All right, good afternoon, everyone. Thanks for joining us for Raymond James Institutional Investors Conference. I'm Rick Patel, research analyst covering global brands, soft lines, retail, and digital commerce here at RayJay. I'm thrilled to be hosting our next company, which is FIGS. FIGS is a digitally native company that focuses on medical scrubs and related lifestyle products targeting healthcare professionals. I'm thrilled to be joined by co-founder and CEO Trina Spear, as well as CFO Daniella Turenshine. Thank you both so much for being here. Trina, maybe you can help us get things started by talking about what inspired you to start FIGS as a business and what differentiates FIGS from what seems to be a pretty commoditized space in the market.
Sure, and thanks for having us. I think I'm going to move this. It's too loud. Are everyone okay? Okay, well, thanks for sticking around here late in the day. Thank you, Rick, for having us. So FIGS, about a decade ago, 11, 12 years ago, my co-founder Heather Hasson was sitting with a friend of hers who's a nurse practitioner at Cedars-Sinai, and she was wearing these baggy, boxy, awful, ill-fitting scrubs. And Heather said to her friend, "What are you wearing?" And her friend said, "These are my scrubs." And she said, "There's got to be something better out there. I'll find you better scrubs on the best shopper in the world." And she went out to all these different medical supply stores, and she saw racks and racks and racks of scrubs sold next to bedpans and knee braces.
She thought, "Wow, not only is the product awful, but the experience just wasn't there." She thought to herself at the time, which was like 2011, "Why were there these multi-billion dollar companies so focused on the athlete? What about the people saving lives? What about the people that help patients and dedicate their lives to serving others? What about them?" We teamed up in 2013 and set out to change an industry, bringing the highest quality medical apparel in the world to the best people in the world. We call them awesome humans, our healthcare workers, and then delivering an incredible experience direct to consumer that is easy and beautiful and seamless. With a few clicks on your phone, you can get your uniform and go to your job so that you can look good, feel good, and perform at your best.
That's what we're doing.
Can you talk about the size of the healthcare apparel market? How big is the market in general, and what's the right way to think about the rate of growth of that market?
Sure. So the U.S. healthcare apparel market is $12 billion. The global healthcare apparel market is $80 billion, and it's the fastest growing. Healthcare jobs are the fastest growing job segment over the next 10 years, and we'll basically take about 45% of the job gains over that time period. And I think if you think about healthcare professionals in general and healthcare apparel, this is a mandated industry. Healthcare workers must wear their uniform to go to their jobs. It's recession resistant. It's non-seasonal, non-cyclical. Healthcare workers are the backbone of any functioning society, and they're needed. And so as we look at the long-term future of where we are and where we're going, there's a lot of tailwinds in front of us.
Can you also talk about innovation, both on the core scrub side of the equation as well as on the non-scrub side? It feels like since your IPO in 2021, you've made a lot of progress in growing, particularly that non-scrub side. So just curious how we should think about the opportunities there.
Sure. So what we did in the early days was really, before FIGS, it was a V-neck top and a drawstring pair of pants. That was scrubs. And what we did was we really reinvented what scrubs could be. So we have mandarin-collar tops with jogger scrub pants. That wasn't even something that people could dream about. And since then, we've really innovated on our fabrications, on our silhouettes, on our fabric technology, on kind of all the areas of how do we solve problems for healthcare workers within scrubs. And even when we went public in 2021, people said, "Okay, that's great, scrubs brand, but how do you build everything else?" And to date, or last year, almost 20% of our business is non-scrubs, encompassing outerwear, under scrubs, compression socks. We have a footwear partnership with New Balance.
Kind of everything healthcare professionals are wearing to work, at work, from work, on shift, off shift, head to toe. I am wearing FIGS non-scrubs head to toe today. So this is our extreme jacket, really freaking cool. This is our scrub legging, the best. Urge all the women in the room to try them out, our footwear partnership with New Balance. And so it's been exciting to see that the whole layering system has really resonated with our community, and all of these categories are really growth levers for the business as we move forward.
