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FIGS (NYSE:NYSE:FIGS ) is a business that has successfully been able to brand itself in a way that enables medical professionals or any scrubs wearers to love their product. As long as they continue to sell themselves as the best brand in scrubs, they can justify their high prices, which will mean a continuation of strong financials. They have also been able to keep customers loyal and create customers who effectively advertise FIGS' products for free. Because of their strategic branding and marketing, Figs has been a wonderful investment in the past and will continue to be so in the future.

When my significant other got a job in a dentist's office recently, the first thing she did was order new scrubs. Immediately, she went to the FIGS website. She explained to me that FIGS was simply the best option when it comes to scrubs. She told me how she will be in those scrubs for 10 hours a day for 5 days each week, and because of this, she wants the best and most comfortable scrubs available. After this, I went onto the website, did some price comparisons, and noticed that FIGS' products were roughly double the price as other scrubs I found. When I talked to her about this, she told me that "none of them are even comparable," in terms of quality, design, and comfort.

This short story (yes, this actually happened) is practically the entire value proposition for the customers that FIGS sells to. To make it easier for businessmen to understand, scrubs are like the suits of the medical world. Nurses, doctors, dentists, and practically anyone in the medical profession wear scrubs every day, for their entire shift, every year. Therefore, it really matters how scrubs look, how they feel, and that they are durable. Businessmen care greatly about how their suit feels on them, as well as how it looks because they are wearing a suit practically 24/7. The same is true for medical professionals. They wear their scrubs every minute they are working, so it is critical that they are the very best.

For these reasons, medical professionals, like my significant other, are actively looking for the best products to wear, and they are willing to pay for them. As long as it is stylish, comfortable, and will last them a long time, price is not necessarily very important. Also, considering that medical professionals' median yearly wage is roughly $70,000, compared to the rest of the occupations' median wage of $41,000, these medical professionals also have a little more disposable income. These workers are not necessarily pinching pennies, so they can afford to spend a little more on the comfort in their everyday working lives.

FIGS also see themselves differently than simply a clothes maker:

We are a direct-to-consumer healthcare apparel and lifestyle brand that celebrates, empowers and serves current and future generations of healthcare professionals. We are committed to helping these Awesome Humans look, feel and perform at their best – 24/7, 365 days a year.

FIGS clearly brands itself as the best scrubs maker that wants to make its "Awesome Humans" (its customers) be more confident in their looks, along with remaining comfortable while working. They really are working hard to have their customers separate FIGS from standard scrubs.

FIGS makes their value proposition to customers clear: FIGS scrubs are a form of identity, more comfortable, and better looking than normal scrubs. Clearly, they have been very successful in convincing their customers of this. As of March 31, they have 1.5 million customers. These customers have created over $260 million in revenue for FIGS, and the customers seem to be quite happy with the business. 62% of revenue came from repeat customers, which shows that many people who bought previously loved FIGS so much they decided to buy more from them.

The last figure in the image above is one that is very underlooked but is important. The average customer waits 98 days before buying more from FIGS. This is so important because scrubs last way longer than just 98 days. Traditional scrubs tend to last 6-12 months, with higher quality scrubs lasting longer. FIGS is considerably higher quality than normal scrubs, so let's assume FIGS scrubs last around 1 year. The rate at which customers buy again from FIGS is substantially faster than 1 year. In fact, customers do not even wait 2 months before buying more. This is not because their scrubs wear out at an astronomically fast rate, but rather the customers cannot get enough of FIGS' products. Typically, a customer may buy one or two pairs, and then go buy more after realizing how much they love their product.

