we saw leading indicators of revenue improve. We teed up our company for the Olympics partnership, our most consequential marketing campaign ever and we drove innovation in products, marketing and supply chain. Our growth opportunity is massive and our ability to capture that growth is unique. As we activate our product innovation and broaden our brand reach, we are exceptionally well positioned to capitalize on that growth opportunity in the second half of this year and beyond. I want to lead with our partnership in outfitting the Team USA medical team in the ongoing Olympic and Paralympic Games in Paris. Our Olympics campaign embodies the key strategic drivers we're pursuing for our company. First, we are above all a brand for health care. Our Olympics product is some of the best products we've ever made and we have designed it to address the specific needs of the health care professionals who were wearing it. We've talked about creating pinnacle products and how that pinnacle helps drive our core business. We have amazing pinnacle products with innovative and solutions-oriented features and this includes what we designed for the Olympics. The Olympics collection is On-Shift. Many of these health care professionals are working outside and they need durable functional products that enable higher performance. Other health care professionals can replicate the look and get the same solutions as their counterparts they see on-screen at the game. They can then clearly experience those same design elements, the same colors, the same visual cues in the core products. Our design team went on site to Team USA in Paris to hand deliver this product to the medical team supporting our Olympians. The medical team was blown away. While there is a core group that works with the U.S. Olympic Committee year-round, the majority of the medical team volunteers at the time; never before have they received this kind of focus with product designed specifically for them and a commercial that tells their stories in an elevated way. We also hosted an incredible event to watch the opening ceremony in New York City on July 26 and a celebration of service in Paris earlier this week to honor the USA medical team. Next, we've talked about the importance of our top-of-funnel marketing campaign, which allows us to tap into the emotional connection we have with our community. We are strategically allocating key marketing resources as we execute the kind of 360-degree marketing that will continue to elevate our brand. Shining the light on the USA Medical Team is an absolute honor and there are so many stories about them to be told. Stories that resonate deeply with not only the often unsung humans from our health care community, but everyone inside and outside of health care. Dr. Gloria Beim represents the best of both of those worlds. She is epic. She's an orthopedic surgeon and broke gender barriers to earn her seat. She was the first woman accepted into the prestigious Sports Medicine program at the University of Pittsburgh, where she completed her training before serving on the U.S. medical teams for multiple Olympic and Paralympic Games. Every Olympics she goes to, she learns the language of that country. This is her eighth Olympics. We hope you've seen our anthemic brand film. We featured Team USA health care professionals, including Dr. Beim and some of our biggest brand ambassadors, but it really speaks to all health care professionals and showcases the dedication and the passion they put into their craft. It's airing across linear and streaming broadcast. We're on buses, subways and billboards, we're obviously on social. From awareness to consideration to conversion, this customer journey is very much the future of our brand. As we showed, it truly does take hard to build bodies that break records. Third and finally, we've spoken to you about our second Community Hub, which recently opened in Rittenhouse Square in Philadelphia. It has opened as an activation dedicated to our celebration of the Olympics, which is catapulting it onto the retail push. It will transition to mainline FIGS presentation after the games. Our focus on product innovation on top-of-funnel marketing continues to drive strong results. 