Good afternoon, and thank you for joining the FIGS first quarter fiscal 2023 earnings call. My name is Kate, and I will be the 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 call over to our host, Jean Fontana, Head of Investor Relations at FIGS. You may proceed.
Good afternoon. Thank you for joining today's call to discuss FIGS' first quarter 2023 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. They may include predictions, expectations, or estimates, including about future financial performance, market opportunity, or business plans. Forward-looking statements involve risks and uncertainties. Actual results could differ materially. These and other risks are discussed in our SEC filings, including in the 10-Ks we filed today, which we encourage you to review.
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 supplemental slide deck we issued today. I would like to turn the call over to Trina Spear, the Chief Executive Officer of FIGS.
Thank you. Good afternoon, everyone. We are pleased to have exceeded our first quarter expectations across key financial metrics. We delivered profitable growth through disciplined execution of our strategy and are on track to achieve meaningfully improved inventory levels by year-end. While the macro environment remains uncertain, FIGS is an iconic brand. I believe that we will advance our leadership position in the healthcare apparel industry while expanding our chance. Touching on the financial highlights from our first quarter, net revenues grew 9% to $120 million as compared to the first quarter last year. We delivered gross margin of 71.3% and adjusted EBITDA margin of 13.4%, all of which were above expectations.
Our growth was fueled by a 22% increase in active customers, driven by strong customer loyalty as reflected in record reactivation rates during the quarter, as well as new customers. LTM revenue per customer was down 4% to $216, due in part to a nearly 2% decline in AOV and lower frequency versus last year. While these metrics were down year-over-year, they were ahead of our expectations. Once macro pressures subside and as we continue to advance our initiatives, we believe these metrics will improve. International continued to deliver strong performance with revenue growth of 45%, driven by expanding brand awareness and engagement across our global markets. I want to thank our team for their unwavering commitment to serving healthcare professionals each and every day.
I also want to thank our awesome humans for their loyalty as we continue to support them through our solutions-based product innovation as well as through our efforts around advocacy and giving back. Since our call at the end of February, we've continued to build out the layering system with proprietary non-Scrub products engineered to work with our best-selling Scrubs. Our recently launched ContourKnit Jacket exemplifies how we transform customer feedback into innovative products with distinct features that address the specific needs of healthcare professionals. Our ContourKnit Jacket has been one of the best-performing outerwear pieces in our history. As we continue to see notable strength in our extended size offering launched in December, we are encouraged by both new customer acquisition and the positive feedback we are receiving on our extended sizing offerings.
The work we have done around fit showcases our commitment to serving all healthcare professionals, and we will continue to roll out extended sizes across our assortment throughout the year. Looking at our marketing initiatives, in celebration of our 10-year anniversary, we launched our FIGS10 Iconic Series campaign, giving our healthcare professionals a chance over 10 weeks to grab their favorite Injection Colors by bringing back our most popular ones of all time. Loyal healthcare professionals jumped at the opportunity to purchase these iconic colors, while those new to FIGS were able to experience them for the first time. This event is a great example of how we create excitement and move through inventory while maintaining discipline around our discount rates.
Although our recent color launches have not generated the same level of demand that we saw during the height of the pandemic, they remain one of the most effective drivers of customer traffic and excitement. For International Women's Day, we celebrated Dr. Sarah Kilpatrick, Chair of Obstetrics and Gynecology at Cedars-Sinai Medical Center. She has done incredible work in women's medicine and co-founded CREWHS, the Center for Research in Women's Health and Sex Differences. As a female-founded and led organization, we are proud to celebrate Dr. Sarah Kilpatrick's achievements and especially proud to have donated $250,000 towards CREWHS's medical research. Our commitment to this community has fostered enduring brand strength and remains a key differentiator. Data continues to illustrate that FIGS garners industry-leading customer loyalty. In a recent third-party brand survey, FIGS ranked highest on brand sentiment and across several attributes, including quality, comfort, functionality, and style.
We also experienced the highest purchasing intent from respondents. This aligns with private market data indicating that the percent of new customers who repurchase FIGS within one quarter of their initial purchase is two to three times higher than for other Scrub companies. Our goal is to continue to deliver the product and experience that rises the most and furthers our lead versus everyone else. To that end, I'd like to provide an update on our growth strategies. As you know, we are laser focused on innovation. Over the last few years, we've built our layering system of Scrubs and non-Scrubs with purposeful functionality and comfort in every product while combining this with our unique, cool, and cycle DNA to keep our healthcare professionals engaged with our brand with constant innovation, which is informed by our data through customer feedback.
Our recently launched non-relax jogger was designed based on feedback from our customers requesting a raised waistband. We are seeing strong early results and awesome feedback across social media. Our FREEx fabric, featuring anti-static, lightweight, water-repellent attributes is another example of innovation resulting from customer requests for lighter weight alternatives. We will continue to build our solutions based offerings utilizing this fabrication, which is made almost entirely from recycled and upcycled materials. Our FIGSPRO office-ready collection addresses the demand gap left by traditional apparel companies that don't meet the specific needs of healthcare professionals. We plan to add several new silhouettes and fabrics to our FIGSPRO line, which is yet another example of how we're expanding our TAM. Innovation like FREEx and FIGSPRO represent completely new categories from which we're able to learn and iterate to build out these collections.
