Stock FIGS: premium scrubs at a premium price (NYSE: FIGS)
For those who don’t know, FIGS (NYSE: the numbers) is a healthcare apparel brand that focuses on scrubs and other more fashionable wearables than generic alternatives. The focus on fashion and comfort gives the company a unique niche in a recession-proof industry. So far, the strategy seems to be working as revenues have increased by around 400% in the last three years alone. In the rest of the article, we’ll see why I think this fast-growing company is still a little too expensive.
Three-year chart of FIGS stock prices and earnings trends
The Bull Case – Management, Growth and Industry Trends
Management matters. We have to tip co-founders Heather Hasson and Trina Spear here. These ladies are co-CEOs. Hasson has received a ridiculous number of industry accolades for a 39-year-old executive. Spear, also very young for an executive, developed her business acumen at Harvard Business School, Citibank and Blackstone Group. Together the two have created a fast growing business with a loyal customer base. The pair have amassed an impressive roster of directors, including a former Amazon executive and a former P&G CEO.
Industry trends are also favorable. First, medical careers consistently dominate projections of “fastest growing occupations.” Second, scrubs are mandatory for most medical positions, including CNA positions needed to meet the needs of nursing homes, institutions, and hospitals. These positions are subject to very high turnover. Additionally, relatively recent data shows that health care burnout rates are at an all-time high in nursing, with 34% of nurses saying they are very likely to leave their current job by the end of the day. end of 2022.
Obviously, with a huge need for healthcare workers and a high turnover rate in the field, more and more new workers will be in the medical wear market. The model is driven by replenishment and backed by data from Frost & Sullivan, which estimates the global medical wear market at $79 billion.
The growth is undeniable
It is difficult to say that the growth so far has been very impressive. The past three years have shown revenue growth of 100%, 135% and 62%, respectively. Frost & Sullivan models a CAGR of 6.2 in the healthcare apparel niche in the coming years and the FIGS management team forecasts the company’s revenue to grow 30% over the next five years . Although it’s not quite what it has been, 30% growth is quite impressive.
I’ll cut to the chase here. I think Hasson and Spear did so well so quickly that there aren’t many levers left to pull. They basically created a market that didn’t exist. Prior to FIGS, all scrubs were generic, ill-fitting, and seemingly uncomfortable garments. There was little or no differentiation. With FIGS, we have a more fitted, more aesthetic and more comfortable clothing line. And, of course, more expensive.
Everything written in the previous paragraph is positive. Obviously, there were a lot of medical employees who welcomed this new line. The table above is abundant proof of this.
Management also pulled cost control levers out of the chute using a direct-to-consumer model and word-of-mouth advertising. Even so, management expects margins to decline, with the last quarter showing EBITDA margins of 24.8% and the long-term outlook provided by the company targeting 20%.
My biggest warning comes from management’s hope of fostering growth by creating another new market. The company has done a great job of creating a differentiated niche in the boring and unappealing scrub market. But the foray into becoming a “lifestyle brand” will likely be much harder to crack. With high-end scrubs, FIGS is a trendsetter with virtually no competition. With their new “layer system” consisting of loungewear, outerwear, underwear and performance underwear, among others, the competition is limitless.
With all this, I would say that FIGS will grow. They will increase profits and revenue. However, management’s five-year revenue growth estimate and analysts’ 24.06 EPS growth estimate appear to be a rough ceiling.
Let’s accept these numbers and look at the valuation going forward. In fact, let’s go one better and apply a 30% growth estimate to both metrics.
The chart below shows the numbers if the business meets the estimates and grows 30% over the next four years. The final price applies a PE ratio of 22 to these figures.
2022-2026 Revenue and Profit Projections for FIGS
Compared to peers
Of course, a company that has paved the way and created its own market does not have directly listed peers. Many differentiated companies do not. Therefore, we will look at a basket of publicly traded apparel companies and the corresponding valuations. This shows that most apparel companies are showing both current and future PE values in teens; sometimes lower. The outlier, of course, is Lululemon (LULU) with a premium futures PE of 42. We’ll use that as a framework in the final analysis below.
Evaluation metrics of five garment companies
I appreciate what FIGS has accomplished in its short time as a publicly traded company. He succeeded in disrupting the entire medical apparel industry.
At the same time, operational success alone is not necessarily a prudent investment. Price matters. For FIGS to be an attractive investment in the future, two things essentially need to happen. First, FIGS needs to achieve its growth goals, which I believe is entirely possible. Second, FIGS must maintain a superior valuation relative to other companies in the apparel industry. In fact, it would need a PE at the end of 2026 on 32 just to maintain its current course. While it’s possible to maintain a PE of 35 or better and Lululemon has been doing this for years, it’s not something I can count on. For this reason, when it comes to my investment dollars, I’m going to let it go.