2024 is an exciting year of bringing real innovation through design, collaboration, fabrication and fit. Almost every single launch in Q2 performed above our expectations. We launched our Flare ScrubLegging, essentially creating a category that didn't exist previously and performing extremely well. On our last call, we discussed our Indestructible collection, highlighting Dr. Chloe, a wildlife veterinarian working in South Africa. The combination of unparalleled durability and a compelling narrative resonated with our community. Collaborations are an ongoing strength for us as our brand and franchise attract the highest quality partners. Our Star Wars, May the Force be with you, collaboration with Lucasfilm was highly successful. We also had more incredible launches with New Balance, including both the Roav and 327 model, which combines style, function and comfort. We partner in a strategic way with companies that are aligned with us, earning fantastic engagement. Our layering system is also working. We offer products for on-shift and off-shift, head to toe, to work, at work, from work, inside and out. In the second quarter, our non-scrubwear categories grew by 13% and reached 18% of sales. These products expand our TAM, position us as a lifestyle brand and help drive our core over the long run. As I'll describe later, this impacts gross margin as the new products ramp, but as we gain scale in these new categories and the core follows, we expect to see margins improve. Customers are embracing our product innovation, top-of-funnel marketing and collaboration. They are coming back to our brand more frequently, continuing a trend we shared with you on our last conference call. Another important trend that is moving in a positive direction is branded search. There are now an equal number of searches online for FIGS as there are for 'scrub.' This indicates that we own mind share for the category, which was always our goal. And we have more to look forward to in the second half of the year. On products, we achieved $440 million of net revenues in scrubs alone in 2023, almost entirely from a single fabrication, FIONx. Competitors have tried to copy us, but we're building more and more distance from them. Our product is too innovative, too high quality, too technical, too tailored in the literal design sense and in this laser-like focus on our community and its needs. As we move through the second half, we'll continue to update and upgrade our fit in a way that works for all bodies. As a D2C company, we know more about our customers than anyone and our kit upgrades will allow us to direct them to the right fit and sizing with greater consistency. Our other growth initiatives are also progressing well. International had a record quarter with year-on-year revenue growth accelerating to 32% from 29% in the first quarter of 2024, reflecting the reclassification of duty subsidies, which negatively impacted international growth by 12 percentage points. We have fantastic marketing opportunity to go deep in high potential countries that we're going to pursue over time. We sell internationally, but we haven't even come close to fully capitalizing on the potential of international. As we think about the revenue opportunity of our company, there's so much there. And the competitive set overseas is so much more limited. Our brand has amazing cachet and we're just getting started with what we can do. Our TEAMS business also had a record quarter. We launched our expanded catalog, impacting over 2,000 organizations. We also launched an exciting new virtual storefront for team members of VEG, Veterinary Emergency Group, one of our largest TEAMS customers to enable them to use VEG funds to buy FIGS as their uniform. We're excited that this customizable feature can be scaled to support current and future TEAMS customers. It is incredible to see more and more concierge clinics looking to outfit their TEAMS in FIGS and cover the expense for their employees. Our retail push is also continuing to pace. We continue to see 40% of our Community Hub transactions from customers that are new to the brand. Our retail customers are proving to be sticky. Customers who make their first purchase in the store are buying from FIGS more frequently than those who make their first purchase online. Our Century City Community Hub is delivering on its ambitious plan and is achieving seller sales of $1,800 of sales per square foot. And again, we couldn't be more excited to launch the Rittenhouse Square Community Hub in Philly, which is 4x larger than our Century City location and through both products and programming will be a one-of-a-kind hub for our community there. With respect to our operations, we have massively upgraded our logistics infrastructure to improve our cost profile at our current size and enhance our customer service. We now have the footprint to support a much larger company. We recently opened our new distribution facility in Arizona and have nearly completed our transition out of our legacy facility in California. We've increased our footprint by more than 75%, while reducing our rent per square foot substantially. Our new facility is state-of-the-art with extensive use of robotics. 