While we continue to expect our core Scrubs to represent a high percentage of our overall sales, we are excited about the potential to drive significantly higher net revenue per active customer by addressing a greater portion of healthcare professionals' needs with expanded offerings. Importantly, our ability to drive revenue in non-Scrubs illustrates that healthcare professionals have entrusted us to address their lifestyle needs beyond their Scrubs. Next, I will speak to our marketing strategy. Across our communication channels, we are being more intentional in our storytelling to emphasize our product attributes as we create brand moments that showcase our leadership in product innovation and our relentless support of the healthcare community. Our We're Not Done Being The First campaign highlights our product attributes. This theme was introduced for the launch of the ContourKnit Jacket, and will align with future product launches throughout the year.
Our stream of product innovation creates a flywheel effect in our business through word of mouth. As our loyal healthcare professionals go to work each day wearing the latest FIGS, they generate new customers. As our base gets bigger, we expect this flywheel effect to multiply. This is how we have maintained efficiency in marketing spend that enables us to invest in new ways to reach our community. We're also delivering a more sophisticated market communication around product education to keep us top of mind amongst the healthcare community. This evergreen marketing approach is showing early success in driving stronger traffic on non-launch days, which is enabling us to maintain a highly efficient marketing spend. Our ambassador program remains an important driver of this organic growth. We've employed a more localized strategy to better leverage our growing network of influential ambassadors by hosting frequent events across North America.
For the second quarter, these events will include our Nurses Week event in Seattle, Meet Fig in Toronto, and Pride Day in San Francisco. Turning to personalization, we are encouraged by the signs we're seeing. As our database has grown and we have expanded our product offerings, we're building on our personalization strategies, and we're effectively tailoring our communication to every single healthcare professional based on their individual needs and wants. Lastly, we're driving demand in our early-phase business. Internationally, we're already seeing the benefits of localization strategies, and we're rolling out translations for certain non-English speaking countries starting this month. We continue to build upon our early learnings as well as grow our local ambassador networks within each market. Importantly, we're maintaining our investment discipline as we build our presence across regions.
With almost 120 million healthcare professionals outside of the United States, we are extremely energized by the opportunity in front of us. Within TEAMS, we remain on track to launch an updated version of our technology platform as we look to elevate our customer experience and expand our available assortment. Today, this is a small portion of our revenue, and we're making sure we maintain a methodical approach to grow this business over time. We believe this is a significant opportunity that we've barely tapped into. Turning to retail. We are on track to open our first store this fall. We believe that our retail stores will provide a great opportunity for healthcare professionals to connect and experience our products and to engage with each other through our community hubs. Operationally, we are committed to making investments that will support long-term profitable growth.
We are making progress on our fulfillment enhancement project, which we expect to drive greater flexibility, reliability, and speed to market across our distribution channels. Daniella will provide an update on the project details shortly. We are also continuously working to diversify our supply chain with best in class manufacturers. We've always prided ourselves on the strength of our supply chain, and we're excited to build next level capabilities as we work with amazing partners that help us bring our vision to life. In closing, we continue to expect growth in 2023 to be moderated by a challenging and uncertain macro environment. While we continue to see that the healthcare industry has greater resilience than other industries, our healthcare professionals are not immune to higher inflation.
We continue to focus on building strong loyalty and connections with our customers. When these macro headwinds subside in the future, we're well positioned to deliver accelerated growth. In the meantime, we're managing our business prudently, enabling us to deliver continued profitability. Overall, we plan to continue to disrupt the landscape of the healthcare apparel industry and expand our TAM by helping healthcare professionals do their jobs better and look and feel great on shift, off shift, head to toe. We see tremendous opportunity globally and believe that our product innovation, combined with the power of our brand, will fuel further market share gains. We have scale, profitability and a strong balance sheet with no debt. We expect to generate free cash flow to support our sustainable long-term profitable growth for years to come. With that, I'll turn the call over to Daniella.
Good afternoon, everyone. We are pleased to deliver better than expected results for the first quarter, with strong flow through of top line outperformance. We are making progress against our initiatives while exercising discipline around expense management. We expect to deliver positive Free Cash Flow for the remainder of the year. I will begin with a review of our first quarter financial results, followed by our outlook. Beginning with first quarter net revenues, we grew 9.2% to $120.2 million, compared to $110.1 million in Q1 last year, reflecting an increase in orders partially offset by modestly lower AOV. While frequency trends in AOV were down year-over-year, they were better than expected. Growth in active customers remained robust, increasing 22% as we welcome new healthcare professionals to the FIGS brand globally.
We continue to see more of our customers who have not purchased within the last year come back to the brand after months falls. Turning to AOV, we saw a decline of 1.7% to $114. This compares to $116 in Q1 2022, which benefited from an elevated mix of non-Scrub wear associated with one of the largest New Balance launches, as well as supply chain disruptions causing out of stocks in our core Scrubs product. A higher mix of sales were derived from promotions, again, in line with our expectations given the macro environment. Gross margin for Q1 was above our expectations at 71.3%, compared to 71.2% in Q1 2022.
