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Figs, Inc. (NYSE:FIGS ) Q1 2022 Earnings Conference Call May 12, 2022 5:00 PM ET
Carrie Gillard - VP, IR
Catherine Spear - Co-Founder, Co-CEO Director
Daniella Turenshine - CFO
Conference Call Participants
Robert Drbul - Guggenheim Securities
Adrienne Yih - Barclays Bank
Lauren Schenk - Morgan Stanley
Michael Binetti - Crédit Suisse
John Kernan - Cowen and Company
Dana Telsey - Telsey Advisory Group
Brooke Roach - Goldman Sachs Group
Brian Nagel - Oppenheimer
Ladies and gentlemen, welcome to the FIGS First Quarter 2022 Earnings Conference Call and Webcast. My name is Felicia. And I will be your operator today. [Operator Instructions].
I will now hand over to Carrie Gillard, Vice President of Investor Relations. Please go ahead, Carrie.
Good afternoon, and thank you for joining today's call to discuss FIGS's first quarter 2022 results which we released this afternoon and can be found in our earnings press release and in the shareholder slide deck on our Investor Relations website at ir.wearfigs.com. Presenting on today's call are Trina Spear, our Co-Founder and Co-Chief Executive Officer; and Daniella Turenshine, our Chief Financial Officer.
As a reminder, remarks on this call that do not concern past events are forward-looking statements. These may include predictions, expectations or estimates, including about future financial performance, market opportunity or business plans. Forward-looking statements involve risks and uncertainties, and actual results could differ materially. These and other risks are discussed in our shareholder slide deck and SEC filings, including the 10-Q we filed today, which we encourage you to review. Do not place undue reliance on forward-looking statements, which speak only as of today and which we undertake no obligation to update.
Finally, we will discuss certain non-GAAP metrics, which we believe are useful supplemental measures for understanding our business. Reconciliations of non-GAAP measures to their most comparable GAAP measures are included in the shareholder slide deck and earnings press release we issued today.
Now I'd like to turn the call over to Trina Spear, Co-Chief Executive Officer of FIGS.
Thanks, Carrie, and good afternoon, everybody. Thank you for joining us for our first quarter 2022 conference call.
Before we start, I want to mention that today is International Nurses Day. It wraps up nurses week, one of our most important events, where we go above and beyond to celebrate our nursing community. Here at FIGS, we are committed to celebrating, empowering and serving our Awesome Humans every single day. Our health care professionals are the reason we exist, and we try to get back to them every chance we get.
Now let's talk about the business. FIGS delivered strong Q1 performance with 26% revenue growth year-over-year and an adjusted EBITDA margin of 23% as we further advanced our product innovation and broadened our reach. While these results were lower than our expectations, our ability to deliver outsized growth and strong profitability in Q1 is a testament to our team, our business fundamentals and our incredibly loyal customer base. This is especially true given the supply chain and macroeconomic headwinds that ramped up significantly during the quarter.
Health care professionals are at the center of everything we do, and we approach every decision with them in mind. We're also building FIGS for the long term. Using these guideposts and the inherent strength of our business model, we remain confident in our ability to continue to achieve strong results despite these challenging conditions.
Let's focus in on our key performance metrics. Net revenues were up 26% to $110 million, led by a significant increase in AOV and continued growth in revenue per customer. Our active customer base grew 31% over the last 12 months to nearly 2 million by the end of Q1. Our trailing 12-month net revenues per active customer increased $13 year-over-year to $226. We delivered a 16% increase year-over-year in our AOV to $116. Our Lifestyle business grew 81% year-over-year to 18% of our net revenues, up from 12% in Q1 of last year. And our international business grew 59%, representing 8% of net revenues, up from 6% in Q1 of last year.
Now I'd like to share more about what we're seeing with our supply chain and customers since we last spoke to you in early March. As you may remember, beginning in Q3 of 2021, we began implementing mitigation strategies to help us get ahead of port congestion and longer transit time. We adjusted our transit time assumption, increased our weeks of supply for our core colors -- our core styles and core colors, and when necessary, utilize additional air freight. We built our 2022 plan based on these mitigation strategies and believe we were positioned well to navigate these challenges effectively. We also expect to have less reliance on airfreight in 2022 than we had at the end of 2021.
However, since early March, we've seen an intense and persistent surge in the volatility of ocean transit times for receiving our products, largely due to vessels being unexpectedly rerouted by carriers while in transit. Shipping times began to vary, ranging from as fast as 30 days to upwards of 120 days, and it's difficult to see this unpredictability ending soon. The lack of reliability has it reduced our visibility into when our products will arrive, and without predictability, we are less able to mitigate these issues with longer lead times alone.
This has impacted our ability to keep core products in stock and execute our color and product scrubs that fuel our growth. As a result, our Q1 revenue growth was lower than expected as we had to shift their planned color launch out of the quarter, and we're limited in our ability to keep in stock 2 of our most popular core franchise styles.