60% of the facility is completely automated, essentially people-free with over 700 robots picking and allocating products and extensive automated conveyors moving orders through our facility. We've more than doubled our potential throughput and tripled space for an embroidery workshop to personalize and customize our products for our health care professionals. As expected, this distribution center move increased our selling expenses as a percent of revenue with our estimated full year transitional costs continuing to be approximately $13 million. Even as we've expanded our product offering, geared up for the Olympics and managed our transition into our new DC, inventory remains in excellent shape. Our inventory declined 29% year-over-year, while revenues grew 4.4%. As a reminder, we're structurally advantaged when it comes to inventory because as the uniform player, the products we sell are relatively nondiscretionary, seasonless and much less subject to fashion risk. Health care professionals need them to do their jobs. We also continue to advocate for our community. We mobilized our Impact effort during Q2 by bringing 16 extraordinary health care professionals to Capitol Hill and the White House. Our advocacy resulted in several important wins on our Awesome Humans Bill, including a commitment from Congressional leadership to pass critical mental health support for health care professionals this year. As we enter the back half, we are delighted to welcome Sarah Oughtred as our new Chief Financial Officer. Sarah spent almost 17 years at lululemon and for the past 3 years served as Senior Vice President of Financial Planning and Analysis. She has firsthand experience growing an innovative lifestyle brand as she helped the company grow revenue more than 30-fold to over $10 billion, build a 700-store retail footprint and scale this in more than 25 countries across the globe. We want to thank Kevin Fosty for stepping up and serving ably as Interim CFO and are delighted that he will continue on in his prior role as VP, Corporate Controller. To summarize our quarter and achievements, our Olympics effort is yielding amazing products and unprecedented, highly effective marketing campaigns. Our innovation machine is humming and we have impactful enhancements in site for fit and fabrication. Our marketing is resonating and customers are coming back to our brand. International, TEAMS and Community Hubs are all in the early stages of their long-term growth trajectory. And our logistics capabilities set us up to drive powerful growth going forward. Moving to the outlook. I will let Kevin dive in, but would like to briefly touch on revenue, gross margin and adjusted EBITDA margin. We are raising our 2024 full year revenue growth outlook to a range of flat to positive 2% growth from prior range of negative 2% to positive 2% growth. This reflects our second quarter outperformance and our current visibility to Q3 and the second half overall despite a choppy U.S. consumer backdrop. We expect gross margin for full year 2024 to be 150 to 200 basis points lower than 2023. The reason for this is that our new items are working better and faster than we expected with our new pinnacle products, new scrubwear styles and new non-scrubwear products outperforming. The fact that our newness is resonating is very important. It means we are becoming a lifestyle brand and we are creating TAM in an industry where many of these categories did not previously exist. Our new pinnacle products also helped drive the core. So over time, we expect our success will help grow our already high gross margin core products. And although our new products have a lower gross margin today, as they gain volume and scale, we expect them to have a margin curve that is similar to the one we have historically experienced with our core scrubwear. All of these factors make us optimistic about our newness strategy and its impact on gross margin over the long term. In terms of our adjusted EBITDA margin outlook, we are not flowing the full gross margin impact to the bottom line as we expect to offset some of the impacts within marketing and G&A. As a result, we are guiding to 9.5% to 10% adjusted EBITDA margin for the year. Our balance sheet is in stellar shape. We ended the quarter with over $268 million in the bank, a record level and with zero debt. Our shareholders' equity is also at a record and exceeded $400 million for the first time in our history. We have the cash flow dynamics and the capital to fund our growth ambition. With all of this in mind, we're announcing that our Board has authorized a $50 million share repurchase program. We're pleased that our strong financial profile and long-term outlook enable us to evolve our capital allocation strategies and return value to our shareholders through the share repurchase program. With that, I'll turn it over to Kevin.

