FIGS Inc. Stock: Attractive, Underappreciated Market

Summary

I believe FIGS (NYSE:FIGS) is slightly undervalued today, and investors can look to gain 14% over a 1-year period. The fashion industry is overwhelmed with producers and distributors of products and services. A rare opportunity to grab a huge market share of any customer base is guaranteed to a producer who focuses on serving a specific niche or market.

FIGS is a lifestyle brand focused only on providing apparel to healthcare professionals. To boost their brand and market experience, they sell directly to their end-users via a digital platform. This creates trust from the healthcare professionals since the producer only seeks to satisfy their needs and wants regarding apparel. This has resulted in a majority of healthcare professionals in the markets that FIGS operates in preferring FIGS’s products over products from other general apparel producers.

Company overview

FIGS is a founder-led apparel and lifestyle brand that serves a specific niche of healthcare professionals. It employs a direct-to-consumer approach to sales and marketing.

The healthcare apparel is an underappreciated and attractive market

For a fact, the healthcare sector in the United States is the largest and fastest growing amongst other job segments. By 2020, it would have employed over 20 million professionals, and a growth rate of 15% is predicted in the next decade. This proves that the health sector is an attractive and fundamental industry with scale, a recurring nature, and a compelling growth outlook.

The healthcare apparel industry is largely mandatory, resistant to recession, and less prone to fashion risks. This is because wearing scrubs, lab coats, and other medical apparel during work is a requirement for healthcare professionals such as doctors, nurses, and technicians in hospitals, clinics, laboratories, and medical offices.

Recent years have seen a shift away from institutions being responsible for the sale of healthcare apparel to individuals. Roughly 85% of all medical professionals report buying their own uniforms. As FIGS targets the final consumer in its sales, this tactic fits in with the company’s direct-to-customer model. There will always be a need for new medical scrubs because they wear out quickly, get washed, and get worn over and over again.

Unique branding position sets FIGS apart from peers

FIGS’s business, unlike most incumbent scrubs manufacturers, is driven by a digital direct-to-customer strategy. This strategy is realized by directly engaging and selling to medical professionals through their digital platforms, as opposed to the incumbent manufacturers, who sell through their native distribution channels of wholesalers and retailers. The direct-to-customer strategy allows FIGS to have direct touchpoints with the end user, delivering an elevated, personalized, and seamless experience. The strategy also avails valuable real-time customer feedback and data that is utilized to improve or create new products, improve customer acquisition and retention, ease demand forecasting, and optimize inventory.

Based on customer data and feedback collected, FIGS can customize the end user’s digital experience based on;

• History of purchase
• Products purchased
• User’s size, color, and other preferences
• The type of healthcare professional the end user is

FIGS also gathers demographic, geographical, and psychological information to foresee consumer behavior, which I believe has tangible effects on increasing the effectiveness of the supply chain as a whole, including inventory management and the creation of new products.

Customers feel a strong connection to the FIGS brand because of the company’s commitment to providing them with high-quality, practical, comfortable, and aesthetically pleasing products, as well as an unparalleled, digitally-enabled customer service experience. This is further supported by the fact that FIGS is the first healthcare apparel brand to actively seek to comprehend and cater to the requirements of its target market, the healthcare professional.

Through word of mouth, brand marketing, and performance marketing, I believe FIGS has a fantastic opportunity to increase brand awareness and gain new customers. Every day, thousands of healthcare workers are in close proximity, making hospitals and other health institutions an ideal setting for FIGS to grow their customer base through word of mouth. It’s also encouraging to see management putting resources into seizing this opportunity. For example, in order to attract new customers and retain existing ones, a dedicated team of marketers creates and distributes unique promotional materials via the website. FIGS raises brand awareness through advertisements and billboards that convey emotion and inspiration, in addition to digital marketing. As a result, the FIGS digital platform benefits from a hybrid of brand and performance marketing strategies.

Effective distribution model

FIGS’s winning approach to retail is grounded in a consistent, practical supply of essential scrubwear styles. These foundational designs come in a wide range of colors, from neutrals to seasonal offerings. This is a smart strategy, as the intention behind the multicolored selection is to heighten consumer interest in the brand and create a sense of urgency to make a purchase.

