FIGS recovery at early stage, but traction of new product launches promising

Investing.com -- FIGS better-than-expected Q2 results Thursday, show that the medical apparel company is on path to recovery, albeit at an early stage, but the success of its new product launches in the quarter suggest there is plenty of room to rack up market share.  

The company is still in the "early stages of a near-term recovery, in our view, while FIGS works through prior execution issues in a challenging macro-operating environment," analysts at Telsey Advisory group said in Friday note after lifting the price target on the stock to $7 from $6, while maintaining a market perform rating. 

FIGS raised its fiscal 2024 revenue outlook after reporting a Q2 beat, but the outlook on margins was cut as the launch of lower margin products are expected to weighed. 

The company now expects the full year gross margin to be 150 to 200 basis points lower than fiscal 2023, compared with a prior estimate of roughly flat previously.

The lower margin guidance is the result of "continued product mix shift towards newer products, which are lower margin than the core assortment," Telsey added, following a slew of product launches in Q2 as part of its newness strategy that appear to be gaining traction. 

"Almost every single product launch in the second quarter performed above expectations, notably the flare scrublegging, the indestructible collection, a number of collaborations (including Star Wars), New Balance, and others," the analysts said.

"Non-scrubwear categories grew by 13% YoY in Q2 and accounted for 18% of sales, though these newer products have a lower margin than the core scrubwear, resulting in gross margin contraction," the analysts added.

But management expects the hit to margins to be short-term pain but long-term gain as it looks to rack up market share. 

"The fact that our newness is resonating is very important," FIGS said on an earnings call Thursday. "It means we are becoming a lifestyle brand and we are creating TAM in an industry where many of these categories did not previously exist," it added.

Telsey agrees, and points to FIGS' positioning as the largest platform in the healthcare space that can help it expand in "underpenetrated markets as well as drive growth through its TEAM business."

FIGS fell 14% on Friday to $4.92, and is now 78% below its its initial public offering price of $22 in May 2021.