Thank you, Trina, and good afternoon. For the second quarter, we are pleased that net revenues and adjusted EBITDA margins came in ahead of our guidance. The inflection of our frequency trends and the return to growth in our U.S. and scrubs business indicate the long-term growth opportunity is still ahead of us. As we reignite industry-leading product innovation and powerful top-of-funnel marketing campaigns, we are confident that we are on the right track to drive long-term sustainable growth. I will begin my discussion with a detailed review of our second quarter results followed by an update on our financial outlook. Starting with our second quarter results. Net revenues increased 4.4% to $144.2 million as compared to Q2 last year. Net revenues reflect higher orders from existing customers offset by lower AOV. Active customers for the trailing 12-month period increased 6.1% compared to the same period last year. Average order value decreased 1.7% to $113 and net revenues per active customer decreased 2.3% to $210 versus the same period last year, mainly driven by the accounting reclass related to duty subsidies for international customers. Looking at product categories. Non-scrubs grew 13%, reaching 18% of net revenues, as Trina noted. Gross margin for Q2 was 67.4% compared to 69.5% in Q2 of 2023. The decline in gross margin rate was primarily due to the product category mix shift that Trina described as well as the reclass to duty subsidies. Our selling expense for Q2 was $36.9 million, representing 25.6% of net revenues compared to 24.4% in Q2 of 2023. The increase in selling expense as a percentage of net revenues primarily reflects transitory expenses associated with the transition to a new fulfillment center. Marketing expense for Q2 2024 was $23 million, representing 15.9% of net revenues compared to 15.1% in Q2 2023. The increase in marketing expense as a percentage of net revenues was primarily due to our strategic investment in the biggest marketing campaign that we have ever done, our first-of-its-kind partnership outfitting the Team USA medical team at the Olympic Games. G&A for Q2 was $35.8 million, representing 24.8% of net revenues compared to 25.2% in Q2 of 2023. The decrease in G&A expense as a percentage of net revenues was primarily due to lower stock-based compensation expense and lower legal fees. The decrease was partially offset by a one-time scrubwear donation. Taking this to the bottom line, second quarter net income was $1.1 million or diluted EPS of $0.01 compared to second quarter 2023 net income of $4.6 million or $0.02 in diluted EPS. Adjusted EBITDA for Q2 was $12.9 million with an adjusted EBITDA margin of 9% compared to 13.7% in Q2 of 2023. Touching on our balance sheet. We finished the second quarter with cash and cash equivalents and short-term investments of $268.5 million with no debt. Inventory declined 29% to $119.3 million versus Q2 last year as we continue to track to our plan of bringing inventory back to normalized levels by the end of the year. This is our fourth consecutive quarter of improved inventory turns. We are very proud of our ability to significantly reduce inventory while maintaining healthy margins and generating sales growth, illustrating the resiliency in our business model. Capital expenditures for the second quarter totaled $9 million. This is primarily related to the build-out of our new distribution center. And finally, we delivered strong free cash flow of $7.5 million in the second quarter. Turning to our outlook. Based on our Q2 performance and strong response to our product launches and brand initiatives, we are raising our full year net revenue outlook, as Trina noted, to flat to positive 2% growth compared to 2023 and versus prior guidance of negative 2% to positive 2% growth. We are pleased by the momentum of our business coming out of the second quarter and the success of our Olympic campaign. As we mentioned last quarter, we are committed and focused on driving product innovation across scrubs and non-scrubs assortments, including new categories. As we evolve our product mix, we expect to shift into non-scrubwear as well as the shift into new scrubwear styles to impact our gross margin. As a result, we expect our 2024 gross margin to be 150 to 200 basis points lower than the prior year. It is important to note that we remain confident that we can maintain healthy gross margins over the long term. As we invest in new innovation, fabrications and product categories, we anticipate realizing economies of scale over the long run. We expect new innovation to provide a halo effect over our higher-margin core business as we are working on several initiatives, including evaluating our pricing and costing along with optimizing our supply chain strategies, which we believe will enhance margins over time. Regarding selling expenses, transitory costs are still estimated at approximately $13 million. A majority of these costs are now expected in the third quarter, including some costs initially planned for the second quarter. We anticipate the transition to be largely complete by the end of the third quarter. With respect to marketing, our increased investments are beginning to pay off. We are pleased with the results from our Olympic marketing campaign and continue to expect the bulk of this investment to be incurred in the third quarter. For G&A, we continue to carefully manage our expenses as we are identifying further cost efficiencies to offset our reduced gross margin outlook. As a result of these factors, we are updating our full year adjusted EBITDA margin to the range of 9.5% to 10%. Notably, as Trina described, we are not flowing the full gross margin impact to the bottom line, and we are instead expecting to offset some of the impact from marketing and G&A. Turning to our third quarter 2024 outlook. We expect net revenue growth of approximately 1%. We expect gross margin to have a similar trend year-over-year to what we experienced in Q2, largely through our product mix shift that we discussed earlier. Looking at operating expenses. For selling expense, we expect deleverage of approximately 250 basis points compared to the prior year. With respect to marketing, we continue to plan for the highest marketing investment in the third quarter. These higher expenses will be partially offset by continued efficiencies in G&A expenses. To that extent, we expect third quarter adjusted EBITDA margin to be approximately 5.5% to 6%. Our capital expenditures expectations for 2024 continues to be about $18 million to $19 million, including $13 million to $14 million in fulfillment enhancement-related costs. In closing, we're encouraged to see that our strategy around product innovation and top-of-funnel marketing is working and driving positive trends in our business. Moving forward, we'll continue to capitalize on our robust balance sheet and cash flow dynamics to strategically invest in our future growth and drive long-term shareholder value. With that, I will turn it over to the operator to kick off our Q&A session. Operator?