For the rest of the year, we plan to significantly increase our use of airfreight to reduce our exposure to these unpredictable transit times. While this will create additional gross margin pressure for the year, this is the right thing to do for our business and for our health care professionals. We have readjusted our product launch calendar to further mitigate these impacts and to more reliably deliver the innovative products our customers want and need.
In addition to these supply chain challenges, as March progressed, we also began to see trends soften due to macroeconomic factors such as high inflation and shifts in consumer spending patterns. While our largely nondiscretionary replenishment-driven business model is enormously resilient in the current environment, we are not completely immune to these factors in the near term.
So to summarize, supply chain disruptions have intensified significantly since the beginning of March, and macroeconomic trends are probably having some impact on our customers. As a result, we are revising our full year outlook, which Daniella will say more about in a moment.
That all said, I want to remind everyone that we have a deep connection with our health care workers who live in their uniforms, and the demand for our brand remains strong. Our leadership position, our incredibly strong brand and our passionate community gives us considerable advantages in this climate. For example, in Q1, searches for the term scrubs grew 3% year-over-year as compared to 7% for the fourth quarter. In comparison, searches for the term FIGS grew 44% year-over-year in Q1 compared to 40% in the fourth quarter. Data like that is why we remain confident in our ability to achieve at least $1 billion in annual net revenue by 2025.
Now let's go into more detail on how we are advancing our key strategic priorities to drive to that $1 billion number. Our key areas of focus are product innovation, deepening the connection to our customers and growing brand awareness.
Let's start with product. Product innovation is our foundation. We are changing the definition of a health care professional uniform, our holistic approach focused on driving innovation across our layering system from base layer to outer layer remains at the heart of our product design and development. This starts with our scrubwear products, which represent over 80% of our revenue. In Q1, we released our reimagined FIONlite line collection, now known as FREEx. FREEx is a sustainable functional fabric engineered with 92% recycled poly and a mesh lined interior for breathable warmth. This unique fabrication is both fur and liquid repellent, which makes it perfect for our veterinarians and dentists. The collection is just one of the many ways we are innovating with specific professions in mind as we continue to serve the needs of our customers and drive brand loyalty.
We're also seeing tremendous success in the franchises we are building around our 13 core styles. In Q1, we launched new slim styles like our slim pattering and scrub top, a fresh look on a timeless favorite with a more tapered fit. And just like we've seen with our high-waisted pants, this style is resonating with our customers. In the less than 3 months since it launched, the Slim style already makes up 21% of core Catarina scrub tops sales. Outside of scrubs, we are excited by the continued strong growth in our lifestyle offering, which were up 81% in the first quarter.
On shift, off-shift, head-to-toe, we are outfitting the medical community through our innovative layering system and driving increasingly higher purchases of complete look with our complementary color-coordinated products. Our lifestyle products like underscrubs, outerwear and footwear, are specifically designed with the needs of the health care professional in mind. These categories did not exist before FIGS. It's a market we created and we are expanding it every day.
Let me say a bit more about footwear. In Q1, we upped our footwear game, debuting a new style with even more color that strategically aligns and complements our full layering system, and it's working. Our footwear revenue in Q1 alone was larger than all of our footwear revenue in 2021, a great indicator of the progress we have made in this key category as well as the ability of our brand to extend beyond scrubs. Our strategy of deepening and expanding our product is resonating with our community. As of today, we officially have over 2 million active customers. This is an important milestone for us as we continue to build a truly iconic brand. And as a reminder, this growing community comes back to FIGS again and again, with almost 70% of our revenues coming from repeat customers. These individuals are our brand evangelists. They stay up until midnight to see our latest release, and buy it before it sells out. And they spread the word to colleagues that the latest color and style has launched. This dynamic is incredibly difficult to replicate, and it motivates new customers to try FIGS. Our brand and the loyalty it drives transcends beyond making great products. And our engagement on social reflects the deep connections we have made.
For instance, across our almost 1.2 million followers on social with an engagement rate of over 3% compared to the industry standard of approximately 1%, which means our health care professionals are interacting with our brand 3x more frequently, and we continue to grow this relationship through unfiltered, authentic, honest conversation.
We also look to build deeper connections with our customers through localized experiences. After a 2-year hiatus due to COVID, we're very excited to be returning to our roots of in-person community building. In just a few days, we will be bringing almost 200 of our Awesome Humans on a retreat filled with yoga, meditation and reflection.
These are some of the most influential voices in health care, voices that deeply believe in our mission and absolutely love our products. And their authentic connection to FIGS further drive meaningful engagement with our community.
While word of mouth remains our primary source of new customers, investing behind top-of-the-funnel marketing strategy is a key focus for us in 2022. It was only 2 million active customers today, out of the 21 million health care professionals in the U.S. alone, we have so much room to grow. This year, we are targeting select cities, Seattle, Houston, Philadelphia and Chicago, with powerful integrated marketing campaigns and activations, beginning with our pop-up experience in Houston that kicks off Nurses Week. We've intentionally chosen markets with dense concentration of medical professionals where we are underpenetrated. Our active customer count in these markets represent less than 12% of health care professionals in the area. And similar to the successful penetration, these out-of-home strategies have driven in key cities like New York and Los Angeles, we are confident these brand activations will bring more Awesome Humans into the FIGS family.
