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FIGS, Inc. - Promising Growth Potential, But Significantly Low Return

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FIGS, Inc. (NYSE: FIGS) performed has reasonably good erstwhile focusing connected expanding its organization of progressive customers. In its caller Q3 2022 net report, guidance mentioned that it saw a grounds level of customer reactivation. These are nan customers who person returned to FIGS aft a 12-month lapse. FIGS is besides expanding its merchandise statement beyond scrubs. Its caller description , manner offerings, generated 65% of wide income growth. The institution has been capable to turn its full addressable marketplace (TAM) owed to nan merchandise statement description .

Although location are respective positives for FIGS, I still person concerns astir nan firm's existent financial position. These positives are not tantamount to its early net and growth. While I judge that FIGS has nan imaginable to grow, it's facing respective setbacks astatine nan moment. These concerns request to beryllium addressed earlier we let optimism to overpower our finance decision.

About FIGS

FIGS is simply a direct-to-consumer (DTC) healthcare apparel institution headquartered successful Santa Monica, Calif. It designs and sells scrubs chiefly for healthcare professionals. It intends to grow its customer guidelines done its DTC business strategy. It besides intends to widen its merchandise statement beyond scrubs to see different clothing and accessories for nan healthcare industry. Along pinch emphasizing its products, FIGS places a privilege connected firm societal responsibility. The institution has been successful a maturation shape since its inception successful 2013. It went nationalist connected nan NYSE successful 2021.

Healthcare Supplies Industry Analysis

The healthcare proviso manufacture is comprised of companies that supply aesculapian devices, equipment, and supplies basal for nan diagnosis, treatment, and guidance of diseases and different aesculapian conditions. This manufacture is an basal portion of nan healthcare sector. It provides entree to instrumentality that healthcare professionals request to present safe treatment.

According to a report by Markets And Markets, world aesculapian supplies marketplace size is projected to turn by 3.4% successful nan adjacent fewer years. The worth is estimated to scope $164 cardinal by 2027. One of nan cardinal drivers for this maturation is nan aging population. This is starring to an summation successful chronic conditions specified arsenic cancer, diabetes, and cardiovascular diseases. Moreover, nan COVID-19 pandemic accrued request for individual protective instrumentality (PPE) to protect healthcare professionals from infectious diseases.

However, nan emergence successful ostentation has slowed nan maturation of this manufacture down a bit. This is chiefly because of nan hurdles successful nan proviso chain, thereby expanding inventory costs. But I judge this is simply a impermanent setback. This manufacture has increasing request from consumers, not only successful North America but globally arsenic well.

Strengths

With its DTC business model, FIGS is capable to gauge nan personification acquisition closely. They person been capable to innovate their merchandise designs and colors based connected customer feedback. Of nan customer reviews that I person travel across, astir declare that they are satisfied pinch its value and durability. There are immoderate who person issues pinch its pricing, but these were conscionable a handful. I judge that FIGS's attraction connected firm societal work initiatives besides resonates pinch its customers. This was reflected successful nan customer reviews arsenic well. Moreover, they were capable to grow their progressive customers by 24% successful Q3 2022 connected a past 12 months (LTM) basis.

FIGS tin besides reap nan benefits of nan increasing marketplace size of nan healthcare proviso industry. Rising demands for this type of apparel by healthcare professionals will apt bespeak maturation successful FIGS's revenue. For that matter, gross astir doubled since 2020, presently opinionated astatine $490 million. However, gross maturation since December 2021 was only 6%. There are respective possibilities for this constricted gross growth. The awesome 1 tin beryllium attributed to nan emergence successful inflation. This mightiness person led to an summation successful costs of revenues. Customers besides go frugal pinch their spending, which mightiness person constricted their purchases.

That said, FIGS is besides increasing its beingness internationally, chiefly successful Canada, nan UK, and different European markets. This led to an summation of 49% successful nett gross successful Q3 2022. In 2020, surgical drapes, scrubs, and gowns comprised 35% of nan U.S. healthcare supply. This creation continues to persist. Moreover, FIGS chiefly manufactures these very products. It is besides expanding its merchandise statement to different aesculapian accessories. Hence, I judge nan request for these products will yet use nan gross and maturation of FIGS.

Weaknesses

My superior interest pinch FIGS's financials is nan expanding costs of inventory. Its inventory has doubled successful nan past 12 months, reaching $170 million. As mentioned earlier, this could beryllium mostly owed to rising ostentation starring to declines successful purchases. Additionally, expanding labour and worldly costs mightiness effect margins.

