On this episode of Industry Focus: Wildcard, we break down the not too long ago public FIGS (NYSE:FIGS), an organization with a contemporary, extra customer-first strategy to the basic scrubs healthcare professionals put on. Pay attention in for why FIGS’ financials make it appear to be a software program firm, and the 2 huge numbers that caught our eye going by means of the corporate’s prospectus.
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This video was recorded on June 2, 2021.
Dylan Lewis: It is Wednesday, June 2nd, and we’re speaking about an organization that makes garments for docs and nurses. I’m your host Dylan Lewis, and I’m joined by a longtime Idiot and fellow Scrubs fan, Anand Chokkavelu. Anand, how’s it going?
Anand Chokkavelu: Doing properly. To be clear, a fan of Scrubs, the TV present.
Lewis: That is proper. Yeah, Invoice Lawrence fan, proper?
Lewis: I am going to confess, we’re speaking about FIGS, this can be a firm that makes scrubs and all through the prep course of, the outlining course of for this episode, I had the Lazlo Bane Superman music taking part in within the background in my head. The theme music from Scrubs the TV present.
Lewis: Which is sweet, as a result of I have never heard shortly, and I really feel like that was a present I at all times cherished as a child. I am extra of a fan of the present than the clothes, however that is as a result of I am not within the medical trade. A number of people clearly want it for his or her jobs, and we’ll be speaking about an organization at the moment that actually is squarely targeted in the marketplace of scrubs, day by day workwear for medical professionals, and possibly a enterprise that might’ve been simply dismissed by lots of people, however Anand, most likely belongs at the very least on the watch record, as a result of it is such an fascinating firm.
Chokkavelu: Yeah. Spoiler alert, you are going to really should include my enthusiasm. Shockingly, I used to be shocked, as soon as I appeared into this, how a lot I get pleasure from this firm.
Lewis: Yeah, and so let’s dig proper into it. The mission for this enterprise is “To have fun, empower, and serve those that serve others.” That is imprecise sufficient that it may be laborious to get a way of what it’s exactly what they’re doing. At core, Anand, this can be a life-style model that’s serving healthcare employees.
Chokkavelu: Precisely. They’re seeking to turn into a premium model that elevates one thing folks historically did not pay a lot for, hospital scrubs, proper? Healthcare employee uniforms. Like Starbucks did for espresso or Lululemon did for exercise garments or Peloton did for exercise gear, that is what they’re attempting to do with scrubs. At this level, imagine it or not, round 85% of medical professionals purchase their very own uniforms versus the hospitals. I might’ve thought that. My spouse was a healthcare skilled and she or he claimed that she received out most likely proper round when she would’ve been draining our financial institution accounts shopping for FIGS.
Lewis: It is fascinating, Anand, in doing prep for the present, I haven’t got a relative or a household buddy or something like that that works in healthcare, and I had no foundation for that quantity you threw on the market of, do folks typically use scrubs which can be supplied by the hospital which can be then cleaned on-site, are they tending to purchase their very own scrubs? I used to be shocked by that quantity and that it was as excessive as it’s.
Chokkavelu: Yeah, it was very surprising. I keep in mind, to not get into the distribution and stuff, I used to be asking her to substantiate, how are you shopping for the scrubs? A number of instances it will be annually. There can be an expo on the hospital the place all of the completely different suppliers would come and would go and type by means of the racks, like T.J. Maxx model. That was the factor that they had been doing, so you’ll be able to see why their tag line is, “Why put on scrubs when you’ll be able to #wearfigs.” They’re actually simply saying, “Look, there’s a greater means,” after which, spoiler alert, then they are going to increase out even past that.
Lewis: Yeah, and I feel the short thesis for this firm is nobody has actually given this house loads of consideration. We’re coming in right here with one thing that’s particularly direct-to-consumer, actually geared towards the viewers it’s meant to serve and designed for those that are going to be sporting it. Frankly, it could be a bit of bit extra flattering than many of the choices which can be at present on the market. As a result of I feel scrubs are inclined to have the repute of being boxy in terms of clothes.
Chokkavelu: Precisely. Hey, you have received people with fairly respectable disposable revenue, at the very least above common, within the healthcare employees house. We have a rising trade and since it’s a must to purchase your individual, and it is your work garments, how a lot can we spend on our button up shirts, proper?
Lewis: Yeah. That is proper, and COVID’s gave us a bit of little bit of a breather on that, I feel, as a result of we have been working from residence and we work for an off-the-cuff enterprise. However these are non-negotiable bills or issues that you simply simply gotta have if that is uniform for the job you are in.
Chokkavelu: Proper, and what makes them salivate as you are studying by means of that S-1, you get it. Particularly once they had been based, which is not way back, however 2013, the place a few of this with extra bricks-and-mortars or much more so in our researchers, extra web sites and issues that we discovered since then. However principally, they suppose their competitors stinks, and what they’re attempting to disrupt is that old-fashioned clothes makers who promote these commoditized boxy scrubs that are not constructed for consolation or style. They’re competing towards people who use wholesaling and conventional bricks-and-mortar retailing or un-optimized on-line executions. These are firms that do not have nice margins, which retains you from innovating and advertising. Additionally they had been huge on speaking about being objective pushed, and the way they describe themselves as we have now constructed the biggest DTC, direct-to-consumer, platform in healthcare attire, main the trade within the shift to digital. Is smart, proper?
Lewis: Yeah, and I feel that that is actually simply catching onto, or making the most of a development that we have now seen be so profitable for retailers. We see more and more loads of these sturdy, up-and-coming retailers on the market and shopper manufacturers on the market have a a lot nearer relationship to their prospects. They personal that relationship rather more. They don’t seem to be practically as reliant on third-party platforms to drive their gross sales, which is nice as a result of it helps them construct these loyalty packages.