And our focus does not stop with the U.S. Health care professionals around the world are underserved by the legacy products and buying experiences available to them. That's why we are continuing to build out the FIGS experience in our international markets. Learning as we go, inspiring those Awesome Humans outside of the U.S. just as we have done domestically.
In the quarter, International grew 59% year-over-year, and we are continuing to develop the experience with site-specific assets and promotional strategy, greater localization and an increased ambassador presence. Additionally, we are excited to announce that in April, we soft launched 7 new countries in the EU, Belgium, France, Germany, Ireland, Italy, Netherlands and Spain. While we have a lot of work to do to scale overseas, we're seeing great early results. I'm incredibly proud of the work the team has done to expand our international presence as this remains a massive area of untapped potential for FIGS.
I'll close by saying this, FIGS continued to grow significantly in the first quarter despite the headwinds created by unprecedented supply chain issues and macroeconomic uncertainty. Year-over-year, we grew revenue, users, AOV and all other aspects of our business. We remain on track to reach at least $1 billion in annual net revenue by 2025. And I want to stress, because of the nature of our business, we believe our growth will be less impacted by the macroeconomic environment than others in the consumer space.
FIGS is incredibly well positioned to continue to be the brand for health care professionals. Our business model is based largely -- based on a largely nondiscretionary replenishment-driven core product. Health care occupations are projected to add more jobs than any other occupational group through 2030, and the industry dynamics remain as strong as ever. Our management team is best-in-class. And through innovative products, a superior user experience and a deep connection with our community, we've created a formidable moat as the clear D2C leader in the space.
With that, I will hand the call over to our CFO, Daniella Turenshine.
Thanks, Trina, and good afternoon, everyone. I want to reiterate what Trina said. We are immensely proud of the performance we delivered in the first quarter and our ability to continue to navigate the evolving and dynamic supply chain challenges we are experiencing today. Now let's dive right into the financial results.
Net revenues for Q1 were up 26.4% to $110.1 million compared to Q1 last year. Our unique financial model was driven, in part, by a robust customer dynamic, which despite a challenging backdrop, continues to strengthen. Our net revenues per active customer increased to 226, up 6% from 213 the prior year.
Average order value, or AOV, grew 16% from the prior year to 116 this quarter. This result was due to a substantial increase in lifestyle adoption driven by continued growth in footwear and outerwear. As we expand our layering system offering, our customers are increasingly purchasing a complete head-to-toe look, and we see this in our metrics. In Q1, customers who purchased a lifestyle item had over 20% more units per transaction than their scrubs-only counterparts. AOV also benefited from lower discounts through strategic reductions in our promotional strategy.
Our Q1 revenue growth came in lower than planned, primarily due to the supply chain challenges affecting our scrubwear products that Trina discussed earlier. As a result of these impacts, primarily a color launch that moved out of the quarter and a delay in 2 of our most popular franchises, the high-waisted Zamora and Yola, which we transitioned to a new yoga weight fan, our repeat frequency and order growth was lower than anticipated in the quarter. Despite these headwinds, we are proud of our team's resilience and agility and still achieving 26% net revenue growth.
Gross margin for Q1 decreased 40 basis points year-over-year to 71.2%. This decrease is primarily due to higher use of airfreight as well as higher freight rates across both ocean and air. Partially offsetting these gross margin headwinds, we saw continued improvements in product costing and then scale and lower discounts that enabled more full-price sales in the quarter.
Moving to operating expenses. Selling expense for Q1 was $22.1 million, representing 20% of net revenues compared to 19.7% in Q1 2021. As we mentioned previously, we experienced increases in shipping rates from our carriers, partially offset by the increase in AOV. Marketing expense for Q1 was $15.4 million, representing 14% of net revenues compared to 12.4% in Q1 2021. As we discussed last quarter, in 2022, we are focusing our investments on top-of-funnel marketing initiatives aimed at driving brand awareness. As a result, we have higher brand spend in Q1 compared to the prior year. The increase was largely driven by spend on ENHANCE creative as well as expenses related to the launch of our localized offline brand activations later in the year.
Within marketing, we have built a diversified media mix that is not overly dependent on any single channel. As a result, we do not believe we are significantly impacted by Apple's privacy changes. However, the efficiency of our performance marketing was negatively impacted by our inventory
strength in Q1. We continue to believe that fundamentals related to customer acquisition funnel remains strong. and we were able to maintain high efficiency even in a challenging environment by driving most of our acquisitions through word of mouth.
GA expense for Q1 was $27.2 million, representing 24.7% of net revenues compared to 21.1% in Q1 2021. This increase was primarily driven by noncash stock-based compensation, the incremental capabilities we are building key departments, like product innovation, merchandising and marketing and public company costs, which did not exist in Q1 2021.