Really great job on the product. As we think about the business zooming out 30,000 ft, so when you IPOed, it was pretty much just a domestic business, but you've made a lot of progress in international markets. Maybe give us a history lesson of the international journey and how should we think about the opportunities for growth going forward?
Sure. Well, I mean, the truth was that healthcare professionals around the world were unserved. We don't even say underserved. If you're a healthcare professional, a doctor, a nurse, a healthcare worker living in Mumbai or Paris or Munich or Kentucky, you similarly had an awful product and an awful experience prior to FIGS. And so we obviously started in the United States. In 2019, we opened up Canada, U.K., and Australia, English-speaking countries. And since then, we're in 20 other markets, so we're about 23 markets today.
And so where we've seen real success is that healthcare professionals, either they get a set from their system, they're kind of coming to FIGS to get three more sets of scrubs, and then over time, they're adding on these other pieces, whether it's their under scrubs, their outerwear, their fleece, their jacket, their compression socks, and really seeing that journey over time as they engage with the brand. And so we'll be opening up a number of new markets this year, and our whole goal is to become an iconic global brand over the next 100 years, and we're well on our way.
Can you also talk about the ramp of growth in international markets? When you launch in a country, are you seeing the same ramp that you saw in the U.S. when that was first getting started?
Yeah, we've been really encouraged by the growth that we're seeing in international, and I think even in the markets that we launched earliest in U.K., Canada, and Australia, we're continuing to drive growth in there through localization tactics like Trina mentioned. And then this year, we opened 10 new markets, two of which were Mexico and the Philippines. Chose those markets based on the demand, the organic traffic that we were seeing to our website, and it was really great to see that they've really outperformed our expectations, even with minimal marketing investment upfront, because all of the brand building that we've done in the U.S. has carried abroad. And so that ramp has been much quicker because everything we've done has really set the stage and done a lot of the legwork for that growth.
We're excited to continue to target markets where that demand is already there, where the worst customer experience is no customer experience, and we want to ensure that we're serving healthcare professionals around the world.
Can you also talk about the B2B side of the business, perhaps frame for everyone how big that side of the equation is in terms of the market opportunity and where you are in your journey for increasing penetration there?
Yeah, so I think when you look at the U.S. market, about 15% of the industry, so 15% of that $12 billion, is B2B, where healthcare institutions, private practices, and clinics are basically saying, "We are going to buy scrubs and uniforms for our entire team." And so we saw early days even people saying, "Hey, I don't want to just buy one set or five sets. I want to buy hundreds of sets." And so we built out a Teams platform to serve the B2B part of the healthcare apparel market. Internationally, it's even bigger than 15%, so we're seeing a lot of synergies between our international business and our Teams business. But Teams is a really important part of the growth trajectory as healthcare institutions are looking to professionalize and standardize and brand their workforce.
Concierge is an area of medicine that's essentially doubling to over $13 billion over the next 10 years. So you're seeing the One Medicals of the world. You're seeing Next Health, Sollis Health, Kindbody in fertility, VEG in the veterinary space, all these concierge parts of medicine popping up, and they have record membership because you and me as laypeople, we want to own our healthcare more. We want to have our medical records on our phone. Medicine is becoming localized and consumerized and personalized. In response, the entire healthcare world is shifting towards concierge medicine. In all of those institutions, like I mentioned, are turning to FIGS and saying, "Will you be our partner?
Will you help us brand our institution?" So what we're seeing is that business growing incredibly fast, 50% year-over-year, and it's a really sticky revenue chain because they are essentially putting their logo or we're putting their logo next to ours, which is an amazing thing. As new people join those institutions, they are becoming part of the FIGS family.
Can we talk about growth, specifically the growth of the market and what you're seeing in terms of the state of the healthcare apparel market? We've been through this period where there was an uptick in demand during COVID, and it feels like things are settling to a new normal now. What's the right way to think about growth for the category, both in terms of 2024 and what you see as the longer-term potential going forward?