Because of this, it is no wonder that FIGS' Net Promoter Score (NPS) is an incredible 81. For anyone unfamiliar with what an NPS is, it is a measurement tool used to gauge customer experience and satisfaction with the business. This score ranges from -100 to 100, with any number above zero being considered satisfactory. When a company receives a score above 50, it is considered to be extremely, and a score above 80 is the highest honor. In FIGS' case, they are the best of the best in terms of customer satisfaction. To put into perspective, as one ranks a business, they do so on a scale of 0-10. If they rank the business as a 9 or 10, it adds to the score, and anything below a score of 6 detracts from the overall score. For FIGS to receive an 81, they would have had to receive many scores 9 or higher, and very (very) few below 6. FIGS' NPS score compared with other brands shows how much FIGS stands out. When they are compared with other specialty clothing retailers like Lululemon (NASDAQ:LULU), whose score is 46, and Nike (NYSE:NKE), whose score is 30, and the industry average of 39, it is clear that FIGS stands tall above the averages. Even among some of the best-known clothing brands in the world, FIGS does better.

It should come as no surprise to investors that customers generally love FIGS. After all, while most clothing companies are focused on athletes or fashion-minded customers, there is no brand that focuses on healthcare professionals.

While multi-billion-dollar companies were focused on athletes, we believed that nobody was sufficiently focused on healthcare professionals—extraordinary people who care for patients, cure diseases and save lives, and who deserve to look, feel and perform at their best. As a result, we developed cutting-edge fabric technology and product designs to specifically address their needs.

FIGS is clearly branding themselves as the peoples' scrubs maker. So far, they are succeeding greatly. How they have created their brand has led to many amazing things financially, which will be discussed shortly. FIGS is a brand that is highly skilled in branding and advertising. They are doing this extremely effectively, so much so that their new customers are barely being influenced by FIGS itself, but by their customers. Between FY 2019 and FY 2020, their revenue more than doubled, but their marketing expenses only increased 17%. This makes marketing expenses less than 15% of total revenues for FY 2020. This is remarkable for a company that relies heavily on its brand image.

This incredible fact shows how FIGS is obtaining new customers: old customers are recommending it! Because of their low marketing spend, it shows investors that their marketing spend isn't driving in new customers, but the recommendations from past customers are. This, yet again, shows how highly regarded the FIGS brand is in the medical space among customers. They truly do love FIGS' products, so much so that their customers are advertising and recommending it at no expense to FIGS. This is an extraordinary accomplishment by FIGS. Very few companies shave such happy customers that they are willing to pay a premium for its product, and then love it so much that they openly recommend it. That requires the production of some amazing-quality products, and FIGS seems to be accomplishing that very well. All of these reflect themselves in the financials and the balance sheet, which is where FIGS seems to look like a SaaS company more than a consumer goods company.

If an investor were to look at FIGS' financials without knowing what company they were from, the investor would likely guess that the company was a software company, not one that sells scrubs. To start, FIGS has no debt and $58 million in cash on the balance sheet before the IPO raise, which raised almost $400 million. Based on this balance sheet alone, FIGS is already a strong company. After knowing that it raised its EBITDA margin from 1% to 26% from FY 2019 to FY 2020 is even better. But many investors' jaws may drop to the floor (mine did) after taking a look at the Statement of Operations.

Revenues increased 138% Year-over-Year, along with gross margins improving from an already amazing 71% to 72.3%. In the first quarter, they were net income positive, and their net income margin was over 13%. Operating Margin was even higher, over 20%. These financial numbers are incredible for any business, especially a consumer goods business.

FIGS blow Lululemon and Nike out of the water when it comes to key financials for these businesses. Even Lululemon and Nike are big, established winners with already-great financial stability, and FIGS even tops that. At 10% of the size of Lululemon and 2% of the size of Nike, FIGS is clearly a strong company when it comes to its financials.

The reason they are able to be so successful financially is simple: They are selling products that wealthy people love at a high premium. Like previously mentioned, these products are bought by relatively wealthy people in the US. Nobody who is buying FIGS is financially troubled. FIGS' customer base is on the wealthier side of the economy, and it is something their customers deem as essential. Therefore, they have tremendous pricing power. As price is not as important to their consumer base, they can have their products be a little pricey while retaining all of their customers. Because of what they sell, how they sell it, and to whom they sell it, FIGS has crucial pricing power, which is integral to their success. As long as they continue to keep their pricing power, there is no reason this business should not have astounding financials for the foreseeable future.