Taking this to the bottom line, our net income was $9 million or $0.05 of diluted EPS for the quarter. Adjusted net income was $10.5 million, and diluted EPS, as adjusted, was $0.05 in Q1 compared to $0.08 in Q1 2021. As expected, the decrease in diluted EPS, as adjusted, was driven by a decrease in adjusted net income year-over-year due to investments in the business. We believe these investments in marketing, talent and innovation are essential for our long-term success and position us well to capitalize on the long runway of road to.
Finally, our adjusted EBITDA for Q1 continued to be strong at $24.9 million or an adjusted EBITDA margin of 22.7% compared to 28% in Q1 2021. This change was primarily driven by increased investments in brand marketing and talent as well as incremental expenses related to now being a public company. Despite a softer-than-expected top line, we continue to execute with discipline at the highest level, leveraging the strength of our financial model to deliver high revenue growth coupled with strong profitability.
Quickly touching on our strong balance sheet. We finished the quarter with cash and cash equivalents of $189.4 million. Our cash on hand and cash flow generative business model enables us to strategically deploy capital to fuel our growth and operations over the long term.
Turning to inventory. We ended the quarter with 102.8 million on our balance sheet. We continue to use our strong balance sheet to ensure we can meet future demand. The increase in our balance is being driven by our decision to increase weeks of supply on our core scrubwear offerings as well as higher in-transit inventory due an extended lead times and the impact of higher inbound freight costs.
Moving on to our outlook. Based on the challenges that Trina discussed, we now expect 2022 net revenues to be approximately $510 million to $530 million, representing growth of 22% to 26% compared to 2021. This change is primarily driven by the increased supply chain disruption that began in late Q1 and that we expect to impact us for at least the remainder of the year. Specifically, this is making it more difficult for us to bring product enhancements to market quickly and plan and sing our color coordinated launches, which feature multiple colorways with products from facilities around the world.
For example, in April, we had to split a Tricolor launch that was fully merchandised and campaigned together into 2 completely separate launch date. It led us to move the largest volume colorway weeks later, leading to a suboptimal experience for our customers and met demand opportunities. While these inventory constraints are the primary factor affecting our outlook for the full year, we also recognize that our consumers are facing pressure from macroeconomic factors, particularly inflation as well as shifts in their spending patterns.
The Salesforce Q1 shopping index were the first recorded drop in the 9-year history of the index. We continue to grow significantly in Q1 despite the decline in this index. But as a completely digital company that is properly scaled during this time, we understand this could be having some impact on FIGS, and we are adjusting our expectations accordingly.
To be clear, our business fundamentals have not changed, and our growth will continue to be driven as a largely nondiscretionary replenishment-driven nature of our core product portfolio combined with increased adoption of our complete layering system.
With respect to gross margin, flexibility is critical to operating in this challenging environment, and we are committed to making the right decisions for FIGS' long-term success. Given the increased unreliability of ocean freight, we are shifting more of our freight mix to air to ensure time and consistency for our launches. As a result, we are now anticipating our gross margin to come in between 67% to 68%, which is below our previous outlook of 70% plus, but remains a leader in the apparel space.
We believe these headwinds are temporary and do not structurally change our long-term margin profile. While we anticipate these challenges to continue throughout the year, we believe they will ease in the future, and we will return to our long-term target. For adjusted EBITDA, high growth, balance of profitability are key tenets of our business model. And in this environment, we must adapt to maintain the correct equilibrium. As a result of the near-term pressure we see in top line growth and gross margins, we are now anticipating our 2022 full year adjusted EBITDA margin to be in the range of 16% to 18%, which is below our previous outlook of 20-plus percent.
FIGS's future growth ultimately depends on making smart investments in product innovation, marketing and community to support our long-term ambition. That means that while we will remain disciplined, we will not prioritize short-term profitability at the expense of our future. As always, you will find states to drive efficiency so that all of the pressure we see in revenue and gross margin does not flow through to the bottom line, enabling us to continue to deliver strong profitability in spite of the near-term challenges. We believe we can return to higher profitability once these challenges pass.
Moving to tax. We expect our full year tax rate to be approximately 36% to 37% as a result of several nondiscrete items driving our effective rate higher. We also expect capital expenditures to be in the range of $8 million to $12 million for the year, with the increase primarily driven by our fulfillment expansion.
Now I'd like to give you some perspective on our quarterly flow. As it relates to the top line, we expect our second quarter revenue growth rate to be less than 20% as we continue to be impacted by supply chain challenges and macroeconomic factors, including the rephasing of our product launch calendar, which means more launches to the second half of the year. As it relates to gross margin, based on what we see today, we anticipate our second quarter gross margin rate to be at the high end of our full year range.