Chokkavelu: Precisely, and 2020 stands out as the yr of e-commerce, in an enormous means. They’re doing that and getting that actual really feel for his or her prospects. They […] issues like their proprietary — I do not even know how you can pronounce it — FIONx cloth expertise, like an Below Armour would speak about it. They speak about, “Hey, we need to make these for hospital employees,” similar to folks spend a lot time with athletes. You consider Below Armour, or Nike, or Lululemon all doing that type of factor after which they deal with that social consciousness. They have the threats for the threats program, which has similarities to, I feel, nearly each new direct-to-consumer phrase has, to not diminish it, however Toms has that. I feel Warby Parker does it the place, “Hey, you purchase a pair of eyeglasses, we donate a pair of eyeglasses.” Perhaps the identical with scrubs to different international locations that possibly do not have the revenue to be buying these items, serve loads of people, and so they name their prospects. This is among the most grading issues for me. Superior people. That is how they name their prospects. Which is cool, it is simply a type of the place you actually should tow that needle in your branding.
Lewis: Yeah, and that is one of many realities of being extra of a life-style model. When you at all times see these efforts to create catch-on names or create a way of id amongst your prospects. We do it right here at Idiot, proper? We name ourselves Fools, and that is an enormous a part of how we place ourselves. What I feel I can get behind once I hear one thing like superior people is, they clearly like delighting the purchasers that they attain, and so they want to elevate folks, make folks really feel superior. If you have not seen any of their merchandise, you have not been on their web site, you have not seen their digital footprint. I feel one of the best ways to explain it’s it appears to be like like a really millennial pleasant model. I take into consideration half of their prospects are in that 18-35 bucket, and it has the appear and feel of a digital first firm, very modern designs. However among the issues that I discussed earlier than about deliberately designing stuff for his or her market.
One of many issues they identified was they deliberately designed pockets into a few of their scrubs for marriage ceremony rings. They realized that was one thing that they needed to clear up as a serious downside and I feel one in every of their buyer interviews mentioned that they had been speaking to a health care provider who’s on his fifth marriage ceremony ring as a result of he saved dropping the marriage ring tying it into the waistband of his present scrubs. Simply being a bit of bit extra purposeful within the clothes that is being designed for individuals who have to put on it every single day. You possibly can simply see that changing into a aggressive benefit, Anand. You possibly can additionally simply see it being one thing that will get mimicked because the trade catches on.
Chokkavelu: Completely. I am unable to consider one other phrase however the ring is true, the place I keep in mind my spouse would at all times be battling what to do with the marriage ring. However yeah, it is similar to any of the premium manufacturers. The imitation, can you retain that model and might you retain folks coming and as you develop and preserve these margins as a result of they’re very costly scrubs in comparison with simply the common outdated Cherokee or Dickies kind of scrubs.
Lewis: They’re, and they’re very a lot positioning themselves upmarket. You see that, I feel purpose-driven firms can get away with that a bit of bit extra as a result of it is a life-style model, it is a objective pushed firm. You talked about among the charitable efforts that they’ve. When that is the story and the product is admittedly nice, persons are typically keen to pay up. It is not going to come back as any shock, I feel we have mentioned scrubs about 14 instances to this point on this podcast. The overwhelming majority of the cash proper now’s coming from these scrub strains that they’ve. I feel it is like 13 of their core scrub strains make up over 80% of their gross sales. However they’ve an fascinating mannequin the place they’ve their staple line. However then in addition they create particular occasions which can be in a position to drive visitors to the location and have interaction with their prospects.
Chokkavelu: Yeah, they do drops roughly each week. I used to be shocked that it was weekly. You are considering of various kinds, completely different colours. Clearly if 82% are from that core, these are incremental. However in addition they when you’re again on the location or on the platform, possibly you purchase one of many core choices too. Then what they’re attempting to do in any other case is being that life-style type of factor, which their definition of life-style proper now it is nonetheless fairly healthcare targeted the place it is lab coats beneath scrubs, like an beneath scrubs, which could possibly be worn exterior the hospital. Outerwear, activewear, loungewear, compression socks and stuff like mast shields, footwear. They have that as their, “Hey, if it is tremendous comfy and you’re keen on sporting it at work then it’s also possible to discover issues that folks would put on exterior of labor.” That is a development alternative.
Lewis: Yeah, and it is an fascinating founder story with this firm. As a result of what I used to be shocked by is a few slight healthcare publicity for them, however not hardcore healthcare expertise in the way in which that you’d historically give it some thought. However nonetheless, founders that recognized a ache level and realized that they will provide you with an answer that was much better than what was at present on the market, and people founders nonetheless on the helm for this enterprise.
Chokkavelu: Yeah, co-CEOs. Effectively, really, let’s begin with Heather Hasson, who previous to the 2013 launch, she began her first firm at age 22 and ran that for seven years. I am seeing various things on whether or not it was a high-end purse line or whether or not they made neckties or possibly each. However both means, within the style realm. Then, Trina Spear was an affiliate at Blackstone Group. She was doing Wall Road stuff. The way it began is as a result of I used to be on the lookout for that founder’s story of, “I used to be a healthcare skilled. My scrubs had been itchy and boxy,” after which as soon as I noticed their backgrounds, I used to be like, “That is why I have never seen the story. However midway by means of the few dozen pages by means of the S-1, you see the letter and also you see that Heather Hasson had espresso with a buddy who was a healthcare skilled, and the scrubs had been terrible and boxy. Then, it is laborious to get them at locations as a result of the bricks-and-mortar outlets, they’d shut at 5:00 PM. When you’ve received a 7:00 AM to 7:00 PM shift, when are you going to get these scrubs? Then ultimately, she was launched to Trina Spear from a mutual buddy, after which they partnered up, after which they began going.
