FIGS(US:FIGS) seekingalpha.comยท2024-05-19 22:54Core Viewpoint - FIGS (NYSE:FIGS) is facing challenges with low operating margins, decelerating growth, and increasing competition, leading to a Hold rating despite a recent stock price increase of 20% following earnings release [1][2][10]. Financial Performance - In 1Q24, FIGS reported a revenue decline of 0.8%, marking the second consecutive quarter of low or no growth, despite a 9% increase in customer count [3][12]. - Gross margins decreased due to a shift in product and geographic mix, with international sales and non-scrub products contributing to lower margins [5][12]. - Operating margins were close to breakeven, exacerbated by higher investments, particularly in growth initiatives [12][16]. Cost Structure - Selling expenses decreased due to accounting changes but are expected to rise in the next quarter due to a fulfillment center transition [6]. - General and administrative (G&A) expenses grew by 5% year-over-year, raising concerns about excess costs, particularly in management compensation [8]. - Marketing expenses remained flat, with ongoing investments in brand marketing, including campaigns for Nurses Week [7]. Cash Flow and Valuation - The company generated $12 million in free cash flow in 1Q24, but $11.6 million was attributed to stock-based compensation, indicating a lack of robust cash flow generation [9]. - The adjusted enterprise value (EV) is estimated at $970 million when accounting for potential share dilution from stock options [11]. - To achieve a reasonable valuation, FIGS would need to significantly increase revenues or improve operating margins, which appears unlikely under current conditions [14][16]. Future Outlook - International sales present a key opportunity for growth, as FIGS has yet to penetrate markets outside the US effectively [18]. - Increased competition in the US market from direct-to-consumer brands could pressure FIGS' pricing and margins, necessitating close monitoring of promotional activities and margin changes [19].