Finally, within operating expenses, we are planning higher marketing spend in the second quarter to support our efforts around Nurses Week and our ambassador retreat that Trina described. Additionally, within selling, we expect higher onetime costs in Q2 associated with the expansion of our existing fulfillment center. And finally, we expect higher GA expenses in the second quarter, primarily due to comping a period with no public company costs. Given these factors, Q2 adjusted EBITDA margin is expected to be in the low teens.
In closing, we are incredibly excited about the long runway of growth ahead of us. And despite the near-term challenges, we remain confident in our ability to achieve at least $1 million in net revenues by 2025. We have a free business model, a world-class management team and a dedicated community we're passionate about.
We cannot wait to deliver on all of our plans to support FIGS Awesome Humans. With that, I will turn it over to the operator to kick off our QA session, first, with our analyst community. After addressing their questions, we will then answer a handful of questions received from our shareholders through the Say platform. Operator?
[Operator Instructions]. The first question comes from Bob Drbul from Guggenheim Securities.
A couple of questions I just think more on the top line and I think your customer. When you look at the changes that you're seeing in your customer spending, can you maybe break down, if you think some of it is COVID pull forward versus just a tougher environment on the macro? I was just like if you could maybe break it down a little bit more, the priorities on what you see impacting the overall business, that would be helpful.
And the second question is on -- when you think about the new outlook in terms of '22 for the full year, can you break down some numbers around air freight? What's in your new numbers on the air freight on the gross margin? You can give us a little color on the second quarter in terms of the rate, but it would just be helpful to have a little bit more on the dollar numbers that you're spending in aggregate as we think about the full model.
Thanks, Bob. Great question. I think we'll break it up into a few parts. But from the demand side, we're -- it's mainly the supply chain issues that we discussed. From the demand perspective, we're seeing a bit from an inflation standpoint and from a shift in consumer spending, but the majority of the -- on the supply side. And so we're doing everything we can to get our goods to our health care professionals throughout the rest of this year. But that's really where we're seeing that. We're still planning to deliver 22% to 26% growth for the year. And we do believe that once the supply chain challenges subside, that we can accelerate our growth. As a reminder, this market opportunity remains massive. And as you know, we're the clear leader in the space. As it relates to outlook, Daniella, if you want to take that?
Yes, I'll take gross margin and the outlook. So we're navigating some very fluid and evolving dynamics as it relates to inbound, really seeing unprecedented challenges that are impacting almost everyone out there. And so a reminder on gross margin, we were already expecting to be down relative to 2021 due to ocean and air freight generally being higher and also increasing transit times resulting in the need for continued air freight. We've been able to offset some of that near-term pressure through driving more sales at full price and also continued product costing benefits at this scale.
That said, we're anticipating an additional 300 to 400 basis points of impact due to the increase in air freight spend that we're planning for the back half of the year. Now most importantly, our underlying business model is not changing. We believe that these pressures are temporary, and that when these supply chain disruption ease, we'll be able to return to our long-term gross margin target. We're making the right decision for our business and we're doing what's best for our business and our customers for the long term.
The next question comes from Adrienne Yih from Barclays.
Trina, my first question is -- it's on pricing. I think that in past calls, you've talked about the need to sort of maintain your pricing. Has that actually changed? And what does -- I guess it's for Daniella or the other half of it, what does your average unit cost look like within your inventory? So what's your AUC up as kind of general industry is sort of like 10 percentage. And I'm just wondering, have you changed your philosophy on whether you should or could be raising prices, especially now that there's all this kind of macro pressure that's out there? So that's my first question.
Thank you, Adrienne. I think what's most important here at FIGS is to ensure that our prices are actually advantaged gross margins that have been built from day 1 here at FIGS. We're not seeing any real need from a costing perspective beyond the strategic decisions we're making around air freight to increase our costing given as active with our manufacturing partners. So -- and the good news about the business is that 80% of our product, as you know, comes from 1 fabrication, over 80% of our business is 13 core style. So we're going to continue to monitor the situation and make the best decision for our community that enables us to serve and meet the high expectations of the health care professionals we serve.
Yes. Adrienne, as it relates to your question on average unit cost, I think we are a little bit different. While we're seeing higher air freight spend and higher air and ocean rates, we're actually seeing this offset by better costing across the board, and it's really driven by what we're seeing in our core scrubwear. So -- and top-selling styles like Catarina, Casma and Zamora, we've been able to offset any increases in raw materials through continued efficiencies as we grow and we scale. So while we're seeing some increases in average unit costing, it's not as large as probably other people in the industry.
Our next question in the queue comes from Lorraine Hutchinson from Bank of America.
This is Alice on for Lorraine Hutchinson. We wanted to get an update on sourcing. Since the majority of fabrics are sourced out of China, did the recent lockdowns impact your ability to get inventory for later this year? And if there are any impacts, can you give any guidance on how we can try to quantify that? And then also maybe elaborate a bit on how you're navigating them.