Lewis: What’s cool is I like moving into the founder’s story and getting a few examples there of clear ardour in metallic and simply actually desirous to be on this, placing within the work to create one thing actually huge. There are tales of them going to hospitals, going to care amenities, and establishing cubicles the place they knew that docs and nurses had been going to be switching their shifts. They’d arrange with free espresso and principally watch for folks to come back by and, “By the way in which, listed below are our scrubs,” and begin to create these extra grassroots relationships with folks additionally working within the expos and doing issues like that for healthcare merchandise, however there may be loads of that to the story. Despite the fact that they don’t seem to be healthcare employees that had been essentially fixing an issue, they personally had been experiencing quite a bit.
Chokkavelu: Frankly, as an investor, I prefer it as a result of that is the place you get that, hey, you aren’t simply targeted on the healthcare house. They’re shortly already serious about growth somewhere else. Then, you have received that with Trina can be Wall Road type of expertise of simply and also you see it with as we’ll get into the financials and issues like that. At the very least from what I’ve seen simply operationally and gameplan, a extremely well-run firm.
Lewis: Yeah, let’s dive proper into that slightly than wait as a result of the numbers are actually spectacular. The highest line for 2020, internet income was $263 million, which grew 138% yr over yr. I do not spend a ton of time within the typical retail house. […] the patron items house, they have an inclination to go away that for Emily Flippen with Trade Focus as a result of she does such a superb job with it. I do not suppose you usually see development charges like that on this trade.
Chokkavelu: I preserve coming again to SaaS. You do not at all times see that in SaaS this previous yr with a pandemic.
Lewis: Yeah. What’s unimaginable to even additional that SaaS comparability, gross margins for this enterprise, 72%. That is extremely excessive for the trade.
Chokkavelu: Yeah. I used to be simply speaking […], who’s our cohort on Twitter. He was saying, “I do not know if there are any even premium life-style manufacturers.” You checked out Lululemon and Yeti and Tiffany. They had been all within the 50%’s to low 60%’s. Then once you do take a look at SaaS firms, keep in mind, FIGS is at 72%, Zoom is at 69%, CrowdStrike‘s at 74%, and Salesforce is at 74%. It is proper there with SaaS firms proper now, at the very least.
Lewis: Not surprisingly, with gross margins like that, though it could not essentially be the corporate’s precedence to be worthwhile proper now, they’re, which simply speaks to how a lot money is left over after they’ve performed making the product.
Chokkavelu: To discover a firm that is rising over 100% and get profitability is loopy, after which for them to be making bodily items which have the actual value of products offered. Superb.
Lewis: Superb. I suppose for them actually, the upfront prices of making their designs, determining what they wished to do in cloth, doing the event there to create one thing that feels differentiated is loads of the place that upfront value goes to be. However as soon as you have figured loads of that stuff out, the core inputs aren’t that costly.
Chokkavelu: Particularly reasonable, however nonetheless.
Lewis: I say that as a power. It is one thing the place so long as you’ll be able to preserve the pricing energy that you’ve got, you are going to preserve these margins as a result of the enter prices aren’t going to go dramatically up until they begin going into some product strains that alter their value construction a bit of bit. Particularly when you think about simply what is going on on with them with their value to accumulate prospects, we’re seeing them profit tremendously from the dimensions they’re working on.
Chokkavelu: Yeah, they’re speaking about going from $101 to accumulate a buyer in 2018 down to only $39 in 2020, so that you’re down 60%. That is due to model consciousness and phrase of mouth kicking in. To place that $39 value buying perspective, prospects are spending $215 with them within the first yr. Often, in any kind of enterprise the place you are doing a price to accumulate a buyer, you’re taking a shower at first, and then you definitely’re hoping that it pays off over the long run with over lifetime worth. Perhaps within the second or third time, they arrive again to the location within the second yr, however they’re worthwhile from the primary buy. When you take their contribution to revenue, simply the gross revenue minus another direct prices and you’re taking that over the associated fee to accumulate, they’re at 1.3. That means, in the event that they spend $100 in advertising or promoting, they get again $130 from that first sale.
Lewis: Yeah. It is laborious to argue with any funding you’d make in a enterprise when these are the numbers that you simply’re in a position to put up along with your buyer acquisition prices and the way shortly you are in a position to be repaid.
Chokkavelu: Yeah, there isn’t any payback interval, which is bizarre.
Lewis: Which is wonderful. Simply to intestine test with these numbers that you simply’re seeing. We mentioned $215 for common spend within the first 12 months. That equates to roughly a mean order that we’re seeing from them about $100. The simple solution to simply shortly take a look at their web site and perceive that’s usually, you are going to see their scrub pants at about $48 and the scrub tops at round $40. It is like $38. A set of their scrubs will get you fairly near that common order proper there.
Chokkavelu: I’ve received my […] groupings so that you simply get your package deal the place it is like, “Hey, look. I’ve received an outfit. Increase.” Yeah.
Lewis: Which I feel is compelling, significantly as you realize, I’m going to put on this on a regular basis. I am going to purchase one equipment and see how I prefer it. If I prefer it, I am going to proceed shopping for extra. However it’s a pleasant, straightforward means for somebody to attempt one thing out when it is your on a regular basis uniform.
Lewis: We talked a bit of bit in regards to the management construction and the co-founders. Of us additionally within the present know that inevitably every time we’re speaking a couple of group, particularly founding group, wish to dig into what we see by way of voting construction for the enterprise, like to try what we’re seeing by way of worker suggestions from Glassdoor and get a way of past all the superior founding tales, stuff we’re listening to about this enterprise, who is asking the photographs and in addition what’s the tradition of this firm?