Excess inventory tin necktie up a company's rate travel and retention space. This tin besides impact wide margins. The effect connected rate travel from operations tin beryllium seen successful its rate travel statement. Currently, its rate travel from operations is down by $26 cardinal for nan past year. There was besides nary important gross maturation successful nan past 12 months. If this business persists, it tin beryllium a origin of interest for investors. However, since nan institution is heavy investing successful expanding its operations globally on pinch its merchandise line, I tin discount this interest for its maturation initiatives. That said, this business should not beryllium overlooked. Since its inception, its full return dropped by 48% (see below). This mightiness not amended anytime soon owed to nan ongoing setbacks.

ChartData by YCharts

The healthcare assemblage arsenic a full besides comes pinch regulatory risks and changes successful healthcare policies. Therefore, contempt nan maturation prospects, nan healthcare proviso manufacture faces respective challenges. These challenges not only see strict regulatory standards, but besides challenges specified arsenic precocious manufacturing costs and a shortage of skilled labor. We request to see these factors while making an finance determination successful summation to nan intrinsic financial factors of nan firm.

Valuation

I person utilized P/E (price to earnings) multiples and EV/EBITDA (enterprise worth to EBITDA) valuation methods erstwhile evaluating FIGS. I person not utilized a DCF (discounted rate flow) valuation method because location isn't capable accusation connected analyzing its rate travel trend. Moreover, since FIGS is successful a high-growth shape pinch antagonistic trailing 12 months (TTM) levered free rate flow, nan DCF method isn't justified. It has a TTM P/E ratio of 58 vs. a sector-median P/E ratio of 25. This worth is much than double erstwhile compared to nan sector. We request to understand that P/E ratio unsocial cannot warrant a company's maturation rate. A higher P/E ratio tin besides mean that nan institution is overvalued.

Valuation utilizing P/E multiples and EV/EBITDA

Intrinsic Valuation of FIGS. Created by author.

Based connected my intrinsic valuation noted above, we tin spot that nan mean stock value comes retired to astir $6.70. But, FIGS is presently trading astatine $9.80. FIGS saw a 12% increase successful its stock value complete nan past mates of weeks. This is considered to beryllium nan aftermath of an analyst's raised net estimate. Investors flocked to nan shares, making assumptions astir its maturation and nan company's expertise to combat challenges related to inflation.

FIGS value abruptly accrued aft caller expert report

Price of FIGS Inc successful nan past week (The Motley Fool)

Even though location isn't a important quality betwixt my evaluated mean stock value and nan existent stock price, I americium still concerned astir its TTM net per stock of conscionable $0.18. This is not successful statement pinch its existent stock price. It besides has a PEG (price to net to growth) ratio of 29 currently, which is measurement supra nan adjacent marketplace value. This is again owed to accrued optimism successful its maturation rate. As such, I judge that FIGS is astatine slightest moderately overvalued.

Conclusion

Given nan projected maturation successful nan healthcare proviso industry, I judge that FIGS will prehend nan opportunity to grow its marketplace size. The ongoing innovations and expanding request successful this manufacture will summation FIGS's revenues. Management is focusing connected trading to get much customers. With its DTC business strategy, I judge FIGS has nan imaginable to summation its customer guidelines and retention rate. However, its existent inventory costs and anemic valuation interest me. Thus, for now, I complaint FIGS a hold.

This article was written by

Saloni Singh floor plan picture

I americium presently moving arsenic an Investment Research Intern astatine Sungarden Investment Publishing. I americium chiefly focused connected Equity Research Analysis. I person besides worked arsenic a Research Analyst successful various industries, specified arsenic healthcare, HVAC, telecommunication, and electrical power. I americium presently pursuing my Masters grade successful Finance pinch a Financial Analytics and Risk attraction astatine Stevens Institute of Technology. I person besides graduated pinch a Masters successful Engineering Management grade from nan Johns Hopkins University.My skills dishonesty successful Financial Analysis and Predictive Modelling, Portfolio Construction, Market Research, Risk and Decision Analysis and Business Development Strategies. Moreover, I americium willing successful exploring nan effect of ESG factors connected a firm's financial performance. Sectors I keenly travel are Consumer Cyclical, Basic Materials and Communication Services. Closely associated pinch writer Modern Income Investor.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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