FIGS: Positioned Strongly; Favorable Risk Reward (NYSE:FIGS)

Thesis

Peter Lynch discovered L’Eggs through his wife, after he noticed how much she admired the product and brand. Although I am not a healthcare worker myself, I’ve heard about FIGS, Inc. (NYSE:FIGS) again and again through countless discussions with family and friends. My fascination with this company grew even more after looking at their financial statements and overall level of profitability – Which is quite a feat after an initial IPO in 2021 and overall inception of the company in 2013. They offer a well-sought-after product, and the stock is undervalued. For such a high-potential company, I believe the risk-reward profile is now favorable.

Field Research

To help aid my investment research, I conducted a question and answers with close family and friends about the FIGS brand and products. This is what I came up with:

Sample Size: (7) Total females, Gen Z and Millennial:

• (5) Nurses
• (1) Pharm D
• (1) Physical Therapist Assistant

One of the interviewees was my sister, who is a licensed physical therapist assistant. I asked her what her thoughts on the product were and this was her response:

Figs scrubs are super good quality. You can move well in them, and they don’t shrink. They are made of soft material and have a lot of different styles. They are considered the “pricey” or “luxury” scrub brand, but I think they are worth it. I think sometimes they are a little overpriced, but when you get them on sale, they are definitely worth it!

When asked about alternative brands, this is what she responded with:

I have other brands. Cherokee is another good one. It’s a competitor. Grey’s Anatomy is good. I have all three brands. Depending on the style you get, Cherokee can also be pricey. It really just depends on the fabric used and design.

When I asked a family friend, a nurse, about the product, this is what she said:

Figs are the Lulu scrubs. They have a special sparkle. I’d say the top competitors are Jaanu, Cherokee, and Grey’s Anatomy.

For the most part, respondents had nothing but positive words, besides some comments regarding price and competition. Although, one friend had the following comments:

I don’t wear figs. I have a cheaper brand I like. Figs are too expensive for me right now. I don’t want to ruin expensive scrubs.

I’ve liked every pair I’ve seen on people, but I will probably not invest in them until I switch to an outpatient setting.

Consensus

Through interviewing family and friends, the general consensus was they loved the product. It is made from great materiel, fits well, has plenty of pockets. It is “the brand” in the healthcare field, especially those in gen Z and millennials. Though the products are on the pricier side, it seemed that most still had at least one pair, or were on trajectory to buy some. I asked them what they thought about me owning stock in such a company, so long it was at a fair price, and they fully supported the idea.

What is FIGS?

FIGS is a healthcare apparel company that designs, manufactures, and sells medical scrubs and other clothing for healthcare professionals. The company’s main product line includes scrubs, lab coats, and other medical apparel. They sell their products primarily through their own e-commerce website and through partnerships with hospitals and healthcare systems. The company has a strong growth strategy, which includes expanding its product line, increasing its international presence, and continuing to build relationships with hospitals and healthcare systems. The main attraction to FIGS is they are doing something completely different in the Healthcare apparel industry. Not only are scrubs about fit/form/ and function but they bring a certain fashion appeal where customers are proud to wear such attractive garments.

Valuation

We will value this company using two different methods:

1. Discounted Cash Flow Analysis (“DCF”).
2. Multiples

DCF

For the DCF, we perform a simplified model by projecting out revenue and free cash flow (“FCF”) using assumptions for worst case, base case, and best-case scenarios.

The following assumptions were made:

Where,

Revenue Growth Assumptions were derived from:

• Industry CAGR – 4.8%, 5.5%, 6.3%, 5.9%, 4.4%
• Analysts estimates 5-18% with average of 12%
• Historical growth rates – 5.58% TTM , 25.2% YOY

FCF Margins Assumptions were derived from:

• Industry Margins (10-12%) – (NKE) – 10%, (LULU) -12-13%, (HBI) – 8%, (SKX) – 3.6%, (VFC) -10%, (GOOS) – 10.5%, (OTCQX:ADDYY) – 5-9%
• Historical Margins – 11.3%

These assumptions were plugged in our model.

The range of fair values is shown in the following sensitivity chart:

Multiples

For a company like FIGS, which is still in its infancy, I’m really only focused on revenue multiples. When compared to the Healthcare industry, FIGS looks undervalued in this regard.

I also compared to other apparel companies like LULU and competitors in GOOS and SKX. FIGS looks relatively fair to undervalued against these as well.

Conclusion

I feel some of the best research you can do for growth companies is in the field. This is because the single most important factor for the company at this stage is the brand or product. If it’s good, customers will stay loyal, and the company will compound through thick and thin. At its current state, FIGS is undervalued. They do have pricing competition that may hinder margins, especially in a down cycle. However, even a worst-case scenario, where they would have to lower margins greatly to compete, the stock would still yield a return. FIGS is already now at a price where the risk reward profile is favorable, and I will be adding a small portion to my portfolio.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.