The 10 basis point increase compared to Q1 last year was primarily due to lower air freight utilization, partially offset by the higher mix of promotions and higher duties. Moving to operating expenses. Selling expense for Q1 was $31.2 million, representing 25.9% of net revenues, compared to 20% in Q1 2022. This 590 basis point increase was largely due to higher costs within fulfillment, including a 290 basis point impact from incremental warehouse storage and associated labor necessary to house inventory we pulled forward. To a lesser degree, the increase in selling expense reflects duty subsidies that we put in place in the third quarter of last year for international sales. Marketing expense for Q1 was $17.1 million, representing 14.2% of net revenues, compared to 14% in Q1 2022.
Our marketing initiatives enabled us to maintain a healthy return on ad spend while driving strong new customer acquisition. G&A expense for Q1 was $34.2 million, representing 28.4% of net revenues, compared to 24.7% in Q1 2022. The increase was due to the change in accrual methodology we discussed in our Q3 2022 call related to charitable donations, an increase in stock-based compensation, and an increase in professional fees, including public company costs such as those associated with the implementation of Sarbanes-Oxley 404. Our net income was $1.9 million, or $0.01 in diluted EPS for the first quarter. Adjusted net income was $2.5 million, and adjusted diluted EPS was $0.01 in Q1. This compares to adjusted net income and adjusted diluted EPS of $10.5 million and $0.05 per share in Q1 2022, respectively.
Our adjusted EBITDA for Q1 was $16.1 million, for an adjusted EBITDA margin of 13.4% compared to 22.7% in Q1 2022. Turning to our balance sheet, we maintained a strong cash position, finishing the quarter with $156 million in cash and cash equivalents. Inventory totaled $180 million at the end of the first quarter. As we stated on our last call, we expected inventory to peak in Q1 and decline sequentially through the remainder of 2023. Looking at inventory on hand, approximately 55% is comprised of always in stock, seasonless core styles and classic colors, and therefore doesn't have significant obsolescence risks. An additional 20% of our inventory balance is in upcoming styles and colors.
We are making good progress towards getting inventory to 25 weeks of supply by year-end while maintaining discipline around promotional activity to protect the long-term health of our brand. Moving to our outlook. Consistent with the factors we discussed last quarter, our guidance assumptions incorporate a challenging macro environment through the remainder of 2023. We expect these headwinds to continue to impact frequency trends and result in a higher mix of promotional sales. As we manage through these temporary headwinds, we remain profitable and will continue to make investments in our business to drive healthy long-term growth. For the second quarter, we expect net revenue growth to be between 8% and 10%. We expect Q2 gross margin to be slightly below 68% due to a higher mix of promotional sales associated with our annual Nurses Week event and product mix related to new launches.
We expect these headwinds to be partially offset by lower air freight utilization year-over-year. Looking at operating expenses. Due to higher labor utilization than we previously anticipated, we now expect the warehouse storage fees and associated costs to impact selling expense by approximately 220 basis points in the second quarter. For G&A, we continue to expect to leverage year-over-year due to an increase in stock-based compensation and personnel-related costs. As a result of these factors, we expect second quarter adjusted EBITDA margin to be between 9% and 10%. For the full year, we expect net revenues to increase between 5.5% and 7.5%. As we look at the second half of the year, we expect tougher compares for two reasons. First, we are anticipating a difficult macro environment.
Second, we will be lapping the very strong new customer adds last year. We expect Q3 to be the most challenged in terms of year-over-year net revenue growth due to the shift in timing of our product launch and marketing calendars. We now expect growth margins for the year to be closer to 69% as we pass through the better-than-expected Q1 results. We expect growth margin to improve sequentially in the back half due to timing of promotional calendars and product launches. Turning to selling expense. As it relates to our fulfillment project, we are providing an update on the timing of this initiative. The estimated cost associated with the implementation and execution of this project remain between $16 million and $18 million. However, we now expect to incur the bulk of these costs in 2024.
Associated with this timing shift, we plan to extend the use of storage facilities through the end of 2023. As a result, we now expect selling expense pressure from excess storage and associated costs, in addition to initial fulfillment costs, combined to be approximately 250 basis points for the full year of 2023 versus our previous expectation of 300 basis points. G&A is still expected to be leveraged for the full year in part due to investments associated with growing our international and TEAMS businesses, product innovation, and an increase in stock-based compensation, as well as our accrual for future inventory donations. As a reminder, our G&A for Q3 last year reflected 190 basis point benefit due to a change in our accrual methodology for charitable donations.
As a result of these factors, and based on our Q1 outperformance, we now expect adjusted EBITDA margin for the full year of 2023 to be between 12% and 13%. We expect capital expenditures of between $24 million and $26 million for the full year of 2023. This reflects approximately $20 million for the fulfillment project, with the remainder being related to software investments and our retail store build-out. We remain a clear leader in healthcare apparel with significant growth opportunities in front of us. Our strong balance sheet and ability to generate healthy Free Cash Flow positions us well to invest in our future growth. Near term, we remain focused on managing our business prudently through macro and cost headwinds.
