Investing In FIGS - The Next Lululemon?
Updated: Jan 24, 2022
FIGS - The future of nurse (and lounge) wear
2021 saw a fascinating new development for retail investors: the ability to invest in companies at IPO prices. SoFi and Robinhood both raced each other to the finish line on developing a product that would allow normal people like you and me to invest in newly-listed companies before the "'x stock' popped 40% on its debut." The first stock that Robinhood offered in their new service is medical apparel company FIGS, making its debut May 27, 2021. But when investors actually dug into the company and got past the novelty of being Robinhood's shiny new poster child, what they found surprised them.
Market Capitalization: $6 billion
Full Year 2020 Revenue: $263.11 million
Q1 2021 Revenue: $87.08 million (+172.40% YoY)
Q1 2021 Net Income: $11.44 million (+176.73% YoY)
How Did FIGS Get Started?
Started in 2013 by Heather Hansson and joined by former Wall Street exec Trina Spears, the two bootstrapped a new type of apparel company aimed specifically at solving the pain point of most healthcare professionals: clothes that just don't get the job done. The two sold these new-material scrubs out of the trunk of their car at 7am and 7pm every day, targeting healthcare worker shift changes. Fast forward to 2017, and they secured the fourth-largest funding round in history for a female-led company and were doing more than $100 million a year in revenue. This all culminated in their initial public offering in May of 2021.
What's The Business?
FIGS is a company built from the ground-up for healthcare professionals. They are "a direct-to-consumer healthcare apparel and lifestyle brand that celebrates, empowers and serves current and future generations of healthcare professionals." Essentially, they sell scrubs. It's as simple as that, and they are absolutely killing it. The healthcare sector had grown stagnant when it came to innovations in apparel, with all of the innovations being saved for things like inoculations and new cures to old issues. According to Spears, the healthcare industry had been relying on companies like Nike, Under Armour and Lululemon to satisfy their apparel needs of wearing what amounted to compression material underneath scrubs in order to stay comfortable during long shifts. Scrubs in the traditional sense have to essentially fulfill the need to be stain resistant, keeping the person under them safe from the hazards typically encountered in that line of work. In order to make them comfortable, they developed a new type of fabric that is stain resistant, stretchy and anti-microbial to handle the workload healthcare professionals encounter every single day.
Will I Invest In FIGS?
Everything I listed above is incredibly reminiscent of another company that's been public for a few years, and I even mentioned them above: Lululemon. Lululemon's story is very similar, in creating clothing that that was purpose-built for the yoga community before taking that same technology and applying it to other fitness and lifestyle avenues. So, before we dive fully into FIGS, let's look at Lululemon's performance since it went public.
If you look closely at the chart above, you'll see a flat-looking blue line at the bottom of the chart. That's the S&P 500, the gold standard index upon which nearly all stock performance is measured. Lululemon crushed it so badly since its debut in 2008 that they're not even in the same weight class anymore. If you have $LULU in your portfolio, you probably deserve a standing ovation but you won't be able to hear me because you're on your yacht in the Mediterranean.
So back to FIGS. This company, I believe, is the next Lululemon, with two key differences:
They are in a sector that is ripe for innovation, and they are the only player. It's like when Nike jumped into the branded shoe game in the late 80's, or Starbucks opening their franchises. They're the only game in town, and;
Their products require constant refresh. It's the Lululemon theory on steroids. While Buckhead Betty wears her Lululemon leggings to grab brunch with the girls, head to Target and do like two yoga classes a week, FIGS customers are healthcare workers pulling 15 hour shifts and dealing with constant trauma and fluids. Sure, they're stain-resistant and anti-microbial, but clothes can only take so much of a beating before they need a refresh.
Four more key advantages are working in FIGS' favor. The first is the overwhelming positive sentiment from people that use the clothes. Google "FIGS Review" and the sentiment is almost unanimously positive. The main detractor seems to be that they aren't necessarily true to sizing as that seems to be the way the fabric fits, but that's the only negative I can find when I scour the message boards.
The second advantage they have is their shift into lifestyle. I mentioned earlier that Lululemon was a yoga brand, but I didn't mention that it was primarily targeted at women. When they shifted into men's apparel, and by extension the larger fitness world, they saw the acceleration in sales that led to dramatic share gains. FIGS is quick to note on its website that they cater to "lifestyle," and you can see that reflected in the SKU's. They now offer jackets, joggers and underwear lines, and have a new partnership with New Balance to develop their own line of branded footwear. A re-balance into lifestyle branding could pay dividends for years to come.
The third advantage is their current market share. According to the Motley Fool, the U.S healthcare apparel market is a $12 billion per year industry. When you look worldwide, that number jumps to $79 billion per year. In doing $263 million in sales last year, that equates to FIGS owning just a 0.3% market share, giving them massive expansion opportunities. If they were to set out to capture just 10% of that market share, that implies a 30x upside to the current levels of the company, excluding anything additional on the lifestyle front.
Finally, and this is important: they are debt free. None. Nothing. They can allocate all money raised and earned into growing the business, a hallmark of an impeccably run company.
This company seems exceptionally well-poised for future growth at an explosive pace, but I do see two potential business risks worth speaking about at present:
They are newly public, and the first few quarters of public market scrutiny can be tough on a company. Shifting from a private company to a public company is a systemically traumatic experience, because you're now in the shop window with millions of people passing you every day. Your financials are more heavily scrutinized, and each step you take is under the magnifying glass.
At current valuations, the price-to-earnings ratio is...steep. At 104.12, it's 30 points higher than Lululemon and 60 points higher than Nike, its closest competition. From a technical standpoint, it could be ripe for a pullback soon. Fundamentally, growth will need to continue accelerating at a pretty rapid pace in order to justify the valuation.
The Bottom Line
In my company deep dives in the past, I've taken a cautious approach with newly public companies, opting to sit on the sidelines and let them get a few quarters under their belts prior to jumping in. You will not find that level of caution from me this time. For me, FIGS is an absolute screaming "buy." Here's why:
They set out to solve a specific problem, not just chase a check. They wanted to figure out a better solution for healthcare workers, an often overlooked segment of the market that was primed for innovation.
It's founder-led, and the founders are sharp. One founder in Hansson set out to solve an issue, and Spears brought the bootstrapping know-how. That opinion is backed-up by the private equity fundraising records they set prior to going public, which indicates the confidence that multi-billion dollar funds have in these two.
Their business model sees constant refresh as their users rip through inventory, creating a sustainable, repeatable business model.
They are a quality product, and are branching out into creating more quality products for the lifestyle category.
The market share they currently own is microscopic compared to what they could grow into.
They're debt free.
This company is really genuinely incredible. I'm excited to open a position in this company, and if I were you, I would too. Depending on your time horizon and your patience, FIGS could be the biggest winner in your portfolio for years to come.
The following article is for educational and entertainment purposes only, and should not be consumed as investment advice. Do your own research and please do not buy or sell any securities based solely on what you read here. The author has a position with FIGS that amounts to <$100 USD and is not planning on adding to this position in the next 72 hours