FIGS S-1: The DTC Quartet
Differentiated Product, Organic Growth, Gross Margin & Retention
FIGS launched in 2013 to provide healthcare professionals with high quality, well-fitting scrubs. That may sound niche, but scrubs are a $60bn global industry and 85% of medical professionals buy their own.
The company’s growth is impressive — from 2017 to 2020 FIGS grew net revenues from $17.6m to $263.1m, a CAGR of 146%, and delivered an adjusted EBITDA of $69.1m in 2020. They’ve done this with only $60m of outside capital.
FIGS is able to scale in such a capital-efficient way by focussing on four core elements of DTC success: a differentiated product, organic growth driven by customer love, a high gross margin and strong retention.
A Differentiated Product
FIGS scrubs are the Lululemon of scrubs — the fitted designs use a proprietary fabric designed to be antimicrobial, anti-odour, stain-repellant and with four-way stretch.
They replace scrubs from legacy manufacturers that are uncomfortable, boxy, with no brand recognition, and sold through stores that are rarely open when medical professionals aren’t working.
FIGS scrubs stand out in the hospital and customers are happy to pay premium prices for attractive designs and long-lasting materials.
Organic Growth
FIGS is well-positioned for word-of-mouth growth by selling a uniform that thousands of healthcare professionals wear while working in close physical proximity on a daily basis.
The product experience is so delightful that FIGS has a passionate community of followers who spread the #FIGSLOVE message for them online as well:
FIGS empowers this community through its Ambassador program, providing 250 healthcare workers with free apparel and encouraging them to spread the message in their workplace and on social in an intimate, authentic and personalised way.
FIGS deepens the brand affinity felt by their often overworked and underpaid customers by calling them “Awesome Humans” and representing frontline healthcare workers as icons in brand campaigns.
This all matters because organic growth helps bring down customer acquisition cost, which improves unit economics and cash flow.
CAC declined 61% from 2018 to 2020 and last year FIGS achieved a 1.3x Contribution Margin:CAC on the first customer transaction.
Retention
Alongside strong organic growth, that reduction in CAC also comes from existing customers repurchasing — incentivising existing customers to repurchase is considerably cheaper than acquiring new customers. FIGS customers need to replenish frequently which leads to predictable, recurring demand.
While 82% of revenue comes from the core 13 scrubwear styles, FIGS uses limited edition weekly drops to bring customers back to the website and entice them to restock (90% of sales on launch days are core styles).
FIGS is able to acquire a customer once and continue to earn revenue from that customer for years. Approximately 62% of net revenues in 2020 came from repeat customers:
Over the years, as each cohort stacks on top of the last, FIGS is able to earn a greater and greater proportion of revenue from customers they don’t need to spend significant marketing dollars to acquire:
This may not be the >100% net dollar retention you look for in an Enterprise SaaS business but it’s considerably more attractive than a one-time mattress purchase.
High Gross Margin
One of the most obvious differences between SaaS and DTC is the gross margin. The 80%+ GMs of SaaS allow considerable operating leverage with scale, enabling businesses to turn revenue into cash flow.
Many DTC brands have ±30% gross margins so they have to be much tighter with operating costs and it’s significantly harder to get to a >10% net income margin over time.
FIGS has a 72% GM, similar to a software business, and as revenue scaled last year that operating leverage drove net income margins from 0.1% in 2019 to 18.9% in 2020.
An Unbelievable First Investment
I first heard about FIGS in a podcast in May 2019. Thomas Tull, laundromat entrepreneur turned film producer as CEO of Legendary Entertainment (The Dark Knight, Inception, The Hangover) which he sold in 2016 for $3.5bn, discussed his journey and next chapter as an investor.
In 2017 he founded Tulco, and from the information I can find online FIGS was his first investment in 2018 — he invested $65m for a majority stake in the business.
Without knowing the exact % stake or IPO valuation, based on similar comps in market it’s fair to say that stake could now be worth over $1bn just three years later.
The Risks
Defensibility - FIGS is without a doubt the category leader in scrubs. However, with relatively low barriers to entry and no lock-in for customers, there will inevitably be competition in the future, which will drive up CAC and put pressure on margins.
International - FIGS now has 5% market penetration in the US. This may sound low but FIGS is a premium product so a significant portion of that market will not be addressable (I’d like to see more data on what proportion of healthcare workers are willing to pay the price point). As a result, a large part of the growth story from here is in International, which is still unproven at only 3.5% of revenue.
Overall
Most high-quality DTC businesses have two or three of the elements we mentioned above:
Chewy has strong retention but 26% gross margins.
Hims & Hers has a differentiated product experience, 76% GM and strong retention but relies on paid marketing which leads to longer CAC paybacks and reduces profitability.
FIGS has all four and is growing revenue quickly. A differentiated product loved by customers leads to organic growth. Organic growth when combined with a high gross margin and strong retention becomes highly cash generative. While there is almost certainly a positive COVID effect in there and revenue growth could decelerate from here, I still expect this IPO to price at top-of-the-range DTC multiples.
Links I Loved:
Jacqueline Novogratz on building Acumen, the non-profit global venture capital fund whose goal is to use entrepreneurial approaches to address global poverty.
One-tap checkout for the physical world
This video is meant to be about why people love video games but imo describes why we’re so obsessed with productivity tools.
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