We believe we have a line of sight to return to high teens plus EBITDA margin as we move past some transitory costs, fulfillment investments, and as we right-size our inventory. With that, I will turn it over to the operator to kick off our Q&A session. Operator?
Thank you. Our question and answer session will now begin. If you would like to queue up for a question, please press star followed by a one on your telephone keypad. Our first question will be from the line of Edward Yruma with Piper Sandler. Your line is now open.
Hey, good afternoon. Thanks for taking the question. I guess first, thanks for the update on inventory and when you kinda expect to get to alignment. I guess just maybe looking at some of the promos you ran in the first quarter, how would you gauge their success in kinda closing out the inventory you wanted to close out? As we think about the promotional cadence going forward, are there, you know, as we think about the shape of that kind of promotional curve as you wind through that excess inventory? As a follow-up, I know you guys had some really interesting innovation this quarter. You launched Reed Scrub Jacket. Maybe just any more color on the performance of some of the new SKUs you launched and kinda how you see that unfolding for the balance of the year? Thank you.
Thanks, Ed. I'll start with your inventory question. As it relates to the success of our promotions in the first quarter and what that curve looks like for the remainder of the year, you know, our inventory was as expected at the end of the first quarter. Really getting our inventory into a more normalized position is a really big priority for us, and we do have initiatives in place to get to 25 weeks of supply by year-end. I think just as a reminder, we're a uniform business. You know, our product is seasonless. It doesn't go out of style. 55% of our products is in core styles and classic colors, which are always in stock, always available on our site. We're confident we'll move through the products at reasonable sell-through rates and disciplined promotional levels.
We're really focused on balancing protecting the brand for the long term with the right pace to move through our inventory balance. As we've done, we're gonna continue to really keep a similar promotional cadence that we have to the prior year. We did that in the first quarter. We're planning to do that into the second quarter as well. We are being mindful of mix shift that we're seeing into some of these more promotional times. Looking at our inventory balance, we have initiatives that we're doing to really work through the balance outside of promotions. You know, first, as we've seen shipping times normalize, we've been able to shorten our lead times, which has really enabled us to be more flexible with our inventory planning.
We're updating our purchasing to buy more shallow in the future, and we're bringing back previous launches of limited edition inventory in ways that feel really new and exciting to the consumer, like you saw in the FIGS 10 Iconic Series. With that, I'll turn it over to Trina.
Thanks, Daniela, and thanks, Ed, for the question. In terms of the Reed and Page Jacket, those were great additions. They're cargo Scrub jackets, eight pockets. You know, I think it's actually one of our most technical Scrub jackets that we've launched. We had a number of other product introductions throughout this year that, super excited about and really resonated well with our community. You know, to the point about innovation, I really wanna reinforce how we think about it at FIGS. Product innovation is first and foremost about solving real problems for healthcare professionals, and we do that with premium products. Sometimes this is as, just as simple as updating pockets, like what you saw with the Scrub jackets, adding zippers, changing our waistbands, to classic silhouettes. You know, that's On one end.
On the other end, it's, you know, building completely new businesses, you're seeing that right now with our FIGS PRO line, you're seeing that with our FREEx fabrication, and you're going to see more going forward on all of these fronts. This all comes back to listening to our customers and creating products that enable them to perform at their best. Everything we do at FIGS is designed with intention, and every product we make becomes part of our layering system, which coordinates across our product lines, across our colorways and our accessories. It's one of the reasons that almost 70% of our revenue is from repeat customers. To Daniella Turenshine's point, when we think about our inventory levels, they're not impacted by the amount of newness and innovation that we're able to deliver to our customers.
Our new launches keep our customers engaged with our brand, whether they're purchasing the product that we just launched, like you saw with the Reed,and t he Page jackets, or whether they're coming back to buy their favorites, our core or other products that have existed on our site. You know, as we think about innovation, it's happening at FIGS every single day, 24/7, 365 days a year, and it's driven by solving real problems in the most creative, comfortable, and functional way possible. That's why we're where we are, and that's this is a huge differentiator for us.
Thanks so much.
Thank you. Our next question will be from the line of Alice [audio distortion] with Bank of America. Your line is now open.
Hi. Thanks for taking my question. Can you please elaborate on the quarter to date trends that you've seen, and also how AOV conversion and customer purchasing frequency have trended since the end of the quarter?
Our Q2 guidance is not necessarily reflective of our growth rate quarter to date, but really it's an expectation of the quarter's performance in aggregate. Given our main event of the quarter, Nurses Week is actually kicking off today, we still have a lot of volume in front of us, and we're cognizant of that in the guide. We're not speaking specifically to trends inter-quarter today.
Got it. Thank you. Just really quickly, can you talk a little bit more about the TEAMS business % of mix and any progress in signing up more customers? Like, what % of the assortment is currently available versus, you know, what you want to make available through that program? Just any quantifications around that would be really helpful.