Our first question is from Brooke Roach with Goldman.

Trina, I was wondering if you could elaborate on the consumer engagement metrics and the trends that you saw throughout the second quarter and into third quarter to date. What is your current assessment of the health of the FIGS consumer today in the United States?

Thanks, Brooke, and great to speak with you. We're seeing — we talked about this in the last call — we continue to see positive trends as it relates to repeat frequency. And that's really being driven by our product innovation coupled with the top-of-funnel marketing. You saw this in Q2 with our launch of our Indestructible collection. We tied that in with Dr. Chloe's story and that worked really well. And in Q3, I talked a little bit about it, but our biggest campaign ever. We have really incredible pinnacle products around our Olympics collection. That, coupled with all of the marketing we're doing around the Olympics is really driving engagement. It's driving repeat frequency. It's driving a lot of positive trends across the business. In terms of the health of our consumer, I think it's great to see these trends. That being said, there's a lot of uncertainty in the macro environment. Our customer is still buying well below their purchasing from prior to COVID — obviously less than historical, but even prior to COVID. Prior to COVID, health care professionals were buying about 4 to 6 sets per year. We're well below that level on an industry level. But it's great to see that we're on the direction to normalizing from that perspective. And so still a lot of uncertainty, a lot of noise in the environment. But once again, we serve health care professionals. This is, as you know, the fastest-growing job segment over the next 10 years, an incredibly stable consumer base, incredibly stable wages. And so our goal is to continue to serve them with great products, incredible marketing and get them excited about what we're doing and hope to kind of see that normalization generally across the industry as it relates to purchasing patterns.

And then just as a follow-up, can you speak to the current level of margin that you achieved between your core business versus the rate that you're seeing on new innovations that have yet to scale? What's the outlook for narrowing that gap between those two product lines going forward? And then can you provide a little bit of color on the marketing pullback that's offsetting some of these incremental gross margin pressures for the rest of the year?

Sure. As it relates to the margin, we have a strategy that pinnacle is driving core. Pinnacle products as well as non-scrubwear — these are at a bit of a lower margin. There's not a huge delta, but a bit lower margin than our core scrubwear product. As we gain scale in our newer products, we would expect to see a similar margin curve as we saw within core scrubwear. The second piece is that we're already seeing some positive trends as it relates to pinnacle driving core. So, these new launches, these new styles, this new innovation that we're bringing to our consumer base is also driving them to replenish their core. As the core follows pinnacle, as the core continues to build, we'll see the margin from that core pay for the margin on the newness. And so those two things combined — as well as Kevin mentioned on the call, opportunities around costing and pricing — we're always looking at that as being super data-driven around capitalizing on margin opportunity across the portfolio. Your second question was around how we're making up the margin from marketing and G&A. So, in the third quarter, there are two things that are happening. The first one being the gross margin impact from this mix shift — this mix shift within scrubwear to new styles and limited editions, and the mix shift into non-scrubwear. The second thing that's happening in Q3 is this marketing campaign around the Olympics, and so that's driving the bottom line pressure in the near term. Going into Q4, offsetting that, there's a number of opportunities that we found to offset the impact on gross margin and that's within marketing in the fourth quarter as well as in G&A. So, I think we're just being strategic about how we look across the business to offset that gross margin impact and I think we feel really good about that.

Our next question is from Bob Drbul with Guggenheim.

A couple of questions for me. The first one is just on — I know it's early, but the Olympic marketing campaign, I think it's been incredible. What are some of the early learnings that you have been able to take away from it? How will it shape your marketing strategy going forward between brand messaging and performance marketing?

Sure. So, as I mentioned on the call, this has been our biggest and best campaign we've ever done and we're seeing it pay off. We're incredibly proud that we are the first brand to outfit the health care professionals supporting our Olympians. It's really a historic moment. I think we've learned a lot. This marketing campaign has been really the next level. We have a commercial that's airing in prime spots throughout the Olympics. We have taken over, as I mentioned, buses, subways, billboards. I think there's not a day that goes by that you're not seeing our campaign and we're just getting the feedback from our community and outside of our community — just how large scale and how everyone has been really blown away by it. And we've seen the metrics as well. We're seeing — I think this is very much driving what we're talking about in terms of repeat frequency. Also, we're seeing our core business improve. In terms of engagement, which I think is really important, we've been able to see 60 million impressions from out-of-home, over 200 million paid digital impressions, 50 million linear impressions and almost 500 million earned media impressions. And so I do think as it relates to your question around shaping the future of how we think about marketing: top of funnel, top of funnel, top of funnel. We're a real brand, right? And we're building this brand the right way, the hard way over the long run. Digital marketing fuels that top of funnel and digital marketing fuels what we're doing from a product standpoint. But if you're not building the message in an authentic way with your community in all the places where they are — not just on a cell phone, not just on search, but in all the places they are in the real world — you're kind of missing it. So, we feel really good about our strategy around marketing, around top of funnel, around doing things others can't do. We have the scale and the leadership position to partner with Team USA on this. Not many can do that. So really just pleased by the team and all of the things we did to pull it off.