Chokkavelu: We have the 2 co-founders, after which this third particular person, Thomas Tull, was a Hollywood producer who invested about $65 million in 2017, are available in. Principally, that is much like what we see with others the place if you’re shopping for into this firm, you’re shopping for into them, as a result of it will get a bit of clergy with what goes the place and who owns what, however principally, they management the corporate. Now, the group of these three, they’ve a voting settlement the place they again one another up on stuff and so they personal a controlling curiosity. There are A shares, B shares, and C shares, and there are numerous issues. I feel the B shares, all of them can convert again to A, take 10 years for the B. Good distance of claiming, you are trusting the 2 co-founders and the investor, Thomas Tull, to do what you need them to do.
Lewis: Yeah. When you see their imaginative and prescient and you purchased in, that is an ideal signal, as a result of it means they don’t seem to be going to have very many roadblocks in executing their imaginative and prescient, at the very least internally. Each time that plan meets the market, it is one other factor, however you realize that they will be capable to exert their very own strategic imaginative and prescient over the corporate. When you’re much less satisfied, then clearly, that is a purple flag. We speak about this with most firms that come public. As a result of particularly if you happen to’re coming public at a sufficiently small analysis and you are a founder, you need to be ready the place you are going to management the future of the corporate. As a rule, particularly if you happen to’re actually a visionary chief, traders additionally need you to be in that place.
Chokkavelu: Sure. Frankly, if you happen to’re in a founder-led enterprise, you are betting on the founding father of whether or not they’re controlling curiosity or not. Frankly, the truth that they preserve management provides me some religion within the founder.
Lewis: Yeah. It means they’re sticking round. They’ve pores and skin within the sport, we like to see that. Their monetary pursuits are aligned with the corporate’s monetary pursuits, that are aligned with investor monetary pursuits. In case you have somebody who’s making a class and actually upgrading the way in which the trade works, you need to see that thesis play out over time. Typically, I take a look at this and say, that is implausible. Like to see that. They are going to have the ability to name the photographs. With an organization of this dimension, I feel they debuted round $5 billion or so. Founders and the chief group have an outsized impression on the route of the enterprise due to the scale of the corporate.
Chokkavelu: Proper on. Let’s get to the purchasers, possibly. We have 1.5 million energetic prospects. That means, these are individuals who have purchased as soon as up to now 12 months. Now, we at all times attempt to get behind retention, as a result of ideally, if it is a huge model, you need people who find themselves repeat prospects. They are saying that 60% of their energetic prospects had been repeat prospects, and so they give some retention numbers. They are saying in 2020, we retained 75% of the 2019 prior cohorts internet revenues, together with 100% of the 2019 internet revenues generated by 2018 in prior cohorts. I do not understand how you’re studying this […]. That is good.
Lewis: It is a bit of complicated. We really had an identical dialog final week, the place we had been attempting to unpack a retention quantity for an organization we had been . Principally, anytime it falls in need of one thing that’s a simple comps determine, it may be complicated for traders as a result of that is what we’re on the lookout for with that cohort evaluation. I feel we’re getting one thing that will get near this right here. I like seeing that they are in a position to create repeat prospects with at the very least the vast majority of their energetic prospects. I feel that that is a powerful signal. What’s been extremely spectacular for me is the expansion inside their energetic prospects. They went from, I feel, about 600,000 energetic prospects a yr in the past to, I feel, it was 1.Three million by 2020. This can be a firm that has skilled huge development. Ideally, you are having fun with that buyer development and also you’re getting continued spend out of your present prospects. That appears to be the case based mostly on the numbers that we see right here. I would like for this to be acknowledged in a bit of little bit of a cleaner means although.
Chokkavelu: Yeah. I do give a bit of, as a result of it is not like, I’ll speak about SaaS firms once more, however we’re, “Hey, I’ve received my subscription,” after which subsequent yr, if I do not subscribe once more, I’ve churned off. Whereas with clothes, you is perhaps getting scrubs from 5 completely different producers of clothes and also you would possibly like it, however possibly it is two years later that you will purchase one thing, during which case it will possibly rely as churn within the conventional sense, however you like it and that is effective, otherwise you’re somebody who simply bulk buys and buys each two or three years and simply will get 10 scrubs.
Lewis: Yeah. What’s so laborious about that’s, non-purchasers might really be an indication of loyalty and happy prospects. When you’re shopping for a ton of stuff in a single yr after which it is final yr for that yr after which the next yr you do not order something, that metric would fail you, since you would say, properly, there wasn’t any buyer development for that particular person buyer. The fact although is that they purchased loads of merchandise, and if it holds up and so they’re pleased with it, and so they purchase in yr three, that is a really profitable buyer relationship.
Chokkavelu: I’ll guess it is like some other factor, particularly manufacturers that actually resonate the place you have most likely received some people who’ve 50 pairs of scrubs. Then you definately’ve received different people who find themselves like, “I’ve three and I wash them each few days.”
Lewis: Yeah. I suppose it simply is determined by how usually you need to do laundry. It matches most likely what it comes all the way down to.
Chokkavelu: Hopefully, they’re doing laundry.
Chokkavelu: It is fairly disgusting.
Lewis: To place a few extra numbers to what is going on on with their buyer base, by the corporate’s personal rely, ladies make up about 83% of their prospects, and roughly half of their prospects are in that 18 to 35 demographic. Not terribly shocking on the age demographic. I feel they are surely positioning themselves as a little bit of a millennial branded. It strikes me in loads of the identical means as what I are inclined to see marketed to me on Instagram, and I am 30. I am proper within the center. I feel I’ve really been marketed huge funnily sufficient. To place only a sense of principally buyer shopping for energy, roughly two thirds of the shopper base earns lower than $100,000 a yr and one third of the shopper base earns lower than $50,000 a yr. I feel the explanation they name that out is once you get into a few of these life-style manufacturers and also you begin seeing a few of these value tags, it is pure to surprise, the place is the sensitivity level with pricing? Is that this an accessible product or not?
