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FIGS Inc: Navigating Tariff Headwinds with Strategic Resilience

Isaac LaneTuesday, Jun 10, 2025 9:13 am ET

5min read

FIGS Inc (NASDAQ: FIGS), the healthcare apparel specialist, faces a pivotal moment. While its Q1 2025 results revealed margin pressures and a net loss, the company's strategic moves—bolstered by brand equity, international expansion, and B2B diversification—suggest it is weathering near-term headwinds to position itself for sustainable growth. For investors, the question is whether the current valuation inflection point, fueled by a 40% YTD stock decline, offers a compelling entry into a business with a clear path to recovery.

The Near-Term Struggle: Tariffs, Margins, and Inventory Risks

FIGS' Q1 results underscore the challenges of its growth model. Net revenue rose 4.7% to $124.9 million, exceeding expectations, but a 130-basis-point margin contraction to 67.6% and a net loss of $0.1 million highlight execution risks. Gross margins were squeezed by rising freight costs and a product mix shift toward lower-margin non-scrubwear categories. Meanwhile, inventory surged 13% year-over-year to $131.5 million as the company stockpiled ahead of potential tariff disruptions.

The tariff issue remains critical. U.S. trade policy uncertainty has forced FIGS to adopt a “wait-and-see” approach to 2025 guidance, with full-year revenue growth now projected to fall slightly from 2024 levels. This cautious stance, while prudent, has spooked investors, contributing to the stock's underperformance. The 16% quarter-over-quarter drop in free cash flow to $7.9 million also raises concerns about liquidity management.

Why the Long-Term Outlook Remains Strong

Despite these challenges, three pillars suggest resilience:

1. Brand Equity and Customer Loyalty

FIGS' premium positioning in healthcare apparel is its moat. Active customers grew 3.8% to 2.7 million, while average order value (AOV) hit a record $119—a 2.6% rise—driven by full-priced sales and higher-value product mixes. CEO Trina Spear's emphasis on AOV as a “brand strength indicator” is justified: repeat customers are increasingly buying into the lifestyle and quality narrative, not just functional scrubs. This stickiness reduces reliance on discounts, a key margin stabilizer.

2. International Expansion: A Growth Engine Ignited

While U.S. sales grew modestly (2.9%), international revenue soared 16.4% to $18.9 million, with Mexico, Europe, and the Middle East leading gains. Management's focus on markets like Japan and South Korea in 2025 could amplify this momentum. Crucially, international gross margins (typically higher than domestic) offer a path to offset U.S. tariff pressures.

3. B2B Diversification: A Margin Shield

Though Q1 lacked B2B-specific metrics, the TEAMS platform—targeting healthcare institutions—remains a strategic lever. Unlike direct-to-consumer (DTC) sales, institutional contracts provide recurring revenue and higher margins. CFO Sarah Oughtred's emphasis on “selective B2B investments” hints at a playbook to stabilize profitability amid macro headwinds.

Valuation: A Discounted Growth Story

At a market cap of $820 million and a P/E ratio of 253 (based on diluted earnings), the stock appears rich. However, this multiple is inflated by the Q1 net loss. Excluding one-time costs and focusing on adjusted EBITDA—$9.0 million in Q1, with a full-year target of $30–$34 million—the picture brightens.

With $90 million in cash and no debt, FIGS has ample liquidity to navigate tariffs and fund growth. Its current ratio of 4.25 (vs. peers' averages of 2–3) underscores financial flexibility. At a price-to-sales ratio of 0.7x—well below its 2023 average of 1.1x—the stock now reflects a “worst-case scenario” that may not materialize if tariffs stabilize or B2B traction accelerates.

Investment Thesis: Buy the Dip, Bet on Resilience

The risks are clear: tariffs could worsen, inventory overhang may pressure cash flow, and competition in healthcare apparel could intensify. Yet the opportunities outweigh them:
- Margin Recovery: As tariffs normalize and B2B scales, EBITDA margins could rebound toward 10%.
- Valuation Re-rating: A return to mid-single-digit revenue growth and margin stability could push the stock back toward its 52-week high of $7.
- Balance Sheet Strength: Cash reserves provide a buffer against downside, making the equity a “pre-crisis” story with limited downside.

For investors with a 12–18-month horizon, the current dip presents a rare opportunity. The stock's YTD decline has overshot the company's actual risks, particularly given its structural advantages in brand equity and international markets. A long position here bets on management's ability to convert short-term resilience into long-term dominance—a bet worth taking.

Position: Long FIGS Inc (FIGS) at $4.60. Target: $6.50–$7.00 within 12 months. Risks: Prolonged tariff uncertainty, margin misses, or B2B underperformance.

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