To maximize the effectiveness of the limited edition colors and styles strategy, FIGS employs a buying strategy that involves making small initial purchases followed by data-driven repurchasing decisions. This creates scarcity while also lowering inventory risk. Weekly releases of limited-edition colors and styles attract new customers to FIGS’s online store, where they can buy the new releases in addition to the brand’s staple products. A result of this is a higher level of public interest in FIGS’s primary activities.

This innovative and low-risk merchandising strategy drives recurring demand as well as improved inventory efficiency, leading to a lower return rate. The general return rate of online apparel ranges between 30 and 40%, whereas FIGS’s return rate is approximately 10 percent (source: S-1). From a financial perspective, the low rate results in low inventory waste, better inventory turnovers, and better cash conversion cycles.

Apparels is not the end

FIGS have more to offer beyond a health professional’s uniform at work. This they believe they will achieve by leveraging the existent trust in their technical function, fit, comfort, and style, as well as their fast product development capabilities. By creating new and innovative products and categories, they have expanded their total addressable market over time. They also hope to increase their share of healthcare professionals’ uniforms and lifestyle wardrobes by outfitting them to work, at work, and after work.

International expansion is part of the plan

I believe FIGS has a great opportunity to penetrate the global healthcare professional apparel industry and, as a result, make their brand global. This opportunity is backed by three major factors:

• FIGS carried out a successful pilot expansion internationally by penetrating the markets of Australia, Canada, and the United Kingdom.
• Strong and proven customer reception in the above markets shows that the brand resonates with its end users beyond the United States.
• The growing number of healthcare professionals and medical students internationally will increase from approximately 118 million in 2020 to 124 million in 2025 (S-1).

• To penetrate new markets globally, it is great to see the management of FIGS intending to make a strategic investment that will lead to a localized experience for global customers. They will achieve this by launching products specific to the local market, launching digital experiences tied to the local culture, offering market-specific languages, currencies, and content, and launching strategic international shipping and distribution hubs.

To penetrate new markets globally, it is great to see the management of FIGS intending to make a strategic investment that will lead to a localized experience for global customers. They will achieve this by launching products specific to the local market, launching digital experiences tied to the local culture, offering market-specific languages, currencies, and content, and launching strategic international shipping and distribution hubs. The use of social media and the growth of its network of brand ambassadors will also help FIGS spread its name around the world.

Valuation

My model suggests that FIGS is slightly undervalued. At this valuation, investors are probably looking at a 14% return over a 1-year period.

Looking at the consensus estimates, they are projecting a mid-to-high teens growth rate, which I think is fairly reasonable given the growing large number of healthcare workers available. That said, this mid-to-high teens growth rate is a double-edged sword, as it means that the market is already expecting a pretty high growth. In the event FIGS misses, it could lead to really bad share price action, which is an opportunity for investors to enter.

Anyway, at 2.2x forward revenue (where it is trading today), FIGS is worth $1.4 billion in FY23, or $9.7.

Risk

It is not a tough business to replicate

FIGS could easily lose its first-mover advantage if it doesn’t build up its competitive advantage enough. This is because their business is easy to replicate, and with the increasing total addressable market, competitors are bound to enter this industry.

Growing into other verticals and nations carries risk

Markets vary in abilities and preferences. A successful business in the United States might not be successful in new markets. Deploying resources to these new markets might not be successful and will be destructive to shareholder value. It could also drive the management’s attention away from their core business, leading to an attack on their market share by their competitors.

Conclusion

I believe FIGS is slightly undervalued today. FIGS has proven to be a niche-focused manufacturer of healthcare professional apparel. With their direct-to-consumer approach in the market, they make their products affordable and make it easier for them to collect customer data and feedback, which they use to improve their offerings, upsell, or target new markets. As a niche-only business, FIGS has the privilege of enjoying a monopoly and has time to create trust and a loyal customer base before competitors crop in. The expected increase in the customer base only points to positive revenue growth for FIGS.