Sure. I mean, I think we're in a little bit of a transitory pressure time period where inflation is impacting the healthcare worker. Two-thirds of our customers make less than $100,000 a year. I also think we're in a bit of a COVID overhang situation where healthcare professionals were on the front lines of essentially a war during the pandemic. I know all of us are saying, "COVID, that was so long ago. We're past that." If you're a doctor or you're a nurse and you're working in a hospital, COVID is front and center, and you still feel the aftereffects. So that's kind of shown up in the form of burnout and lower morale and stress and fatigue.
There's a real supply-demand imbalance in the system right now, where the demand for healthcare is at an all-time high, and the supply of healthcare workers, there's really a shortage. We believe that will normalize over time. It has to. All society is depending on healthcare workers, or we're all going to die, not to be morbid, but we need them, and they're not going anywhere, and we need more of them. That's on us. It's also on our governments, and it's also on kind of society to normalize this over time. As I said earlier, this is the fastest growing job segment over the next 10 years of any other job segment in the world, and they are the backbone of any functioning society.
And so as we continue to be the brand for healthcare, this is a time in our history where we just have to—the onus is on us—to show up even more with great product and great experiences and connect with this community in really deep ways.
We get a lot of investor questions around the U.S. business. It's the segment where you're furthest along. What do investors need to know in terms of new customer acquisition and some of the trends that you're seeing there? And what's the right way to think about the opportunity for acquiring new customers as we go forward?
So one of the things we've been speaking to is that we really saw record customer acquisition over the past several years. We've doubled our active customer base since 2020, so we're comping some really strong growth numbers that we're super proud of. But we are seeing that active customer growth slow in the near term. We're also really focused on shifting more of our marketing spend into top-of-funnel initiatives, which we ultimately believe is going to enable us to attract those really high LTV customers. But we anticipate that there's a little bit of a longer payback associated with it, but we're focused on how we build the brand in the right way over the long term. So I think still continuing to see growth in our active customer base.
If you look at our active customers versus total healthcare professionals in the U.S., we're about 10% penetrated, so we have a lot of opportunity to continue to grow from here. But modeling, as we work through the macro and we work through some of the burnout that Trina spoke to, a little bit of pressure in that number looking into 2024.
Just to clarify that point, so when we think about the pressure, it's slower growth as opposed to declining growth.
Yes. Yes.
Great. And then can we also talk about margins? Remind us of where the margins are for the business today, what the guidance is for 2024, and perhaps your long-range target.
So in 2023, we delivered 15.8% adjusted EBITDA margin for the full year. So it's always been a part of our story to deliver growth with profitability, and it's something that we continue to be incredibly focused on. Looking into 2024, we're guiding to margin adjusted EBITDA margin of 11%-12%, and we'll talk through some of the components within that. Gross margin, we expect to be pretty similar year-over-year. We're going to continue to see some mix shift as we invest in innovation and product mix shift, but we're offsetting that with duty drawback opportunities that we're going to aim to get in the later half of 2024. Selling is where we're seeing some transitory pressure in 2024.
We're embarking on a fulfillment enhancement initiative where we're transitioning to a new fulfillment facility, and as part of that, we're going to have double the cost of operating two facilities at the same time. That's about $14 million or 250 basis points. Looking into 2025, it's a lot of opportunity to leverage that. One, that 250 basis points of transitory is going to fall away, but also we aim to open a Canadian DC in 2025 that's going to drive meaningful profitability enhancements to our international business, duty savings, shipping savings, get our shipments to our customers faster, and also the opportunity to leverage fixed costs within selling and drive better cost per order. And then similarly, in G&A, as we accelerate there, a lot of opportunity as we accelerate sales to leverage G&A.
We believe that high Teams Adjusted EBITDA margin is a good kind of medium-term target for us looking past 2024. When you remove some of that one-time pressure in 2024, we feel like we're really close to that.