Chokkavelu: Now, these are actually fascinating. When you think about that, it is the swimsuit for a healthcare skilled. $100, $200 for a swimsuit, that is not that loopy.
Lewis: Yeah. Notably one which’s extra comfy wicks water away, you are feeling higher in. Has a bit of bit extra of what you are on the lookout for by way of pockets and storage and that stuff. I completely get it, and I actually get it once I take a look at the online promoter rating for the corporate. As a result of I feel greater than the rest we have talked about to this point by way of buyer retention, the accessibility by way of value, that is the factor that stands out to me as this firm is onto one thing.
Chokkavelu: Yeah. I am undecided precisely how they received the Internet Promoter Rating as a result of I feel you’ll be able to, relying on sources as we’ll see, however they’re claiming a Internet Promoter Rating of +81. Now, anybody who is aware of Internet Promoter Rating is gasping proper now. What it’s is principally on a scale of 1-10, they ask folks, ”How doubtless are you to suggest the corporate to a buddy?” When you say 9 or 10, the corporate will get a degree. When you say seven or eight, it is a push. Something decrease than seven, six and under is a adverse one. The dimensions is adverse 100 to optimistic 100, in order that they’re optimistic 81. When you interview 100 folks and so they all say, eight, or 9, or 10, that is 100. In the event that they’re all six or under, it is -100. For comparability, at the very least what I am seeing on the web, is Apple, 47-89 relying on the supply. You are in that Apple kind of territory.
Lewis: Yeah, it is simple to take a look at a quantity like 81 and suppose it is a B-, however I feel that is really an A+, as a result of it’s a must to regulate your scale, -100 to 100. It is actually spectacular. I feel it speaks to how properly they deal with the viewers that they are assembly. I feel they’re attempting to have interaction that viewers in a few other ways. They’re digital first and also you see that in among the initiatives the corporate has, significantly the Ambassador program the place they’re tapping immediately into that superior human demographic that they are assembly as prospects.
Chokkavelu: Yeah. They have that. You really can apply to be one They are saying on the applying, ”Please observe that in case your social media is personal or lacking, we can’t be capable to take into account your utility.” Clearly, they’re on the lookout for influencers, proper?
Lewis: Yeah. I imply, I get it.
Lewis: When you can organically create these relationships slightly than should dealer them by means of businesses, why would not you?
Chokkavelu: Yeah. Did a fast sanity test on their social media simply by way of Instagram followers simply to ensure as a result of I did not need to see 10 Instagram followers. They’ve over 500,000 Instagram followers. Peloton solely has 1.5 million, which was shockingly low and Lululemon, 3.6 million. For scale, these are all comparable. In some way Below Armour has 8.6 million. They’ve struggled a bit with their scale, it is not the be it and end-all, nevertheless it does present that they are being savvy on social media and so they’re increasing their viewers.
Lewis: I feel one of many huge questions from me trying on the firm was, it looks like they’re delighting the folks of their core market and so they’re exhibiting actually nice buyer development. How huge is that this market? As a result of as somebody who does not work within the healthcare house, does not actually know anybody that works within the healthcare house or would wish to put on scrubs on a regular basis, I’ve actually no idea of how many individuals put on scrubs on a day-to-day foundation. I needed to again myself away from my core assumptions right here, we all know what I used to be considering, docs, nurses, and begin considering a bit of bit extra broadly about it. I actually, in getting ready the present, was Googling like, who wears scrubs? Simply to see who I used to be forgetting right here. You’ve got dentists, dental assistants, pharmacy technicians, veterinarians, bodily therapists and I am certain loads of different occupations that I am leaving off the record. The corporate estimates 20 million folks working within the healthcare sector. We talked about 1.5 energetic prospects. It is laborious to know precisely how they’re pairing these numbers up. However the level is, there’s a substantial quantity of development for them. There’s loads of buyer acquisition in entrance of them if they’re able to provide compelling merchandise to the folks which can be at present utilizing them.
Chokkavelu: Precisely. With that $5 billion market cap and solely about $300 million in gross sales, in order that’s a 16 instances gross sales. Proper now it’s a must to have loads of development for that to work out even with their revenue margins. How they mentioned they are going to develop was very compelling. Prime stage attending to the Dylan factor of how huge is the house? Principally, the healthcare house is the biggest and fastest-growing job section for the Bureau of Labor Statistics. That is nice, huge and rising quick. It is anticipated to develop 15% a yr from 2019-2029. So 15% versus 4% for total jobs. Then, by way of that whole addressable market, you are speaking $12 billion within the U.S. These present gross sales are beneath 3% of that $12 billion, and then you definitely’ve received $79 billion globally and each of these numbers are rising. To allow them to develop with the entire house, they will develop by taking market share from different scrubs suppliers, they will prolong deeper into that life-style model. Despite the fact that I am not a healthcare supplier, their scrubs did look comfortable although, the sweat panty-looking issues. I might see, possibly if that is someday a multi-bagger, possibly I am going to power myself. If it is a five-bagger, then I am going to purchase a set of scrubs —
Lewis: That’ll be your deal with for proudly owning shares, proper?
Chokkavelu: Yeah. It’s going to be their deal with for offering me a five-bagger, proper?
Lewis: Yeah. It is a dividend of types, Anand.