Sure. So I think for us, the main impact that we're facing from the supply chain side is on the transit side. As it relates to our manufacturing partners, we have had no shutdowns, and we are fully operational across our supplier network, but it is a fluid situation that we're evaluating as we move forward here. So we're working with all of our partners. We're seeing where the delays are, and we've been able to navigate quite fluidly across our supply chain, but we'll keep you updated as we go.
The next question comes from Michael Binetti from Credit Suisse.
Maybe I just want to make sure I understand what you guys are referring to when you say you saw some changes in consumer spending patterns. The first question. And then I would love to know, just given how dynamic the situation is right now, I guess you reported and guided us on March 8, and revenues obviously ended lower than planned for the full quarter. Can you help us think about a little bit more about the cadence that you saw through the quarter, the exit rate? Must have been a fairly significant downturn at the end of the quarter. And then just sorry for the multipart here, but I'm wondering how much cushion you have below the gross margin line to defend that EBITDA margin. You gave us if sales or inventory flows worsen from here, again, knowing how volatile the environment is right now.
Sure. Yes. I mean I think in terms of what we're seeing and experiencing from the consumer side and just the macroeconomic changes, right, we have a pandemic, we have supply chain volatility, high inflation, consumer spending shifts and a host of other significant macro issues, and there's a lot of uncertainty in the world. But I want to be clear that while we're not immune to it, it's having relatively less of an impact on us than others. I feel really good about our business model and our long-term prospects.
What hasn't changed is that we're able to navigate through this uncertainty by controlling what we can. So we're airing products so that we can meet the demands of our health care professionals. And we're also, as a reminder, we sell nondiscretionary products that health care professionals need, and are pretty recession-resilient. So as we continue to move forward here, we feel really good about the industry that we're in and the replenishment-driven nature of our business.
As it relates to your other half of your question, Daniella, do you want to take that?
Yes. So I'll start, Michael, with cadence through the quarter. So as of our last earnings call, our trends were on track with expectations, and we had our sample sale in the first week of March that did really well on fewer promotional days year-over-year, which gave us a lot of confidence in our plan. We began to experience impacts on our business in early March. We started to really see increase on reliability and volatility around transit times. And the biggest impact for the quarter was a color launch that was planned for the end of the quarter that actually moved into Q2. So that had the largest impact for what we saw in Q1.
As it relates to adjusted EBITDA margin and gross margin. So I want to start by saying that we're really proud of our ability to deliver 23% adjusted EBITDA margin despite lower than planned revenue in the quarter. I think that's really a testament of our business model and our management team's commitment to high growth and strong profitability.
So when we think about the full year, we're going to continue to invest in places that are really essential to building a strong foundation for long-term growth, like marketing and product innovation and technology.
So within marketing, it's critical for our long-term growth and brand awareness. So we're going to continue to invest here. We think it's going to stay consistent as a percentage of net revenues. Selling, we're expecting to delever slightly because of expanding in our fulfillment also with higher shipping rates that we've been seeing. Finally, within GA, this is the biggest area where we think we can really drive efficiency and where we have flexibility if revenues are to be higher or lower than we anticipated. So we'll continue to look for ways here to really balance investment as the year progresses. And so very few companies at our stage that are able to really invest meaningfully in their business while simultaneously being really disciplined and sustaining a best-in-class adjusted EBITDA margin profile, and we're going to continue to do just that.
Our next question comes from Lauren Schenk from Morgan Stanley.
I was wondering if there's any dollar amount you can put around the color launch in the first quarter to just help us triangulate how much of the disappointment is relative to that launch relative to macro. And then in terms of the back half of the year, how are we thinking about third and fourth quarter. Should third quarter be essentially better than the second quarter? Or is there more going to -- more would be a bell curve with the fourth quarter better?
Yes. So as it relates to what we saw with the color launch and supply chain in the first quarter, a couple of factors for supply challenges in the first quarter, the first of which was the color launch that moved out, but we were also out of stock on some of our key core franchises like our high-waisted Zamora and Yola. And so I'm not giving exact numbers, but the majority of the impact that we saw in the first quarter was related to the supply chain challenges. And we do believe that the macroeconomic factors were impacting us to a lesser extent, and that's what we expect to see in our full year outlook and how we're modeling it in our full year outlook.
As it relates to the third and fourth quarter, we're not really guiding specifically to quarters in the back half of the year. We will say that because of the changes that we've made to our product calendar, we've moved more of our product launches into the back half of the year. And so we do feel -- we feel good about our outlook and our ability to hit the third and fourth quarter and hit our full year outlook.
The following question comes from Brian Nagel from Oppenheimer.
I apologize for the reputation of my question because it's going to follow on some of the other questions. But you're just looking at the, I guess, the top line dynamics here in Q1. So my question is, if the delays of the color launch were -- it sounds to me like a primary -- a primary factor in the sales shortfall in Q1. So the question I have is, has that product now been delivered? And with those sales then, are those -- if the product is available now in Q2, would that basically make up for what was lost in Q1? Or is there some other factor at play there?