Sure. You know, our TEAMS business is smaller today, but there's a massive opportunity in front of us. 15% of healthcare professionals receive Scrubs, receive their uniforms from their institution, we're really excited about this opportunity. You know, we're on track in terms of upgrading our platform and to incorporate more availability across our assortments. You know, it's going to enable more types of institutions to participate and be a part of the FIGS brand, from hospitals to schools to med spas to concierge clinics, private practice. We couldn't be more excited about our TEAMS platform, everything that we're doing to help standardize and professionalize, you know, medical teams across the U.S. and across the world.
Thank you.
Thank you. Our next question will be from the line of John Kernan with TD Cowen. Your line is now open.
Excellent. Thanks for taking my question, and congrats on a nice first quarter. Daniella, can you talk
Thank you.
... to the path back to that high teens, adjusted EBITDA margin? You know, previously, it was in the twenties. Obviously, there's been a lot of changes in inflation since that original target came out, but you are giving us pretty specific detail on some of the selling expenses related to inventory and fulfillment costs. Just wondering how we should think about the sequencing of that path back to high teens adjusted EBITDA margin.
Definitely. Based on what we see today, we believe we have significant opportunity to drive EBITDA margin expansion over the longer term. In 2023, as we spoke about, we're seeing pressure from a few factors. First, we're seeing transitory gross margin pressure, a couple 100 basis points due to the combination of promo mix and also freight related to sell-through of inventory that we purchased last year. Secondly, we're seeing approximately 250 basis points of selling pressure, mostly from excess storage fees. Moving to 2024, we do have the bulk of the $16 million-$18 million in incremental costs related to the fulfillment enhancement project, but excess storage fees are going to largely go away. Net-net, we will see, you know, some more pressure in fulfillment in 2024 versus 2023.
All that being said, our core business is high margin, replenishment driven, highly profitable, and cash generative in a normalized state. There's a lot of short-term impacts that are creating pressure, but the fundamentals of our business remain strong. Over the longer term, we continue to expect gross margin to, you know, approximate 70%. We're gonna aim to keep marketing expense at around 15% of net sales. Selling is going to normalize in 2025 and beyond. Looking further into the future, we do expect, as we accelerate growth, that G&A is also going to be able to leverage from where we are today.
Ultimately, our goal is really to ensure that we're making the right decisions for the long term, while sustaining a strong profitability profile today, and we feel really confident in our ability to do so.
Excellent. That's helpful. Maybe, Trina, you could talk to customer acquisition and retention costs. Daniella just said you plan on keeping marketing expenses relatively flat as a % of sales. I'm just curious in terms of, you know, near-term marketing trends, it looked like marketing expense per active customer ticked down a little bit from where it was, and year-over-year. Just curious what you're seeing from a marketing spend and an acquisition and retention perspective. Thanks.
Yeah. I mean, I think it's been really encouraging. We've seen our customer acquisition trends over the last number of quarters, and it's incredibly strong. I think the same dynamics that we've always talked about remain to be true. How do we acquire customers? It's mainly word of mouth, right? Every FIGS customer is a walking billboard acquiring that next customer for us. That's a trend that drives our efficiency to the levels that you've seen, you know, over the last number of years. You know, over 60% of our traffic is organic. The second thing that we have that many don't is the replenishment nature of our business. Almost 70% of our customers are repeat that we're not, you know, acquiring for the first time.
Those two dynamics really drive what we would call a paradigm shift, right, flipping that paradigm on its head, where as we grow, as we scale, we can become more and more efficient. Now, if we wanted to drive that, you know, way down, we could. Our goal is to keep, to Daniella's point, our marketing at around 15% as a percent of sales, which as a direct-to-consumer, almost 100% digital company, you know, many haven't been able to pull that off. We are proud of our ability to keep acquiring customers at such an efficient level and do it while bringing more and more healthcare professionals into the FIGS family.
Got it. Thank you.
Thank you. Our next question will be from the line of Brooke Roach with Goldman Sachs. Your line is now open.
Good afternoon. Thank you for taking our question. Trina, I was wondering if you could start by talking about the drivers of the record reactivation rates that you saw in the quarter. What was it that brought those customers back to the brand now? Are they engaging in any specific types of new innovation or promotional activity that they didn't in the past?
Yeah. I mean, I think it's a function of, you know, our repeat frequency has been extended a bit. You're seeing that show up where customers are spending a little bit more time between purchase. It's not that they're leaving FIGS, right? They're just spending a little bit more time before they come back and shop again. I do think it's a function of a few things. It's definitely a function of our innovation. We launch products every single week. Our customers are coming back. It's driving traffic, it's driving hype, it's driving excitement and bringing our healthcare professionals back to engage with us. You know, a bit on the promotion side, we're seeing more customers engage on that level, just given the environment and given what's happening from an inflation perspective.
We feel really good as, you know, macro pressures subside over the long run that, given how much bigger our base is, given how much customers we're acquiring, the position that we're gonna be in you know, as the macro normalizes over time, we've never been in a stronger position. It's really exciting to see, and you see it in the customer acquisition, you see it in the re-reactivation, and you see it as we've seen as the frequency is normalizing as well.
