FIGS' Earnings May Be Stronger Than They Seem: A Closer Look at the Accrual Ratio.

FIGS, Inc. (NYSE:FIGS) reported soft earnings, but its accrual ratio suggests strong conversion of profit to free cash flow, potentially understating its earnings potential. Free cash flow exceeded statutory profit, and while EPS shrunk in the last year, the company's profit performance is worth considering alongside other factors, such as margins, forecast growth, and return on investment.

FIGS, Inc. (FIGS), a leading provider of healthcare apparel, reported its second-quarter 2025 earnings, which exceeded market expectations but were accompanied by a notable reduction in earnings per share (EPS). Despite this, the company’s strong free cash flow (FCF) and other financial indicators suggest a robust underlying performance.

Key Financial Highlights:

- Revenue: $152.6 million, up 5.8% year-over-year (YOY) [1].
- Adjusted EPS: $0.04, beating analyst estimates by $0.02 [1].
- Adjusted EBITDA: $19.73 million, a 12.9% margin, beating estimates by 56.5% [1].
- Operating Margin: 6.5%, up from 1.1% in the same quarter last year [1].
- Free Cash Flow: Exceeded statutory profit, indicating strong conversion of profit to free cash flow [1].
- Active Customers: 2.74 million [1].

Analyst Questions and Management Responses:

During the earnings call, analysts probed various aspects of FIGS’ performance. Key questions and management responses included:

1. Angus Kelleher-Ferguson (Barclays): Asked about the main contributors to average order value (AOV) growth. CEO Trina Spear cited product mix and innovation, while CFO Sarah Oughtred emphasized the product mix shift’s largest impact [1].
2. Dana Telsey (Telsey Group): Inquired about pricing strategy in response to tariffs. CEO Spear stated that price increases would be a last resort, focusing on sourcing, supplier negotiations, and operational efficiencies [1].
3. Brooke Roach (Goldman Sachs): Requested quantification of tariff impacts and potential price changes. Oughtred explained that tariffs would have a 150 basis point annualized impact for 2025, prioritizing mitigation strategies over immediate price increases [1].
4. John David Kernan (TD Cowen): Questioned the outlook for customer growth and selling expense leverage. Oughtred noted that promotional pullback would affect customer trends but expressed confidence in returning selling expense rates to 2023 levels by next year [1].
5. Ashley Owens (KeyBanc Capital Markets, via Chris): Sought details on non-scrubwear softness and future product plans. CEO Spear attributed the decline to fewer product launches in Q2 and indicated plans to expand non-scrubwear categories [1].

Market Reaction and Outlook:

Following the earnings announcement, FIGS’ stock experienced a significant uptick, closing at $6.55 in after-hours trading and continuing to rise in pre-market activity to $7.11. This movement reflects investor confidence in the company’s financial health and growth prospects [2].

For the full year, FIGS projects revenue growth in the low single digits, with an improved adjusted EBITDA margin guidance of 8.5-9%. The company anticipates flat to 2% revenue growth in Q3, focusing on mitigating tariff impacts and optimizing promotional strategies [2].

Conclusion:

FIGS, Inc. reported strong financial performance in Q2 2025, with robust free cash flow and operational efficiency indicators suggesting potential understated earnings. While EPS shrank, the company’s strategic focus on product innovation and operational efficiency, along with its international expansion plans, positions FIGS for continued growth. Investors should closely monitor FIGS’ ability to offset escalating tariff costs and the impact of promotional strategies on customer acquisition and retention.

References:

[1] https://finance.yahoo.com/news/5-revealing-analyst-questions-figs-053139471.html
[2] https://www.investing.com/news/transcripts/earnings-call-transcript-figs-q2-2025-earnings-beat-forecasts-stock-rises-93CH-4180086