Chokkavelu: That is proper. Then, worldwide growth. We talked about that $12 billion within the U.S., $79 billion globally, which implies the remainder of the world is 5X the chance within the U.S. Now, assuming comparable proclivity to purchase these sorts of high-end merchandise. Then, the opposite one, which is an enormous one for me, is different sectors past healthcare. There’s 40 million folks exterior the healthcare house. They’re in service-based industries that should put on uniforms. That is meals service, hospitality, development, transportation, that type of factor. Most likely not as uniform as scrubs, however there’s most likely a reasonably large alternative there.
Lewis: Yeah. Even simply their web site and seeing what they provide, I feel footwear might be a fairly respectable development alternative for them as properly as a result of you could have jobs the place you are in your ft all day. If you need a superb shoe advice, speak to a health care provider or a nurse, or a restaurant employee. These are the people who find themselves going to have the ability to let you know what’s comfy for 8-10 hours a day. They’ve, I feel, a collaboration with New Steadiness, however that is one other alternative for them as properly. I feel there are some alternatives exterior of the core healthcare market or the core healthcare use case the place you are increasing for what docs, and nurses, and different healthcare suppliers would possibly put on from you exterior of scrubs, transferring into extra conventional clothes. I am a bit of bit extra skeptical of that. I feel I extremely imagine that they will serve their core viewers properly with the core product. The growth stuff is at all times going to be one thing I low cost simply because I’ve seen how laborious it’s for a few of these different life-style manufacturers to make that leap.
Chokkavelu: Completely agree. For me to purchase the inventory, I wished to make sense healthcare solely. Healthcare solely, U.S. solely, even perhaps.
Lewis: As a result of then all the pieces else is upside. When you make it laborious, I feel that is the place you are going with this. When you make it laborious to make the bull case and the bull case continues to be actually sturdy, then all the different stuff is gravy on prime of it and as a rule, a few of that’s going to materialize if it is a actually high quality enterprise that has some optionality.
Lewis: The entire glowing critiques right here apart there are some dangers related to this enterprise. I feel one of many huge ones is that is an costly product relative to the remainder of the market. I spent a while different websites that combination scrubs and so these aren’t direct-to-consumer, these are extra like scrubsandbeyond.com, which principally says precisely what it’s. Uniform benefit, simply their websites to see, they’re aggregating stuff. You talked about earlier than Cherokee and Vicky’s being main suppliers in that house. There are loads of firms in that house and for probably the most half I used to be seeing stuff priced under what FIGS is providing, for probably the most half within the $20 to $35 vary. I used to be additionally seeing stuff that begins to look a bit of bit like FIGS, not essentially as modern and trendy as they’re designed, however getting loads of the identical factor the place it is extra form-fitting, extra comfy, much less boxy. You are seeing extra intentional pockets labored into these things. This may not be loopy, we have seen the story play out earlier than the place there’s a actually progressive firm that appears at an area with extra intentionality that anybody else has after which the competitors catches on and begins doing precisely the identical factor.
Chokkavelu: Yeah, I do know one which I feel began round comparable timing however Jaannuu appears to be like prefer it’s working a really comparable playbook, that is J-A-A-N-U-U. It is enterprise capital backed however undoubtedly you shortly take a look at their web site, take a look at FIGS web site and all that stuff, and so they’re undoubtedly going after the identical factor.
Lewis: Yeah, and when there’s a good suggestion cash flows after it. While you’re posting the topline development that they’re within the margins that they’re, different companies are going to concentrate. I would not be shocked to see trade incumbents even construct extra millennial oriented sub-brands inside their providing to attempt to compete there. We have seen loads of legacy retailers do this in one other trade as properly.
Chokkavelu: Completely, and/or little acquisition right here and there.
Lewis: Yeah, I imply, I feel with all of that what’s laborious too, I am unable to assist however make some comparisons to Lululemon with this firm partly as a result of the design is so central to why folks purchase it. These aren’t closely branded scrubs although and in the identical means that Lululemon and Below Armour had been providing loads of patterned exercise materials. The sample is what made it cool, it wasn’t the brand that made it cool and that made it simpler for different folks within the trade to hop in. I feel if it is an aesthetic factor they are going to have a more durable time but when the efficiency is there and that proves out that is the place you keep prospects and preserve the house that you’ve got as a frontrunner in trade.
Chokkavelu: The efficiency and branding is, I keep in mind I knew a man who would put on a polo shirt every single day, pokes some enjoyable out of it and he’d say, “No, no these are the very best shirts.” They’re far superior to some other shirt. All of it feeds one another. You need at the very least the notion of, hey, that is the very best model, or that is the very best clothes, or performs the very best, it is probably the most comfy, whether or not the fact is similar or not?
Lewis: Yeah, and one different factor I am going to throw out there may be I feel that is each dangers and alternative and fairly often that is the case with loads of these items is for probably the most half, once more, pretty much like Lululemon, the ladies’s market is driving loads of the outcomes for the corporate by and enormous the healthcare sector it is principally ladies in order that’s not terribly shocking.
Lewis: Yeah, so like these numbers stack in a short time, you understand why that 83% quantity is there. The boys’s enterprise could possibly be a serious development lever for them nevertheless it is also one thing that’s unfelt, does not materialize in the way in which that you simply would possibly count on it to so it is determined by the way you take a look at that, the way you select to low cost that, and the way reasonable you suppose it is perhaps. However one of many good issues, Anand, is we do not have to take a position an excessive amount of in regards to the market response to this firm as a result of it is already public. This can be a potential present the place the corporate has already made its shares publicly out there and curiously sufficient they had been the pilot firm for an IPO entry program that Robinhood was engaged on.
Chokkavelu: Appropriate, yeah it popped up on my telephone and I noticed it. We had been speaking earlier and did not suppose something of it as a result of I noticed $5 billion. I noticed combined hospital scrubs, goodnight, like actually that is the primary one you do and now I am falling in love.
