Expansion Into Japan And South Korea And New Product Lines Will Expand Global Presence

Key Takeaways

• Expansion into Asia with tailored offerings aims to drive revenue growth, while omnichannel strategies boost both in-store and online sales.
  
• Personalized products and new categories like footwear and loungewear diversify revenue and enhance profit margins amidst supply chain optimizations.
  
• FIGS faces challenges in customer growth, brand strategies, product mix, international investments, and operational costs, impacting profitability and revenue.

Catalysts

Together with its subsidiary, FIGS Canada, Inc., operates as a direct-to-consumer healthcare apparel and lifestyle company in the United States and internationally.

• FIGS plans to expand its international presence significantly, especially in Asia with market entries in Japan and South Korea. This expansion is expected to drive revenue growth in new markets with localized marketing strategies and product offerings tailored to these regions.
  
• The company aims to deepen connections with customers through personalized and customized products, enhancing user engagement and customer retention. These efforts are expected to support net margin improvements as personalized products typically have higher profit margins.
  
• The opening of at least two new community hubs (retail spaces) and leveraging omnichannel strategies are set to increase customer engagement and drive in-store and online sales, thereby boosting overall revenue growth.
  
• FIGS is focusing on new product categories, including outerwear, footwear, and loungewear, as well as launching innovative fabrications like FORMx. These initiatives are intended to diversify revenue streams and potentially increase average order value.
  
• The optimization of inventory and supply chain efficiencies, including a pause on unnecessary expansion like the Canadian distribution center, is expected to lead to cost savings and improved gross margins over time.

FIGS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FIGS's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.5% today to 4.9% in 3 years time.
• Analysts expect earnings to reach $29.8 million (and earnings per share of $0.17) by about March 2028, up from $2.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.0x on those 2028 earnings, down from 283.8x today. This future PE is greater than the current PE for the US Luxury industry at 17.2x.
• Analysts expect the number of shares outstanding to decline by 4.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.63%, as per the Simply Wall St company report.

FIGS Future Earnings Per Share Growth

Risks

• FIGS has experienced inconsistencies in performance, including challenges in customer acquisition and active customer growth rates, which could impact future revenue growth.
  
• The company anticipates a potential negative impact on net revenues due to a shift away from promotions as part of their long-term brand strategy, which could affect near-term sales.
  
• Gross margins have been pressured by product mix shifts, particularly from a higher sales mix of non-scrubwear, which may continue to impact earnings if not managed effectively.
  
• Investment in international markets, while strategic, presents complexity and uncertain local conditions which may affect profitability and revenue projections.
  
• Increased selling expenses due to inefficiencies at the new fulfillment center and higher logistics costs could pressure net margins if not resolved.

Valuation

• The analysts have a consensus price target of $5.257 for FIGS based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $7.0, and the most bearish reporting a price target of just $4.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $606.9 million, earnings will come to $29.8 million, and it would be trading on a PE ratio of 31.0x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $4.75, the analyst price target of $5.26 is 9.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.