The only unappealing part of this business is the valuation. However, this is also where their financial status differentiates from a SaaS company. Its Price-Earnings Ratio is 10.24, and its Price-Sales Ratio is a mere 1.7. which is not high, but it is by no means undervalued. Considering its financial well-being, I believe that FIGS should actually be valued at higher multiples. There are no clothing companies that would be able to come anywhere near FIGS' financial status, therefore, I believe its valuation will eventually increase. When investors recognize how financially sturdy this business is for the industry it operates in, I believe that investors will boost up the valuation and the price. Due to the fact that this business IPOed this past week, there are currently no forward earnings or revenue estimates available. I believe that this business is currently undervalued for another reason, which is potential future growth opportunities.

Other than continuing to expand its customer base and grow loyalty within its current customers, I see a few other growth opportunities that FIGS will be able to take advantage of in the future. If they are able to succeed in some of these avenues, I believe that this business could increase its revenues by over 600%.

First, I see drastic growth potential if FIGS were to grow internationally. For the near term, I believe that they will focus on domestic growth, but thinking long term, close to 2025, I expect FIGS to attempt to grow internationally. FIGS expect the market for international healthcare apparel will grow to $86 billion by 2025. In 2020, they successfully expanded internationally by selling into Australia, Canada, and the UK. Revenue from these countries is incredibly small. They do not even break out the revenue for each country. If they were able to grow fast in these markets as they have in America, they could see long and continuous growth in revenue.

I have no doubt that they will continue to grow into those markets into the future, as well as continue expanding into other international markets. Over time, growth into new countries would further establish FIGS as a global brand. They also have the option of styling their products to fit specific cultures if they were to expand. Not only would this allow them to be more successful in certain countries, but, for example, if they were to create hijabs for Middle-Eastern countries, those products would also sell in other countries like America. This would also create an even stronger bond between customers, and increase brand loyalty.

Another potential space they could grow into is simply clothing for other professions. There are 40 million Americans who wear uniforms to work every day. This includes food workers, construction workers, and those in hospitality. If they were to create the same quality uniforms for these workers that they have created for healthcare workers, they could see large revenue growth. Just like the healthcare profession, most of these workers have to wear their uniforms every day, and they are active in it. These workers would be likely to pay up for these pricey uniforms if they dramatically improved comfort and style like they do in the healthcare space. I see growth into other professions as a massive market opportunity for FIGS.

Lastly, I see growth into shoes as a massive growth runway for FIGS. Currently, they only have one style of shoe in 3 different colors. This is a very small portion of revenue, but I think that if they were to expand their collection of shoes they could see that as a large source of revenue. Shoes fit perfectly into the ethos of FIGS and their business. Active workers wear them every day and it is critical that they have shoes that can keep them going without causing pain or wearing down. If they were to focus energy on creating quality shoes for their customers, I think that space would grow rapidly.

Any of these growth avenues have tremendous potential, and if they were remotely successful in any one of these, I would not be surprised if it adds 20-30% revenue growth on top of whatever traditional growth they obtain. This would make FIGS massively undervalued today, which is why I am considering FIGS to be a strong buy at today's prices.

Lastly, I would be remiss if I were not to mention the growth in sales per customer, along with noting some of the metrics regarding customer traits. As previously mentioned, they have been able to drastically cut customer acquisition costs, and this is primarily due to the fact that their loyal, recurring customers are a strong base of their revenue. It is not that they are not growing their new customers at a fast rate, because they are, but rather their repeat customers are starting to buy more and more from FIGS. Revenue from repeat customers has grown to 62% of total revenues, which is incredible. Also, the revenue per active customer has increased substantially. In FY 2018, net revenue per active customer was $168, but in FY 2020 it grew to $202. This is an increase of 20%, and it shows that active customers really love FIGS' products, so much so that they are continuously coming back, and continuously buying more each time they return.