Yes. I mean I think -- so that launch that we've got the Q1 was -- it did occur in Q2, although there are some launches in Q2 that are moving into the back half of the year, which is why we're guiding the way we are in the second quarter of the year. So this is a fluid situation. What we're doing is we have set kind of a very strategic -- we're really strategically airing a number of launches this year that align with specific events that -- with our community. And so Nurses Week, for instance, is a big week. Today is the last day. We had aired in our products to meet the demand, and it's been an incredibly strong week. I think there are other events throughout the rest of the year, where we are airing our product in to meet the demand. But that being said, a lot of these decisions have been made now and are really going to be impacting and coming into play in the back half of the year.
Okay. And then my follow-up question, Daniella, we talked about this, just the supply chain disruption in these longer. It sounds like the ships are spending more time on the water now. So I guess the question I have is, is this a new -- we've been talking about supply chain disruptions now for a while. Is this a new dynamic within the supply chain disruptions or just more of the same?
So it's really changed significantly towards the beginning of March. And previously, we were seeing ships being on the water for longer, right? Lead times as long as 120 days. And what we're seeing now is a lot of unpredictability and volatility. So we're seeing some of our ocean transit times exceed 120 days and be much longer than that, and it's creating a lot of unpredictability in our color launches in our calendar. And so we extended our lead times to really account for the longer transit time. But what we haven't been able to account for is this unpredictability and volatility, and that's what's causing a lot of the issues in the first quarter that we've seen.
So just -- I thought that you're talking to your sharing partners, is there a reason for the -- is there a clear reason why these ships in some cases, now spending more time in the water?
So several of our vessels, what we're really seeing is that our vessels carrying our important launch products, have been suddenly and unexpectedly rerouted in transit. And that's what's leading to these really extremely delayed ocean transit times that we're seeing.
The next question comes from John Kernan from Cowen.
So just on active customer growth, to get to the second quarter guidance that sequentially, there's a big kind of deceleration in just the sequential add implied in the guidance, it has to ramp pretty significantly as we get into Q3 and Q4. Is there anything from a seasonal perspective from Q3 and Q4, understanding Q4 is usually a much bigger quarter than the rest of the year, it gives you the confidence in those customer adds as we go into the back half of the year given you have cited some concerns over consumer spending.
What we saw in Q1, as it relates to new customers, is that really the same things that drive repeat and loyalty and retention also drive new customers. So when we have fewer color launches, that impacts our new customers. We actually see 2 to 3x more new customers on a launch day than an average day. And so we do believe that our numbers in Q1 were impacted by the supply chain challenges that we saw in the quarter. But we have a lot of confidence in the year due to the strategies that we have in place.
So core products like our high waisted are back in stock, and we have mitigation strategies to limit that in the future. We've reflowed our product launch calendar, so that there are more launches in the second half of the year, which gives us confidence in that as well. And we're also increasing investment in top of funnel, worldwide brand activation and brand awareness strategies. So we're going to continue to do all of those things. Sequentially, we also see strength in Q4 because of Black Friday, Cyber Monday and holiday. So we sold a lot of room to grow. We only have 2 million active customers today, out of 21 million health care professionals. And so we feel really confident in our outlook and the active customer numbers for the back half of the year.
Got it. Daniella, just maybe one more question for you. All the IPOs from last year in Consumer Tech are trading much lower than more of the IPO and deals happen. Any changes to stock-based comp and those figures and any equity compensation plans? And how do we think about share count for the full year? It looks like the share count came down quite a bit from Q4. So just curious on how to think about those [indiscernible]
Yes. We haven't had any changes to how we're thinking about stock-based compensation. We continue to think it's an important tool to motivate and incentivize our employees. As it relates to share count, it's going to be impacted by the stock price. So we're expecting it to stay relatively consistent throughout the year with a little bit of growth from where we are today.
The next question comes from Brooke Roach from Goldman Sachs.
I wanted to follow up on John's question regarding net new customers and how you're thinking about the demographics of those customers. As you dig into the new customers that you acquired this quarter, what did the demographics look like among those new customers this quarter or the past 2 quarters relative to prior year cohorts? Did you see any change in customer behavior among some of the lower-income customers within the customer base?
So we're not seeing anything particularly in our data. We see similar income levels in our new customers and also our existing ones and also a similar mix of professions that we've seen in the past. I think it's been an incredibly challenging time for all of us, especially our health care community. But we're not seeing anything in the data to guide us one way or the other on the demographics. I think it's important to note, right, health care professionals are not going away. So we still believe that 1 key supply chain challenges subside. The opportunity in front of us is massive and we really believe we can accelerate from here.
Got it. And then just one final follow-up on the freight and transit times. As you look into the back half of the year, is there an optimal number of weeks of supply that you're looking to plan ahead for given the very uncertain environment to potentially go back to using more ocean freight rather than air? Or is that something that's just still TBD at this point?