Lewis: For them I feel it is a fantastic advertising alternative. We talked in regards to the IPO course of usually being a advertising occasion for companies and I feel for them to say, we’re a shopper model, we all know that loads of our prospects are people who, you heard these revenue bands earlier than, most likely have some disposable revenue. Along with being prospects giving a few of these folks alternatives to be early traders, a very nice story to have the ability to promote to traders available in the market.
Chokkavelu: It is a Shopify, use the Shopify platform and on Shopify web site they present FIGS is an instance of parents who use scrubs so it is all good. Now, the one factor on the Robinhood factor is you do surprise, you are fearful about, we talked about, hey, ready on an IPO as a result of loads of time you need to see the efficiency over a number of quarters and hey they are often an preliminary pop that dissipates, that is one thing to issue into, that, hey, it is the primary IPO on Robinhood.
Lewis: Yeah, could possibly be a bit of scorching in exercise. There could possibly be a bit of little bit of enthusiasm round that. It looks like to this point the shares are fairly heat available in the market. I feel the IPO priced at $22 which is definitely above the preliminary vary they have been working by means of and it’s properly above that now buying and selling within the low $30s. We talked about it with the valuation, Anand, this isn’t valued like a retailer. I feel as long as the expansion charges proceed to be actually sturdy, it does not essentially have to be valued like a retailer.
Chokkavelu: Proper. 16 instances gross sales for that $5 billion. What does provide you with some consolation is simply the profitability there, that is already there and that gross margin and so that you talked about working leverage because it goes on if they will preserve these margins. That would get fascinating.
Lewis: I feel it might and I feel it units us up properly for people that had been final week, we debuted the stoplight framework which is your means of assessing firms and having the ability to give your self a simple shorthand. Having walked by means of the S-1 now, let’s do this precisely. The primary class you could have right here is the upside and whether or not or not you see this as a 10x in 5 to 10 years for people that possibly did not take heed to the present, beforehand easy rule, purple, orange, yellow, inexperienced, dark-green, signaling precisely how all methods go you’re with that class.
Chokkavelu: Darkish inexperienced being the very best, purple being the worst. Yeah, with that upside, the 10x, so loads of the issues we have talked about. I like the model as a result of it means hey they will cost quite a bit. These gross margins are indicative of how good the model is so persons are keen to pay these costs, after which that development, and the execution that they are doing, and the way they have been working the corporate. The entire operational issues I’ve actually preferred however that valuation of $5 billion, $1 billion I would be darkish inexperienced all the way in which however I am going to go gentle inexperienced for this one due to that.
Lewis: Yeah, I imply, they do not have to be rising at triple digit topline year-over-year to be placing up fairly spectacular numbers which can be going to be satisfying loads of development traders which can be shopping for these shares. There is a wealthy valuation right here. I feel even when they wind up working themselves down into the excessive double-digits pretty quickly, I do not suppose that that is going to trigger screeching breaks on the expansion story and that the valuation goes to be damage an excessive amount of. I like with that gross margin, we talked in regards to the profitability a part of it however understanding that this can be a purpose-driven firm and one which I feel is comparatively conscious of its personal house and the realities of its prospects, that additionally leaves some huge cash for them to do issues that they suppose are merely good, no matter whether or not what they need to be doing by way of changing into extra worthwhile enterprise, changing into extra scalable enterprise. It opens issues up for them to be charitable, to be actually mission-driven as a result of there’s a lot money left over after they’ve paid the core prices of creating a product.
Lewis: I feel to your level, $5 billion is a bit of bit greater than I assumed they’d come to market. But when they turn into a class proprietor it is not loopy to consider it as a multibagger. 10x, it is laborious as a result of I haven’t got an ideal comp for it and 10x is perhaps a bit of frothy within the subsequent 5 to 10 years however even going by means of that train I feel they fall quick and it is a three or 5x, it is a fantastic return.
Chokkavelu: Yeah to that time, if it was a direct 10x, they’d be greater than Lululemon, that is powerful.
Lewis: Yeah, I feel it is powerful significantly once they’re devoted. What I feel the professional and the con of being an actual devoted supplier is the market alternative goes to be smaller so you could have some competitors however you do not have competitors that is practically as deep-pocketed. The con is until you’ll find some actually fascinating development avenues in adjoining markets that TAM goes to be your TAM. You do not run into as a lot optionality as possibly another retailers would possibly. The second standards you could have right here, Anand, is draw back, principally, how low is the ground? What does a worst-case situation appear to be for you? Fairly sturdy response from me right here too.
Chokkavelu: Yeah, so it is also like inexperienced as a result of it is already worthwhile and money move optimistic. Superb for an organization rising like they’re, there’s model dangers, they’ve had a advertising snafu or two up to now and I feel a lawsuit for unfair enterprise practices from one of many outdated line people who’re within the entrenched house. I have never appeared too deeply into it nevertheless it’s not all that shocking that you will attempt something to thwart an upstart however all of these are potential dangers. However once more, it is print cash which is that this.
Lewis: It’s. It is good to know which you can take a look at a enterprise and say, I need not squint too laborious to determine what this factor appears to be like like sooner or later. We’ve got a fairly respectable sense of what a extra mature model of this firm appears to be like like. The financials are most likely fairly comparable, it is simply that the topline’s greater and the bottom-line’s quite a bit greater too. You would possibly see them go and spend some extra in advertising in the event that they need to attempt to benefit from the publicity second that they are having fun with proper now, and with these buyer acquisition prices being the place they’re and the return on funding being there, I actually would not fault them for doing that. However even with all of that, it is an extremely sturdy and wholesome enterprise for a way younger it’s. I simply took a fast look over, we did not do that earlier, however simply trying on the debt and the money place they’ve. As of March 31st, $74 million in money, their liabilities, simply taking a fast look right here seeing if I can discover it.
