Description

Summary

FIGS Inc (FIGS) is May IPO of largest DTC platform in healthcare apparel - 82% core scrubs - disrupting commoditized $12B US and $79B global medical apparel market ($86B in 2025) per S-1 through better fit, more comfort and fashion (colors) at premium price. FIGS priced at $22 above $16-19 range and was upsized from 26 to 30M shares incl shoe with sponsor Tulco selling 30% more stock and the company -21% less than original terms. This after insiders incl Tulco and founders sold as part of 57M-share offering at $8.55/share in Oct 2020. Mgmt interviews and recent commentary emphasizing need for investment suggest deal timing may have been pulled fwd to take advantage of material pandemic acceleration. 

Bulls point to strong topline growth incl +30% CAGR implied in $1B 2025 rev target, 70%+ GMs, recent mid-20s% EBITDA margins/LT 20% target and uniquely high LTV/CAC on high retention, repeat frequency and close-knit community/word of mouth benefits. Since the stock’s doubled from IPO and sports $8.8B EV add’l rationalization now incl core scrubwear as low-CAC entry into eventual ability to expand into lifestyle wear (supposedly the next LULU). 

Bear case suggests niche DTC platform that sports unjustifiable valuation of 17x 2022 sales/83x AEBITDA on extrapolation of impressive yet unsustainable 2020-21 growth/profitability driven by stiff pandemic tailwinds that appear to be already starting to diminish. Brand is primary source of differentiation as competitors incl incumbent and legal foe SPI/Careismatic (est 40% US share) offering similar fabric, fit, finish at lower prices and have entrenched institutional relationships. And DTC windfall during pandemic may prove more 1st mover as it’s seemingly already been replicated. So concerns around fad risk, pandemic sugar-high, true SAM and share gains/CAC likely to increase given historical default to lowest cost and uncertain sustained willingness to pay 30-50%+ premium for brightly colored scrubs (trial discounts abound).  

This was a fast-growing albeit small company ($100M revs/$2M AEBITDA in 2019) prior to pandemic and loose JOBS Act disclosure requirements limit historical analysis. Certainly some pandemic benefits will prove sticky incl greater awareness/larger base of customers but pandemic benefitted the business in multiple ways that are likely under-appreciated incl 1/ trad'l B&M retail distribution model essentially went off line, 2/ more medical personnel wore scrubs both voluntarily and involuntarily, 3/ hospitals were staffed at max capacity, 4/ more scrub purchases were subsidized and 4/ replenishment cycle was accelerated. Revs grew +138% y/y in 2020, recent 2Q had revs decel q/q from +172% peak to +58% and initial $395M 2021 guide (only metric provided) implies sub-25% 2H growth (stock sold off -15% initially but recovered as buyside expectations likely remain much higher than implied guide/+30% LT CAGR). 

Mgmt appeared evasive on initial call primarily defaulting to LT targets which only plays as long as stock keeps working. Another potential issue is founders are co-CEOs and have no public-company experience while CFO brought on pre-IPO did <1-yr stint as DPZ CFO. Legal overhang isn’t core to thesis but worth noting nonetheless.  

Thesis 

While mindful of post-IPO dynamics incl limited ~30M-share float and positioning recently skewing increasingly negative (mid-30s% SI), r/r appears asymmetric as $8.8B EV or 17x 2022 revs materially overstates durability of recent growth dramatically boosted by pandemic. Recent initial print highlighted by material topline decel, need for heavier investment and limited guide/disclosure appears supportive of this view. Post-pandemic normalization incl combo of cont’d topline deceleration and increasing investment likely diminish complacency/willingness to discount elevated expectations over extended duration.    

Catalysts

Fund'l catalysts incl 1/ slowing post-pandemic growth vs buyside expectations, 2/ heavier investment (word mentioned >20x on 2Q call) and 3/ add'l supply as insiders hold 57% incl Tulco (32%) and co-CEOs (15%). 

Risks 

Primary risk is sustained post-pandemic growth/profitability above expectations and market's willingness to continue to underwrite durability (every turn on 2022 revs ~$2.50/share). Positioning has also become quite crowded very recently with rate/availability becoming more volatile and represents another key consideration. Latter combined with limited float, getting the compounder/”buy at any price” treatment from retail and 1% of IPO directed to HOOD as its 1st IPO shouldn’t be overlooked in this tape. 

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Catalyst

Cont’d decel in post-pandemic topline growth disappoints vs elevated buyside expectations

Heavier investment that drives downward revisions to profitability expectations/raises questions about sustainability of advantaged CAC/CLV metrics 

Add’l sponsor/insider sales and subsequent increased float on full lockup expiry in late Nov or earlier under recent satisfaction of partial conditions