It does.

Bob, I forgot to mention the most important metric. Snoop Dogg does wear FIGS. So, I will check that out on social as well.

Our next question is from Dana Telsey with Telsey Group.

Trina, as you think about — just one follow-up on the Olympic marketing campaign, which I loved, the commercial was great. What doors is this opening for you for other marketing campaigns and how you see the brand resonating? And next, with the new product that you're introducing in the innovation, how do you see the price points of the innovation product versus the core and essentials? What is the consumer willing to accept? And how do you think about it? And lastly, with transitory fulfillment expenses, it sounded like there's a bit more in the third quarter that maybe came out of the second quarter. How should we be thinking of that for the balance of the year?

Okay. So in terms of this campaign and what it does, I mean we're still in it, right? So, I think there's going to be a lot more learning to come as it relates to what this is going to enable us to do. I think it's giving us a lot of authority to work with others. We have an incredible partnership with New Balance, super authentic, creating footwear for the best people we know and really designed to develop with them. We're now outfitting Team USA medical teams in Paris, and that delivers so much credibility in terms of what we do and really opens the door to future collaborations with the best of the best across landscapes beyond health care. In terms of the price point within our new product innovation, our new product, as I mentioned, is outperforming and demand is there. So we are being strategic and thoughtful around pricing given demand — you saw the first day of our Olympics collection, most of the products sold out before the first day was even over. So, we're being really strategic and thoughtful around our pricing. At the same time, being affordable and accessible is truly very important to who we are and what we do. We need to ensure our price points are in line with our community and want to ensure that we can serve everyone. But I do think there's a lot of opportunity there as we continue to see our new innovation outperform. Finally, your third question around transitory fulfillment. We said on the last call our transitory costs were expected to be $13 million. That's not changing. We're just seeing a shift between the second and third quarter and so that's all that is.

We have a question from Adrienne Yih with Barclays.

Great. And nice to see the progress Trina. Can you talk about sort of the trends in your TAC metrics? Where do you see those trending? Secondarily, it sounds like you haven't talked about promotionality. So, I assume that has been anniversaried successfully. And then third, if you can talk about from a longer-term perspective, the non-scrubs is closing in on 20%. How do you see that over the longer term? Where do you want that to be in terms of mix between scrub and non-scrub?

Thanks, Adrienne. As it relates to TAC metrics, we feel really good about our marketing efficiency. In the first quarter, we talked about how our marketing expense is higher and that's a strategic investment in top-of-funnel marketing. When we think of TAC, we really think of digital TAC — how much we are spending across paid social and that has been stable and efficient. It gives us the opportunity to seed from a top-of-funnel perspective. Over 2024, we really shifted funds to more top-of-funnel, which few can do. Because we've been so efficient on our digital marketing, we are able to invest in top-of-funnel and really show up in big, amazing ways with our community. As it relates to promotions, our promotional calendar this year is actually pretty similar to 2023. We're still working through our inventory balance. You saw our inventory come down by 29% year-over-year while we grew revenue. So we feel good about the cadence of promotions and our ability to continue to move through our inventory while bringing innovation and campaigns to our community. As it relates to non-scrubs, we are really proud that only a few years ago people questioned whether we could be more than a scrub company. The fact that almost 20% of our business is non-scrub is a testament to our layering system really resonating with our community. Health care professionals are coming to FIGS for their under-scrubs, for their outerwear, for their fleeces, their vests, their compression socks. By the way, Snoop Dogg does wear a lot of our compression socks as well. This is really great for the whole business. That being said, core scrubs are seeing incredibly positive trends. Scrubwear in general is seeing positive trends. So scrubwear, we expect to continue to scale and grow. As repeat frequency dynamics continue to improve, scrubwear — across core and limited edition — will improve in addition to non-scrubs. Non-scrubs, as a reminder, are on-shift pieces. We look to see that grow over time. But we're not assuming this becomes a 50-50 business. I think both are growing and both are trending positively.

Kevin, just a quick question on the supply chain. Obviously, we're seeing container cost increases. Are you seeing any pressure on freight costs or are you protected via contracts? And secondarily, do you do a lot of manufacturing in Bangladesh? If so, do you have any impact from what's going on there?