Chokkavelu: There is no debt.
Lewis: No debt, so there you go.
Chokkavelu: That is why you’ll be able to’t discover it.
Lewis: Yeah. Wanting ahead to the road gadgets, attempting to scramble right here as we’re taping, however yeah, that provides you a ton of flexibility as properly. They’re able to plan long run and never having to make curiosity funds actually allows you to management your individual future.
Chokkavelu: I feel that was pre-IPO, so I feel there’s a bit of extra cash within the convention too.
Lewis: Additional cash on the desk, at all times a superb factor.
Chokkavelu: Yeah. I feel loads of it was that investor Thomas Tull offered his shares, however I feel some did come to the corporate too.
Lewis: Anand, your third standards is the wow standards and that is, as you subtitle it, a very powerful factor. You need to clarify that a bit of bit earlier than you break it down precisely the way it applies right here for FIGS.
Chokkavelu: Positive. My most necessary factor, properly, I suppose it could possibly be two issues, most necessary standards possibly, nevertheless it’s additionally simply, what’s that one factor you are telling folks once they say, “Why are you shopping for a scrubs supplier?” For me, it is the model. Past all that we have talked about already, simply the quantity of anecdotal, “My relative or my buddy loves them,” from trusted folks on Twitter. I do know, lots of people I do know in actual life too, however these are individuals who do not personal shares. A number of instances you get stuff from individuals who personal shares and you have a reduction that quite a bit. However simply the love, I feel it would’ve been Matt Frankel’s spouse is a healthcare supplier as properly. I feel he was saying like, he will get that weekly field from FIGS or one thing near that or one thing. That is highly effective.
Lewis: Yeah, and the numbers again it up, which I feel is big. You might be offered the story of the direct-to-consumer model, however if you happen to’re not seeing it come by means of within the retention and the top-line development and the shopper acquisition, and taking increasingly more of a market, particularly when that they’re pitching themselves as disruptors in, then you definitely begin to query it. However I do not actually see something that disrupts that narrative trying on the S-1.
Lewis: I feel that is a fairly sturdy wow issue for me. If there is a single level, I feel you might get out between the online promoter rating of 81 and the top-line development of +130% being no matter that wow issue is. I like for that to be a stat in order that I tie it to one thing that I can regulate additional time. I do know all of us have our completely different parameters for these issues, however these are the wow moments for me with this enterprise.
Chokkavelu: I do not know if we mentioned the colour, however darkish inexperienced for me. You did not see me affusing or hear me affusing.
Lewis: Then your first class, how excited are you to personal it in 10 years and the place do you clock in right here?
Chokkavelu: Mild inexperienced once more. If valuation had been decrease, this might be darkish inexperienced as we had been speaking about. However in any other case, as we’re researching this, I used to be getting actually fearful coming to this podcast as a result of I simply saved desirous to do extra analysis. Then when you do an excessive amount of, I really feel like that is such an ideal signal if I am excited to do extra analysis as an alternative of simply, “Yeah, I get it, no matter.” However when you’re doing website positioning searches on premium scrubs, good scrubs, and seeing the place they go in relation to different ones and the advertising they’re paying for issues like that. By the way in which, facet factor, they’ve some room to develop on the website positioning facet on that entrance. Now I feel they had been on the second web page for premium scrubs or good scrubs or one thing, however that is an upside. However principally, yeah, I am fairly darn excited.
Lewis: Your closing standards, Anand, is the boldness stage and your potential to evaluate. The place do you test in on this?
Chokkavelu: That is the place we get out of the inexperienced into the yellow. Provided that I hadn’t heard of this firm earlier than, Raven had featured it as an IPO. Even then, I simply dismissed it till now, and that their bodily items maker, it is simpler to evaluate, but additionally you are counting on model that one dangerous advertising marketing campaign or one controversy might simply actually ding you had been one imitator who simply does it very well, after which a second and a 3rd and Cherokee or Dickey is getting one thing to realize extra. Yeah, I am not as assured.
Lewis: Within the shopper house, I am at all times going to offer a reduction on myself if I’m not the core consumer for the product. Typically meaning I am taking a go on one thing that winds up being a wildly profitable funding simply because I am not the core consumer and I do not really feel like I’ve a adequate finger on the heartbeat right here. On this case, the numbers are so sturdy, I am keen to beat that. However it’s at all times useful to at the very least give your self a second of pause there.
Chokkavelu: If I used to be the physician my mother and father wished me to be, I would be at the very least gentle inexperienced.
Lewis: Effectively, I am glad we received to kick this one round. I’ve to present a shout out to our listener Nate who put this one on my radar, so we owe the present to Nate often because I feel I pinged on and was like, “Hey, do you need to do that?” He was like, “Yeah, it sounds nice,” and it was solely from that listener e mail.
Chokkavelu: Thanks, Nate.
Lewis: Sure, thanks, Nate. Shameless plug, in case you have one thing you need us to hit, IndustryFocus@idiot.com, you’ll be able to tweet us @MFIndustryFocus, and Anand is extremely energetic on Twitter. Anand, what’s your deal with in case folks need to get in contact with you?
Chokkavelu: @anandchokkavelu, really easy.
Lewis: Anand, I’ll see you on Twitter if I do not see you on Zoom earlier. Thanks a lot for becoming a member of.
Lewis: Listeners, that is going to do it for this episode of Trade Focus. When you’re on the lookout for extra of our stuff, subscribe on iTunes, Spotify, or wherever you get your podcasts. As at all times, folks on this system might personal firms mentioned on the present and The Motley Idiot might have formal suggestions for or towards shares talked about, so do not buy or promote something based mostly solely on what you hear. Because of Tim Sparks for his work behind the glass at the moment, and thanks for listening. Till subsequent time, Idiot on!
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