Great. Maybe a question for Daniella. Daniella, I think you mentioned air freight recapture as a driver of some of the outperformance in gross margin in the quarter. Can you quantify the benefit that air freight was in 1Q, perhaps help us understand what air freight quantification is embedded within this updated 69% gross margin guide for the year? Thank you.
Yeah. As expected, we are anticipating to see better air freight utilization year-over-year. It was one of the benefits year-over-year from the first quarter. It was also, came in better than we expected. Continuing to drive lower air freight utilization. As a reminder, we're not bringing in really much product at all inbound via air freight today. What we are doing is selling through product that was air freighted in 2022 that's already in our balance. Inclusive in our gross margin guide of just below kind of 69% for the full year, we've incorporated that continued benefit that we expect to see from lower air freight utilization over time.
Great. Thanks. I'll pass it on.
Thank you. Our next question will be from the line of Matt Koranda with Roth MKM. Your line is now open.
Hey, guys. Good afternoon. Thanks for taking the questions. just maybe wanted to see if I could get at the re-engagement from a different angle. Curious, maybe could you quantify or maybe just qualitatively discuss how big is the pool of lapsed active users that you have to pull from? What does that mean for marketing efficiency on a go-forward basis?
It's definitely been.
What we've been saying, as Trina spoke to before, is a record number of reactivations. We have people in our customer base who, as kind of those frequency trends expand and as we see a little bit of an increase in days between purchase, they're waiting longer, and we see them coming back in month 13, 14, 15. Definitely on the marketing side, we're targeting those customers through our personalization strategies and focused on providing them with messaging and content to drive them back to the site. It's definitely an opportunity for us in the future to continue to drive more of those reactivations over time.
Okay, great. Then just one more on inventory, if I could. You mentioned 25 weeks is still the goal toward the end of the year. Just curious if you could maybe kinda level set us on what to expect in terms of cadence to get there. Is it just a steady drop through the rest of the year? Are there gonna be chunkier periods around some of the, you know, the promotions for, like, Nurses Week or whatnot? Just kinda level set us there.
As we discussed, the first quarter was a peak in terms of inventory, and we do expect it to decline from here. It is a pretty kind of just sequential decline. There isn't a ton of lumpiness, we've planned kind of our future purchases to get to the 25 weeks of supply by year-end, but there isn't a lot of choppiness to speak to before then.
Okay, great. I'll leave it there. Thank you.
Thank you. Our next question will be from the line of Bob Drbul with Guggenheim. Your line is now open.
Hi. Just two questions from me. The first one is, you know, are you seeing any change in competitive pressures? The second question that I have is, can you elaborate a little bit more on international takeaways, what you've learned so far with the growth that you're seeing? Thanks.
Sure. Thanks, Bob. As we think about competition, if competition didn't exist, we wouldn't be doing our jobs. It's one of my favorite lines. Competition is healthy, right? It's a sign that you're doing something worth copying, and I really believe that. I also believe there's only one spot for first place, and FIGS' plan to remain in that seat for decades to come. How are we evolving to stay ahead? How do we plan on remaining as the number one brand in the healthcare apparel space? First and foremost, product integrity and innovation. We're light years ahead of our competition in terms of product development, research, innovation, and production. We've been working with our healthcare professionals for 10 years on fit, style, functionality, and we have the manufacturing partners so that we can stay agile and create the extraordinary.
Secondly, this point is something that I'm passionate about, we have the scale. We are 10 times larger than our closest D2C competitor, our marketing budget alone is bigger than their revenue. Third, we're profitable, what this means is that we have resources to continuously get better, faster, smarter across all areas of our business. Finally, we have brand love, intangible brand love. We've mentioned this on calls, this is what we've built for 10 years. It can't be replicated in a day by any competitor. Our relationship with our community is deep, our brand trust is unmatched. We're the only brand in the healthcare apparel space that has tapped into what it means to be a human in healthcare. As it relates to international, I think, you know, you saw the growth in the quarter.
We feel really great about our progress in the markets that we're in, and we're gonna continue to localize across markets, and you're seeing that as we talked about translations, actually coming this month, for non-English speaking countries, and that's something that we're super excited about. Localization isn't just about translation. It's also about how we communicate with our healthcare professionals and around the world in the way in which they wanna communicate and engage. This is a big priority for us, and we're just getting started. You know, we talk about penetration. We have 10% market share in the U.S. We have, I mean, a fraction of that internationally.
We have a huge runway ahead of us, and we're excited to keep connecting with the 118 million healthcare professionals outside of the U.S.
Thank you.
Thank you. Our next question will be from the line of Dana Telsey with Telsey Advisory Group. Your line is now open.
Good afternoon. Nice to see the progress. As you think about the supply chain, I think either Danielle or Trina, where you mentioned it in diversifying the supply chain, how far along are you? What will it mean go forward, whether in terms of how you manage inventory or the cost? With the fulfillment enhancement program, what should we be looking for as guideposts along the way that will lead to improved margins? Thank you.