Because of this, they have been able to acquire new customers at the same rate and similar expenses but have been able to see massive revenue growth. Their revenue comes from repeat buyers primarily, and because they do not have to spend much on retaining these customers, they are able to keep marketing costs low. In 3-5 years, I would love to see how much customers acquired this year will be spending because if today is any indicator, these customers will be spending much more than they currently are. These metrics show me that customers who repeatedly buy from FIGS are extremely happy with their product, and they are clearly loyal to FIGS. This astounding brand loyalty is one of the many reasons why I think that FIGS will be immensely successful for many years to come.

Truly, there are very few risks that FIGS has as a business. They have been amazingly successful since their founding in 2013 and they show no signs of stopping. The way they have created their brand and found a loyal customer base shows me that this company is very good at what they do, and the model FIGS follows will likely be effective for a long time. As long as they continue to build their brand reputation for style, comfort, and modernity, I have no doubt that they will continue to be successful.

This is, however, a risk. Their brand is absolutely integral to the success of the business, and if, for any reason whatsoever, this brand reputation were to get damaged, FIGS would likely lose immense amounts of popularity. If they lost their brand reputation, the customer loyalty they also achieved would likely fall by the wayside as well. There is not any specific way this will happen, but if there were to be any management scandal, or a leak saying that they lied about how they produce their products or anything that could damage their high reputation, FIGS' brand could be in serious trouble. If anything like this negatively impacted their reputation and brand, I would likely rethink my investment thesis in FIGS.

I do not think this will be the case, however, because the last 8 years since founding the company have been nothing but success. If this were to ever change, however, it would be a big problem.

Of course, the other main risk is that their products were to get recreated at a cheaper price. If another company came about with the same mission and quality of product but were to lower the prices drastically, this could negatively impact FIGS' business.

Again, I see this as a slim chance. I think that customers love the quality of FIGS' product, but they also buy FIGS for the brand name. Similar to Nike or Champion, FIGS is the new, cool, modern uniform in the healthcare world. Another great example is YETI (NYSE:YETI). YETI is a company that creates coolers, along with other glamping products. People buy YETI for the name on their cooler and thermos, not because of the actual product. YETI is basically a status symbol, a way to show friends that you are cool and trendy because you own a YETI thermos. FIGS is a similar way. If you wear FIGS to work, you are showing your co-workers that you are trendy and modern and if someone wears a clear knockoff that shows that they are merely imitators. The point being, FIGS carry an intangible brand name, and they work as a symbol of trendiness in the workplace. If a knockoff were to enter the market, it is highly unlikely that they would be able to usurp this title from FIGS.

Although extremely slim, if there were a competitor that was able to produce higher quality products, price them lower than FIGS, and steal the title and brand trendiness from FIGS, I would likely consider rethinking my thesis in this business.

FIGS is sitting on a throne today that will be extremely difficult for anyone to take over. Their throne rests on four sturdy feet: Brand Reputation, Loyal Customers, Strong Repeat Buyers, and Pricing Power. All of these are integral to the success of FIGS, and all of them show no signs of slowing down in strength either. This business is financially a fortress, and no other competitor to FIGS could possibly have a stronger balance sheet. The four feet that FIGS' throne rests on are things that FIGS' watches closely, and if there is any slip on them in the future, there is no doubt that FIGS will fix it quickly. This business is agile, smart, and resilient, and it will continue to be that way for many years.

With little chance of disruption and minimal competition, FIGS is well-positioned to become a market leader in this space, and they have built many barriers for anyone to upset them. This business is quite antifragile, and I believe that this business will continue to execute in an efficient manner for many years to come. At these prices, FIGS is severely undervalued, and it does not price in any growth potential, which it will likely take advantage of. I believe that every investor should own FIGS, for I believe it will be successful for the next 5-10 years.

This article was written by

Disclosure: I am/we are long FIGS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no position in any other stock mentioned.