So maybe we can dissect that long-range target a little bit more. So as we think about gross margins, there's a lot of puts and takes as we think about the next year. Once we exit the next year, what do you see as the right long-range target for gross margins, and what are the building blocks that are going to help you get there?
I think we are really focused on delivering really high gross margin rates, around 69% today. I think puts and takes within there. We're continuing to invest in quality and consistency and ensuring that we have the best product on the market. We're continuing to invest in innovation. We're building out our layering system and non-scrub wear, as Trina spoke to. And so mix shift will have some margin impact. We aim to offset that with improvements in our core scrub wear portfolio and also optimizing within our supply chain to ensure that we're making the right product in the right facility at the right time. And so I think for the go forward, we're really proud of where our gross margin is, and we're going to aim to continue to deliver at that really high gross margin rate.
The flip side of that would be on the OpEx side. Maybe help us understand the investments that you need to make in OpEx, perhaps as we exit 2024 and we think about your longer-term aspirations globally and what it's going to take to get there.
Yeah. So looking at investments kind of beyond 2024, we spoke to a Canadian DC that is going to be a much smaller investment than what we're making in our current DC from a capital perspective and also from an OpEx perspective. And it's going to deliver a really strong ROI from the outset because of the duty and shipping savings within that. And we're going to continue to invest in our people. We're going to continue to invest in our growth levers of Teams, international, and retail. But we see a lot of opportunity in 2025 to recapture margin. We think that that is a year of margin expansion, especially within selling as we recapture that 250 basis points of transitory expenses.
Can you also talk to us about the health of the balance sheet, what your view is right now? And as a business that generates a very good amount of free cash flow, what's the right way to think about capital allocation strategies?
So today we have $250 million of cash and short-term investments on our balance sheet. We generated $85 million of free cash flow in the year. It was higher than usual as we sold down on our inventory balance, but we aim and expect to continue to generate a healthy cash balance looking into 2024 and beyond. I think we continue to believe that the best investment of our capital is back in our business and driving future growth. Retail is something that we're just getting started with, that we see a huge opportunity for the future, but also within Teams, within international, as we think about software investments in our app. We've talked about fulfillment and what we're looking to do there in the near term.
And so we want to continue to invest in the business and continue to invest in the things that are going to drive growth over the long term. I think as we continue, if we continue to generate excess cash beyond what is needed to invest in the business, we'll evaluate other capital allocation opportunities, particularly a share buyback. Definitely, if our stock remains from what we consider undervalued, it's something that we'll continue to assess.
Great. The last question I'll ask you is really just around the competitive landscape. We started this conversation by saying that by talking about how this is a category that's been largely ignored by the market for a while, and as FIGS has made great progress in the category, you've also had new competitors pop up. Maybe give us a picture of what the competitive landscape looks like right now and what gives you continued confidence that you'll be able to be very strong and relevant in this category.
Sure. So I think there's essentially two types of competitors. The old world was what we called the anti-moat. All those companies were stuck in the strip mall that I described at the beginning of this session. And the biggest player there was a player called SPI. They've recently gone bankrupt, Chapter 11. And so I do think that's a little bit of what we set out to do. It's a little bit of the Blockbuster Netflix example where you disrupt an industry, the old player can't innovate and can't keep up, and they have since kind of gone down. In terms of the newer players that have been around, there's a number of DTC companies that have popped up after seeing our success when we went public and have tried to copy certain elements of our business model.
I think to date, all are meaningfully less than $100 million in sales. We really do feel like it is very difficult to build an authentic brand over a decade-plus time period, and that's what we've done. We have the love and the loyalty of the healthcare community. We are the brand that stands up for them and supports them every single day. The onus is on us to continue to execute, continue to be better, faster, stronger, smarter, all the things, and continue to innovate. That's what we're going to go do. But I do think this is a time where we can widen the moat between us and everybody else and set ourselves up as the industry kind of comes back from the macro side to be healthier and stronger.
Given $250 million of cash, no debt, the scale that we have, the leadership position that we have, the authenticity that we have, the product innovation engine, the creativity engine, it's all there, and we just need to continue to.