NEW YORK--(BUSINESS WIRE)--Spruce Point Capital Management, LLC (“Spruce Point” or “we” or “us”), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a detailed report entitled “A Forensic Examination of FIGS’ Leaf” that outlines why we believe shares of FIGS, Inc. (NYSE: FIGS) (“FIGS” or the "Company") face up to 45% to 60% downside risk, or $4.40 – $6.05 per share. Download or view the report by visiting www.SprucePointCap.com and follow us on Twitter @SprucePointCap for additional information and important updates.
Spruce Point Report Overview
Founded in 2013 by co-founders Heather Hasson and Trina Spear, FIGS is a direct-to-consumer (“DTC”) healthcare apparel and lifestyle brand primarily known for selling scrubs. FIGS sells the majority of its products in the United States through its digital platforms. FIGS’ boldest claims are that it revolutionized the large and fragmented healthcare apparel market, branded a previously unbranded industry and de-commoditized a previously commoditized product, elevating scrubs and creating premium products for healthcare professionals. FIGS’ ambitions include expanding into every country in the world, increasing its market share in a $12 billion addressable market opportunity and ultimately expanding into new professional markets beyond healthcare.
FIGS went public in May 2021 amidst a backdrop of easy capital raising as an “emerging growth company,” allowing it to present just two years of audited financials. In addition, as a seller of medical scrubs worn by healthcare professionals to ensure a sterile work environment and reduce the spread of infection, COVID-19 provided a unique tailwind to drive FIGS’ financial performance. As a result, FIGS reported $318 million and $88 million of net revenue and Adjusted EBITDA, respectively, during the last 12 months ended March 31, 2021, with expanding Adjusted EBITDA margins approaching 28% and blistering 172% quarterly year-over-year net revenue growth.
However, FIGS’ recent tailwinds and signs of success are starting to fade, and we believe FIGS’ financial performance and growth aspirations will fail miserably during an environment of greater competition and investor scrutiny. Based on our forensic review of FIGS’ claims, severe allegations of false advertising and unfair business practices from an ongoing lawsuit against management, and commentary of former employees suggesting a toxic culture, we believe FIGS’ management is prone to exaggerating financial performance and business claims and lacks the leadership necessary to execute. Key findings from our report include:
- Evidence that FIGS inflated historical revenue figures by 82%, gross margins by 2,040 basis points and its Total Addressable Market (“TAM”) potential by 135%. Based on numerous news stories from late 2018 and early 2019, FIGS clearly purported to the press and the public that it planned to, and ultimately achieved, more than $100 million in revenue in 2018 – in fact, it even appears in a Company press release from 2019. However, as now represented in FIGS’ IPO prospectus, the Company only achieved 2018 revenue of $55 million, a dramatically lower figure. Further, we believe FIGS presents its gross profit in a way that makes its gross margin appear industry-leading but is defined in a non-standard way. Compared with DTC peers, FIGS allocates nearly all fulfillment and distribution expenses to the operating expense lines, instead of cost of goods sold (“COGS”). By re-allocating selling expense to COGS, we estimate that FIGS’ gross margins are overstated by 2,040 basis points. FIGS claims its U.S. TAM is $12 billion, but based on our analysis of U.S. Bureau of Labor Statistics data, average purchase volumes per year, average selling prices and adjusting for non-scrub items based on FIGS’ revenue mix, we derive a TAM of only $5.1 billion.
- Evidence of impending financial pressures on the horizon. We believe there are both obvious and subtle signs of mounting pressures. Less than five months after FIGS’ highly self-congratulatory Q4 2021 earnings call, key business metrics show material weakness: year-over-year revenue growth has slowed to 21%, international revenue growth is now lagging the U.S., customer additions have shown quarter-over-quarter declines in Q1 and Q2 2022, and average order value declined -6% in Q2 2022, the largest decline on record. More concerning and subtle, in Q2 2022, FIGS suspended its written gross margin guidance and updated its “forward-looking statements,” removing reference to “the Company’s ability to fuel profitable growth.” In addition, FIGS regularly provided its market share estimate throughout 2021 and early 2022. However, we observe that it has not updated its market share estimate in the past six months. We believe that FIGS’ customer acquisition cost (“CAC”) calculation lacks transparency since it excludes expense items that cannot be calculated by investors. When we recalculate CAC using total marketing expense, we find that FIGS’ CAC has risen dramatically since its IPO and has exploded in 2022. Further, FIGS’ financial profile appears tenuous as its operating cash flow recently turned negative and its inventory growth is accelerating while sales growth decreases.