Thanks, Dana. You know, as it relates to the supply chain, we're really taking advantage of this opportunity to lay the foundation with new supply partners. Where are we focused? We're really focused, you know, first and foremost on innovation, right? That's our lifeblood. We're also really focused on flexibility, on scale, consistency, and reliability. You know, we are in the process of diversifying further, not just around country, but also around, you know, how we can make the best product across our layering system and deepening our partnerships with the suppliers that we already have and building new partnerships around the world. As it relates to the fulfillment project, you know, we are on our way to, you know, in terms of this initiative, I think, Daniela, I don't know if you have any other points on that.
I think for the fulfillment enhancement initiative, it's really gonna enable us to drive flexibility and reliability and ultimately improve the customer experience. It's also gonna set the foundation for us for future distribution expansion as we think about potential distribution centers in the East Coast or internationally in the future. Over the long run, it's gonna enable to drive efficiency and scale, but there's also a lot of benefits as it relates to the experience that we're providing to our customers, and we'll be sure to update you along the way as we get deeper into that project.
Just one last thing. On the non-Scrubs wear, the rate of growth there versus the past, anything to note on non-Scrubs and the lifestyle product and looking at that this quarter or go forward? Thank you.
Yeah. I mean, I think I. You know, our view around our non-Scrubs business is that they're all tied together. You know, we have a really holistic and intentional view around the entire layering system. You know, it's meant actually to be layered. Our categories aren't really competing with one another. They're really complementing each other. They add value by being part of someone's uniform. Really, as you think about the uniform, it's not. You know, I know we break it out, Scrubs and non-Scrubs, but it's all supporting each other. If you're wearing FIGS, you're most likely not just wearing a set of FIGS Scrubs. You're also wearing our under Scrub, or you're wearing our vest or our jacket.
Our hope over time is that you're wearing the full layering system on shift, off shift, head to toe. you know, you might see some of these categories fluctuate in growth, but our goal is that they're remaining a healthy % of the total, and that's the intention, and that's what you're seeing. The only other thing I would add is that, you know, as much as we're known, you know, we're known for our Scrubs, right? I think we're getting known over time, especially with our repeat customers. They're coming back in their second, their third, their fourth purchase for these other pieces. Our first time customers, you know, 85% of them are buying just the Scrubs. That's kinda why you're seeing that growth rate in the quarter.
I would also, just as a reminder, Dana, last year, in Q1 2022, we saw at a normally high kind of non-Scrub wear percentage as we were out of stock on some of our core Scrub wear products, and we also had a really strong New Balance launch. There's a little bit of year-over-year comps going on as well.
Thank you.
Thank you. Our next question will be from the line of Rick Patel with Raymond James. Your line is now open.
Thank you. Good afternoon, and congrats on the strong execution. Can you talk about replenishment trends? I believe at the time, around the IPO, it was around 98 days, but it's about a month longer now. Is guidance assumed that this trend has stabilized, or does it reflect frequency continues to stretch longer?
As we discussed, you know, frequency continues to be a bit pressured by the macro environment, but that days between purchases has stabilized from the last quarter. I think it's important to note that a portion of kind of the increase that we've been seeing here is that we are reactivating more customers and as customers extend their purchase life cycle, and that metric, that higher reactivation, that has customers coming back after 12 months, and that's just inherently gonna drive this metric up. I think from here, there's a lot of opportunity for us to drive frequency higher over the longer term. As we've discussed, we're really focusing on product innovation and expanding our layering system. We're taking steps through our marketing strategies to drive higher engagement through personalized messaging, through tailored communication, as well as really amplifying product education and value.
We're still early in these initiatives, so we're not factoring in a lot of upside into our guide from here, but a lot of opportunity for us to improve this over the long term.
Can you also talk about the outlook for AOV? What's the right way to think about the puts and takes as we consider the mix of business versus your expectations for consumer behavior during promotional times?
For AOV, as we, I think, spoke about, we expect it to be kind of flat over the remainder of the next three quarters. I think what's really great is we're continuing to see higher UPT, and we're continuing to drive that metric higher as customers expand and purchase more into our layering system. However, that is gonna be pressured in the near term by a lower AUR as we are seeing that higher promotional mix. Over the long term, it gives us confidence in our ability to continue to drive UPT and ultimately AOV up from here in the future.
Thanks very much.
Thank you. Our next question will be from the line of Brian Nagel with Oppenheimer. Your line is now open.
Hi. Good afternoon. Congrats on the nice progress. My first question.
Hi, Brian. Thanks, Brian.
My first question, just a bit of a follow-up, with regard to shipping costs, we saw the gross margin of track above plan in Q1, then, the update to the gross margin guidance for the year.
You know, as we're getting now, you know, further past the shipping disruptions broadly, I mean, how should we think about the ultimate, so to say, benefits to FIGS of either, you know, you mentioned before, Daniella, the, you know, less reliance upon air freight, but then also just lower shipping costs, either, you know, through 2023, then maybe, you know, some commentary beyond 2023?
As we discussed, we are seeing lower inbound rates for both ocean and air, and we're also driving better air utilization. In 2023, we're continuing to sell through inventory that was largely brought in in 2022 at higher ocean and air freight rates. Net-net, we're seeing a benefit in air freight utilization year-over-year. That's still being offset a bit by higher ocean freight rates. As we look further into the future, looking into 2024, we do think there's a couple 100 basis points of gross margin pressure, both from freight, but also promo mix, that we'll be able to recapture over the long term.