In terms of the supply chain, we're very focused on what's happening and we do have contracted rates. So, we're in a good position. We do feel as though we're being strategic across our global supply chain in terms of where we're producing all of our different categories and how we can gain efficiency across that. We do not produce in Bangladesh.

Our next question is from Rakesh Patel with Raymond James.

It's Rick Patel. I had a question on international markets. Can you unpack the growth that you're seeing there? How do trends look like in like-for-like markets for some of the areas where you've been for a longer period? And how should we think about the contribution of newer markets to the overall growth? Also, you touched on the potential to go deeper in international markets that are higher potential countries. Maybe some additional color there would be great.

So, international growth for the quarter is 44%. I want to highlight this because it's important to adjust for the duty reclass. We're really encouraged by what we're seeing in our international business. We're continuing to localize by market and managing a number of different websites across markets, which has been an incredible undertaking. As I mentioned on the call, we're still early days. There's so much opportunity and we're excited to see the growth. Canada, U.K., and Australia are three of our most tenured markets; they are performing and have very similar dynamics to the U.S. in terms of how often people come back, AOV, and how much they're spending. The newer markets have had a few really big highlights: Mexico continues to be performing extremely well, and the Philippines is strong. In terms of opportunities going forward, Asia outside of the Philippines is a huge opportunity and we think there's a lot more we can do in the EU. From a TEAMS perspective, we see a number of private practice and concierge clinics looking to outfit their TEAMS, so the TEAMS opportunity isn't just the U.S.; we're seeing opportunity internationally as well. Regarding going deeper in higher potential countries, it's early days in a number of the newer countries we've launched this year. Our strategy is to see demand first — we see traffic, we turn on these countries, and when the demand is validated, we invest behind it. We're seeing that demand and the growth and will continue to invest in the highest potential markets; we'll give more color on upcoming calls as appropriate.

We have a question from Ashley Owens with KeyBanc.

I just wanted to ask, could you speak on the more functional consumer — the one who more needs their scrub uniforms — how often they're buying? Are there any dynamics that set them apart from the more non-scrubwear oriented consumer? And secondly, within the exciting innovation and new launches like Flare, can you highlight pockets within that outperformance? Where have you been seeing the most excitement among consumers and what they're gravitating towards to inform more of that lifestyle opportunity within non-scrubwear categories?

Okay. In terms of our health care professionals more broadly, they are buying the full layering system. Most of the time, they're coming in and starting with our core scrubwear. The next purchase might be an outerwear item or an under-scrub, then they're coming back again to replenish those scrubs. It's a full journey — very few customers are only non-scrub. It's really about coming to FIGS for your whole uniform while on-shift. As it relates to replenishment, prior to COVID health care professionals were buying about 4 to 6 sets a year. The industry is below that today given COVID overhang and stocking up during that period, but we're seeing normalization and positive trends. As it relates to what is outperforming: within scrubwear, we're seeing our Isabel Wide Leg outperform. Wide leg is a hot style and our health care professionals love it. Our ScrubLegging, both standard and Flare, are performing incredibly well and outperforming expectations. Our Indestructible fabric collection was an awesome collection — more durable on the outside, soft on the inside, intended for more demanding on-shift environments. That combination of durability and comfort resonates. And our Olympics collection — the stadium jacket and the scrub jumpsuit — those items have been very popular and some are sold out. Overall, customers are gravitating to both functional scrub innovations and complementary layering and lifestyle products.

Our next question is from Matt Koranda with Roth Capital Partners.

So, super exciting to hear about the success with the Olympic campaign. I guess that bodes well for growth. I'm curious about how that fits into the third quarter top-line guidance you provided. Do you have a thought process where maybe you grow a little bit better than that 1% in the campaign period in July and August and then assume a drop-off after that? Maybe unpack the third quarter guidance and why some conservatism could be baked in there? And as a follow-up, on the DC shift, I wanted to make sure I understood: the $13 million, are we assuming that falls largely in the third quarter? Can you provide detail on why some of it spilled from the second into the third and whether there's any risk that costs might slip into Q4?