- Major discrepancies point to exaggerated claims of co-founder Heather Hasson’s biography. One of the central tenets of FIGS’ origin story and brand image is that co-founder and Executive Chair Heather Hasson is a successful serial entrepreneur who brought to FIGS a seven-year history of running a successful handbag company in Italy. However, our research finds serious holes in that story. Based on our review of legal, corporate and other public documents, we find evidence that Hasson largely lived in California (and perhaps New York) for much of her time before starting FIGS, meaning she spent substantially fewer than seven years in Italy – if she ever lived there at all. Hasson’s biography also does not disclose that she declared personal bankruptcy in 2009, nor that as part of a related lawsuit, Hasson was accused of making false statements. As disclosed in her testimony, both of the handbag companies she formed were failures and worthless. In fact, she admitted that the company that bore her name, Hasson International, never even got off the ground because she “was never able to put any energy into the project.”1
- An ongoing lawsuit, online reviews and interviews of former employees paint a picture of mistrust of management and a dysfunctional organization. In 2019, Strategic Partners (“SPI”), the largest incumbent scrubs supplier, filed a lawsuit against FIGS alleging that the Company made a number of false and misleading claims. For many years, FIGS’ product promotional materials claimed that FIGS scrubs contained special materials (SILVADURTM, a material containing silver developed and supplied by Dow) with antimicrobial properties that killed bacteria “on contact”. SPI claims, and we believe the evidence presented supports, that FIGS exaggerated this claim and the capabilities of SILVADUR in conflict with the materials’ brand guidelines. Most importantly, FIGS ultimately retracted these statements and removed them from its key marketing messages, which we believe provides support to the claim that they were exaggerated in the first place. Tellingly, these retractions came after FIGS hired its first General Counsel. In stark contrast to FIGS’ carefully crafted media image, feedback from former employees suggests FIGS’ co-founders have created a dysfunctional culture that has resulted in high employee turnover. We believe this creates material execution risks as the Company seeks to grow beyond its core market and geography. We are troubled that former employees have described co-founders Hasson and Trina Spear as “unethical” and “distrustful” and the Company’s culture as “toxic.”
- We believe FIGS will ultimately fail to meet its lofty growth ambitions because it has few, if any, sustainable competitive advantages. While FIGS was a pioneer in branding the premium scrubs category, we don’t believe there are enough barriers to entry to forestall growing competition. We also don’t believe that FIGS’ DTC model, low-cost Asian sourcing, or any of its product differentiators – such as design, color or materials – are truly sustainable. In fact, all of the former FIGS employees we interviewed held the view that FIGS’ competitive position is tenuous and that everything it does can be easily replicated. We find that large incumbent suppliers, such as Careismatic (formerly Strategic Partners), Barco and Medelita, have launched numerous leading tailored brands and product expansions to improve their product positioning and marketing. Moreover, numerous DTC specialty brands have become viable competitors, including Jaanuu, a premium scrubs supplier similar to FIGS. Lastly, new upstarts such as Koi, Lago and Mandala have recently entered the space. We also believe that it would be very easy for an established apparel company, such as Lululemon or Athleta, to enter the medical scrubs market and leverage their comparatively larger customer base and retail reach.
- We estimate between 45%–60% downside risk to FIGS’ share price as its premium multiple contracts and lofty expectations are missed. Despite its post-IPO share price decline, FIGS still trades at approximately 4.0x 2022E revenue, where the average multiple for a broad selection of DTC apparel companies are valued at 1.2x. However, our report details numerous reasons why we believe FIGS should trade at a discount to peers, including its dual-class share structure benefitting insiders over outside investors. We also find that most financial data services materially undercount FIGS’ fully diluted share count, both by ignoring its class B shares and not properly accounting for the Company’s 38 million options and 3.7 million unvested restricted share units outstanding. Based on our application of a generous 1.5x – 2.0x 2022E revenue multiple, we estimate a price target of $4.40 – $6.05 per share price target for FIGS, representing 45% - 60% downside from today.
Please note that the items summarized in this press release are expanded upon and supported with data, public filings and records, and images in Spruce Point’s full report. As a reminder, our full report, along with its investment disclaimers, can be downloaded and viewed at www.SprucePointCap.com.
As disclosed, Spruce Point has a short position in FIGS, Inc. and owns derivative securities that stand to net benefit if its share price falls.
About Spruce Point
Spruce Point Capital Management, LLC is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities. Spruce Point Capital Management, LLC is a member of the Financial Industry Regulatory Authority, CRD number 288248.
1 Source: United States Bankruptcy Court, Central District of California, Case 2:09-ap-02582-BR, Answer to Complaint Objecting to Discharge