That's very helpful. Sorry about the background noise, if you can hear it. The second question I have is also a follow-up. With regard to the better customer or engagement you've seen recently, is that more as you're looking at this happening? I guess maybe if one of you could help size it. I mean, how, you know, how big of a shift has this been? Also, do you think it's more time tied to timing or are you seeing this correspond well with some of these new products you're launching on the innovation side?
Yeah. I think, you know, as you think about what's happening with the environment, more broadly for consumers, and then I'll talk a bit about what's happening within our community that are both impacting healthcare professionals. As you know, and economists are telling us, the macro environment continues to be challenged. Consumers have spent their stimulus checks, and they're moved through their savings. Layoffs are happening across industries. You know, consumers are in save mode, and inflation is creating additional pressure. You know, those factors are impacting our healthcare professionals. On the other end, there are dynamics within the healthcare environment that give us a lot of confidence and, you know, about our community's buying behavior. What we're seeing is that the healthcare community is re-energized, and they're getting back to work.
You know, since 2020, our customers have been fighting a global pandemic that's taken a meaningful toll on them, the COVID fog is lifting, and we're entering a new era of medicine. You know, we're talking to healthcare administration, hospital CEOs every day, there's been an uptick in hiring, in wages, in staffing levels. Zooming out, over the long run, you know, there's gonna continue to be an incredible need for healthcare professionals as they are the fastest-growing job segment. They're an incredibly attractive customer base due to a number of factors, including stable incomes, you know, wages, as we've discussed. Their jobs are incredibly purposeful, and as discussed, it's a stable and growing industry. That's kind of the, you know, zooming out, the bigger picture.
Then to your point, you know, everything that we do from a product standpoint, from a marketing standpoint, that's kinda layering on top of how the environment is evolving over time.
All right. Thank you. I appreciate it.
Thank you. Our next question will be from the line of Noah Zatzkin with KeyBanc Capital Markets. Your line is now open.
Hi, this is Chandana Madaka on for Noah. Just a quick one for me. Could you expand more on the upcoming retail presence? Any early updates around that first store that's opening 3Q? I guess, how are you thinking about an omni-channel approach to business longer term and maybe evaluating any other potential future locations?
Thanks for the question. We're, you know, we are on track to opening our first permanent store this fall. As we've seen with our pop-ups and activations that we've had in the past, our healthcare professionals are obsessed with FIGS and love experiencing us in person. They wanna feel and touch and experience our products. They wanna learn more about our brand. It's why we have five-hour lines around the block with any physical activation or pop-up that we've done. We're really excited that, you know, we're opening our store, and we have a plan to open more in the future. We'll give you more details on all of that going forward, this is the future, right?
The fact that we only have one channel today, as with over half a billion dollars in net revenue. You know, layer on top of our D2C channel, international, layer on top TEAMS, layer on top retail. There is so much opportunity in front of us.
Thank you.
Thank you. Our next question will be from the line of Adrienne Yih with Barclays. Your line is now open.
Thank you very much. Just two quick questions. I guess the first one is on extended sizing. I'm wondering if you can share with us kind of visibility on how much it has aided in new customer acquisition. Daniella, my question is really on modeling the $16 million-$18 million fulfillment in 2024. It was gonna be spread pretty equally over 4Q and 1Q. Should we expect now that that is 1Q and 2Q of 2024? I guess the $250 of excess storage fees, should we just assume that that is negated, kind of it's a wash?
Between moving, the total expense into 2024 offset by the $250 excess storage this year. Thanks so much.
For the release extended sizing, you know, this was a long time coming. We're super excited to bring 3 XL to 6 XL to our healthcare professionals. We're seeing, you know, 5% of new customers engaging in our extended sizing, and we've only really incorporated a few styles. We're really excited to bring it across our assortment and continue to give our healthcare community not just a few of our core styles, but all of them in addition to the full layering system. That's really the goal, and we're gonna do that over time. You know, FIGS is for everybody and everybody, and that was our campaign, and it's we are the most inclusive brand in the world, or we aim to be, because that's what this brand is all about.
It's for all healthcare professionals and all awesome humans wear FIGS.
As it relates to your questions on the fulfillment enhancement initiative, we are now expecting to incur the bulk of the costs of the $16 million-$18 million in incremental expenses in 2024. That, you know, will be spread mostly in the first half with some trickling into the third quarter as well. The 250 basis points, basically from the move of the fulfillment enhancement project into 2024, we are seeing a 50 basis points benefit in 2023, the differential between the 300 basis points of incremental expense we spoke about in our past call and the 250 basis points we're now seeing in excess storage and fulfillment expenses.
Thank you. There are currently no additional questions registered in the queue at this time. I will now pass the call to Trina for closing remarks.
Thank you so much. Thank you all for joining us. We look forward to updating you on our next call and hope you have a great night.
That concludes the FIGS first quarter fiscal 2023 earnings call. Thank you for your participation. You may now disconnect your lines.