Sure. We increased our revenue guide for the year and we're very encouraged to see the positive trends in our business; the trends are recent and we're cognizant of the broader environment. It is an election year and there is a lot of news about a potentially choppy economic environment, and that's part of what you're seeing reflected in the guidance. Regarding the DC costs: that $13 million is our estimated transitory cost total for 2024 related to fulfillment transition. A majority of those costs are expected to occur in the third quarter, but it's not all in Q3 — there was a shift of timing from Q2 into Q3. The $13 million estimate hasn't changed; it's just a timing shift. The transition is expected to be largely complete by the end of the third quarter, and while small amounts touch into other quarters, the bulk is in Q3.

We have a question from Nathan Feather with Morgan Stanley.

Really encouraging signs of the business and particularly helpful to see frequency turn in the quarter. Does it feel like you've finally reached the trough here? How should we think about that metric picking up over the next 12 to 24 months as you continue to inject new products? And one on the share buyback program: how are you thinking about the cadence and execution of that program?

Thank you, Nathan. We are encouraged by the trends we're seeing in repeat frequency and by a number of leading indicators I mentioned earlier: branded search, open rates around our emails, net subscriber rates — all headed in the right direction. Because these are fairly recent improvements we are being mindful, but we are optimistic. As we continue to scale new products and drive repeat frequency, we expect that metric to continue to improve over time. Regarding the share buyback, we're excited to announce the program. Our strong financial profile and long-term outlook give us the confidence to evolve our capital allocation strategy. We have sufficient liquidity and cash flow generation to both invest for growth and return value to shareholders. The buyback will be opportunistic over time, there's no end date on the program, and we'll provide updates as appropriate.

Our next question is from John Kernan with TD Cowen.

Trina, what do you think about operating leverage in the business as top line eventually reaccelerates? There's obviously been some deleverage on adjusted EBITDA margin in the last two years. Just curious where you see the biggest opportunity over a multiyear period. And while you're on the topic of top-of-funnel marketing and some of the increase in marketing dollars in Q2 and Q3 of this year, you did see a nice sequential uptick in active customers from Q1. How should we think about active customers as we get into the back half of the year given the marketing dollars are going to rise again pretty significantly in Q3?

If you look at our financial profile, we have a structurally advantaged model. A lot of the decisions we've made have been strategic investments for growth. From a gross margin perspective, as pinnacle keeps driving core, there's leverage there. From a selling perspective, the transitory fulfillment costs will roll off and we're in a highly automated facility, so as we scale there is significant leverage. From a marketing perspective, as we continue to gain efficiency on digital, we will invest in top-of-funnel but there is also marketing leverage over time. G&A has been disciplined and there is leverage there as well. In the near term, the most levered piece is selling because the costs are transitory. As for active customers, that's a trailing 12-month metric and thus lags recent improvements. We're proud of the growth in active customers but comparisons still include prior periods. As the more recent positive trends in repeat frequency flow through, we expect to see continued improvement in active customers, new customer growth, and resurrected customer metrics.

Our next question is from Brian Nagel with Oppenheimer.

Congrats on the success here. Trina, I want to dig deeper into the gross margin dynamic you're discussing with some of the new products. Is the impact you're telegraphing simply a function of these products selling better than expected, or is there some other shifting dynamic that caused this to happen?

It is primarily that our new styles, new innovation and new fabrications are outperforming expectations. The gross margin impact is driven by three mix shifts: mix shift within scrubwear from core to limited edition (newness), mix shift between scrubwear and non-scrubwear as customers buy more of the layering system, and mix shift within non-scrubwear. Those three together are driving the gross margin change. That said, we expect over time these new products will drive more core purchases — the pinnacle drives the core — and core is higher margin. As the new products scale in volume and gain efficiencies, their margin curve should improve and mirror what we've seen historically in core scrubwear. We also see opportunities around pricing and costing given the strong performance of some of these products, and we'll be strategic about extracting margin opportunity across the portfolio. With Sarah joining as CFO, we're excited about the opportunities there. Over the long term, we remain optimistic about gross margin expansion.

As Q2 progressed and now as we've moved into Q3, are you still seeing that same improvement in frequency?

We are. The Olympics has been an incredible campaign that combines pinnacle limited-edition product with top-of-funnel storytelling and strong marketing. Those two elements combined are working and we've continued to see the positive trend in repeat frequency that we discussed last quarter.

We have no further questions at this time. I'll pass it back to the management team for any closing remarks.

Thank you so much for joining our second quarter conference call. We look forward to seeing you again soon and have a great night.

That concludes today's call. Thank you all for your participation. You may now disconnect your lines.