So it depends on what type of product, right? So within our core colors in our core styles, we are increasing our weeks of supply so that we're better positioned to meet the customer demand that we see. With a lot of what we're planning to air in the back half of the year is related to our product launches. So these generally -- they drive a lot of hype and excitement and engagement on the site, but they live for a short period of time. So it's not really about increasing weeks of supply. It's more about being really decision in our air choices and making sure that we are doing what we need to do to have the product here to meet the demand and to sustain our launch calendar and to grow at the rates in our outlook.
The next question comes from Dana Telsey from Telsey Advisory Group.
As you think about your product assortment and also the expansion into lifestyle, how are you thinking about the marketing with the inventory delays in being able to continue to capture more customers, spend marketing dollars and not disappoint them? How are you thinking about the framework of how you're going to market, what you're going to market and the ability to convert?
Thank you, Dana. Great question. I think that's the decision that we're looking at all the time, right? How much product do we have, what is the demand that we're seeing and how much are we spending from a marketing standpoint to really engage our community across platforms. So I think one of the things that's been really unique about FIGS is this balance, right, of growth and profitability. And what drives a lot of that is our best-in-class marketing efficiency. And so we're going to continue to be super disciplined about how we spend and where we spend those dollars to engage our community and have them get the products they need as well as the products they want, right?
And so even as our launch calendar is shifting, even as we're moving some of our launches around, we are consistently number one, first and foremost, engaging our community with the right products at the right time. In addition to that, we are continuously bringing more as it relates to our lifestyle business. It's a great point, Dana, 81% growth in our lifestyle business and there's so much more that we're going to be bringing on this front. So it is that balance between the products we have, the launches that we -- the cadence of launch as well as the spend, and we're going to continue to be disciplined around all of it.
Got it. And one last thing. You've strengthened the team. I think you've added a new team on the product side, strengthened the Board. Anything that we should be looking at there? Are there people that you need to add? Or how you see the teams developing?
Yes. No, it's been a great number of additions. Jami Pinto, our Chief Product and Sustainability Officer, joined us from Under Armour, and she's incredible. Our new Board members, AG Lafley, Jeff Wilke, Ken Lin, these are all legends and icons in their respective industries, and we're super honored and proud to work with them.
Across the management team, we feel really great about our -- it's really a best-in-class management team, and our Board is incredibly -- they're exceptional. So we really feel good about where we're at, and we're going to continue to execute.
We have no further questions on the telephone line, so I will now hand back to Trina Spear, Co-Chief Executive Officer.
Thank you. Okay. Before ending our call today, we would like to take some time to answer a few of the most upvoted questions from our shareholders through the Say platform.
So the first question asked about our stock price performance and whether there are any plans for stock dividends or buybacks. So first of all, with respect to the stock price, as I said before, in the short run, the stock market is a voting machine. And in the long run, it's a weighing machine. We have a very unique financial profile with an impressive combination of revenue growth and profitability. Our business model is based on a largely nondiscretionary and replenishment-driven core products, and we're in a recession-resistant industry. This industry actually grew in both 2008 and 2009, and we are serving the fastest-growing job segment in the country. As a result, we do believe we're significantly undervalued right now. And with the continued growth and execution, our true value will be reflected over the long run.
In terms of dividends or buybacks, we don't have any plans for those at the moment because as a high-growth company, we believe the best return on our capital is investing back into our business to support our long-term growth. That said, as the stock continues to be undervalued, we will evaluate other options like share repurchases if we believe that is the best near-term return on our capital.
The second question is about whether we're planning on expanding into markets outside of health care. We definitely believe that there are a number of other workwear segments beyond health care that are dramatically underserved. And over the long run, there's an opportunity for us to innovate in these categories. However, we're 100% focused on health care for the foreseeable future. The opportunity within health care is massive, and we are going to grow it further before we expand into other segments.
Finally, we got a couple of questions about our teams business and specifically about partnerships with university nursing programs in large academic hospitals and whether we offer embroidery or color matching for colors that are required at those institutions. So as you all know, our team's business is where we partner with schools, health care institutions and medical practices to supply things directly to them. On the student side, we partner with many of the biggest universities, such as USC, NYU and many others to outfit medical, dental and other students. Many of these partnerships are initiated by students who love FIGS and take it upon themselves to coordinate large group orders. We also work with a large number of hospitals, concierge clinics, med spa chains and other institutions and practices to outfit them in FIGS.
As for embroidery, we have our own fixed tech-enabled embroidery workshop that we offer logo and text embroidery and it allows our health care professionals to tell the world who they are and what they do.
And as for color, we're leading the charge when it comes to colors we offer with our innovative drop strategy, between our core and limited-edition styles we offer, just about any color you can imagine. But what we actually think is most notable is how hospital departments and medical offices have switched to FIGS -- to FIGS colors as their standard colors, like what we've seen over and over again with the group swapping out their old gray for FIGS graphite as an example.
So I think that should cover all the questions from the Say platform. Operator?
Thank you. With that, ladies and gentlemen, the call is finished. Thank you all for joining. You may now disconnect your lines.
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