FIGS - NYSE

Afternoon. Thank you for joining today's FIGS Second Quarter and Fiscal 2024 Earnings Conference Call. My name is Cole, and I'll be the moderator for today's call. [Operator Instructions] I'd now like to pass the call over to Todd Maron. Please go ahead.

Thank you. Good afternoon, and thank you for joining today's call to discuss FIGS second quarter 2024 results, which we released this afternoon and can be found in our earnings press release and in the stockholder presentation posted to our Investor Relations website at ir.wearfigs.com. Presenting on today's call are Trina Spear, our Co-Founder and CEO; and Kevin Fosty, our Interim CFO. 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 SEC filings, including in the 10-Q we filed today, which we encourage you to review. We 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 and key performance indicators, which we believe are useful supplemental measures for understanding our business. Definitions and reconciliations of these non-GAAP measures to their most comparable GAAP measures are included in the stockholder presentation we issued today. Now, I would like to turn the call over to Trina Spear, CEO of FIGS.

Thank you, Todd. We delivered solid second quarter results with revenue growth at the high end of our expected range and adjusted EBITDA margin above our expectations. Our U.S. growth inflected back into positive territories, driven by better repeat frequency trends. Our international growth accelerated and scrubwear also returned to year-on-year growth. Our balance sheet is in stellar shape with a healthy inventory position and we have the financial flexibility to scale our brand and our business. We are particularly pleased that alongside these Q2 results, we saw leading indicators of revenue improve. We teed up our company for Olympics partnership, our most consequential marketing campaign ever and we drove innovation in products, marketing and supply chain. Our growth opportunity is massive and our ability to capture that growth is unique. As we activate our product innovation and broaden our brand reach, we are exceptionally well positioned to capitalize on that growth opportunity in the second half of this year and beyond. I want to lead with our partnership in outfitting of the Team USA medical team in the ongoing Olympic and Paralympic games in Paris. Our Olympics campaign embodies the key strategic drivers we're pursuing for our company. First, we are above all a brand for health care. Our Olympics product is some of the best products we've ever made and we have designed it to address the specific needs of the health care professionals who were wearing. We've talked about creating [ pinnacle ] products and how that pinnacle helps drive our core business. We have amazing pinnacle products with innovative and solutions-oriented features and this includes what we designed for the Olympics. The Olympics collection is On-Shift. Many of these health care professionals are working outside and they need durable functional products that enables higher performance. Other health care professionals can replicate the look and get the same solutions as their counterpart, they see on-screen at the game. They can then clearly experience those same design elements, the same colors, the same visual cues in the core products. Our design team went on site to Team USA in Paris to hand deliver this product to the medical team supporting our Olympians. The medical team was blown away. While there is a core group that works with the U.S. Olympic Committee year-round, the majority of the medical team volunteers at the time, never before have they received this kind of focus with product designed specifically for them and a commercial that tells their stories in an elevated way. We also hosted an incredible event to watch the opening ceremony in New York City on July 26 and a celebration of service in Paris earlier this week to honor the USA medical team. Next, we've talked about the importance of our top of funnel marketing campaign, which allow us to tap into the emotional connection we have with our community. We are strategically allocating key marketing resources as we execute the kind of 360-degree marketing that will continue to elevate our brand. Shining the light on the USA Medical Team is an absolute honor and there are so many stories about them to be told. Stories that resonate deeply with not only the often humans from our health care community, but everyone inside and outside of health care. Dr. Gloria Beim represents the best of both of those worlds. She is [ epic ]. She's an orthopedic surgeon and broke gender barriers to earn her seat. She was the first woman accepted into the prestigious Sports Medicine program at the University of Pittsburgh, where she completed her training before serving on the U.S. medical teams for multiple Olympic and Paralympic Games. Every Olympic she goes to, she learns the language of that country. This is her eighth Olympics. We hope you've seen our anthemic brand film. We featured Team USA health care professionals, including Dr. Beim and some of our biggest brand ambassadors, but it really speaks to all health care professionals and showcases the dedication and the passion they put into their craft. It's area across linear and streaming broadcast. We're on buses, subways and billboards, we're obviously on social. From awareness to consideration to conversion, this customer journey is very much the future of our brand. As we showed, it truly does take hard to build bodies that break record. Third and finally, we've spoken to you about our second Community Hub, which recently opened in Rittenhouse Square in Philadelphia. It has opened as an activation dedicated to our celebration of the Olympics, which is catapulting it on to the retail push. It will transition to mainline FIGS presentation after the games. Our focus on product innovation on top of the funnel marketing continues to drive strong results. 2024 is an exciting year of bringing real innovation through design, collaboration, fabrication and fit. Almost every single launch in Q2 performed above our expectations. We launched our Flare ScrubLegging, essentially creating a category that didn't exist previously and performing extremely well. On our last call, we discussed our Indestructible collection, highlighting Dr. Chloe, a wildlife veterinarian working in South Africa. The combination of unparalleled durability and a compelling narrative resonated with our community. Collaborations are an ongoing strength for us as our brand and franchise attract the highest quality partners. Our Star Wars, May the Force be with you, collaboration with Lucasfilm was highly successful. We also had more incredible launches with new balance, including both the Roav and 327 model, which combines style, function and comfort. We partner in a strategic way that companies -- with companies that are aligned with us earning a fantastic engagement. Our layering system is also working. We offer products for on-shift and off-shift, head to toe, to work, at work, from work, inside and out. In the second quarter, our non-scrubwear categories grew by 13% and reached 18% of sales. These products expand our TAM, position us as a lifestyle brand and help drive our core over the long run. As I'll describe later, this impacts gross margin as the new products ramp, but as we gain scale in these new categories and the core follows, we expect to see margins improve. Customers are embracing our product innovation, top-of-funnel marketing and collaboration. They are coming back to our brand more frequently, continuing a trend we shared with you on our last conference call. Another important trend that is moving in a positive direction is branded search. There are now equal number of searches online for FIGS as there are for scrub. This indicates that we own mind share for the category, which was always our goal. And we have more to look forward to in the second half of the year. On products, we achieved $440 million of net revenues in scrubs alone in 2023, almost entirely from a single fabrication, FIONx. Competitors have tried to copy us, but we're building more and more distance from them. Our product is too innovative, too high quality, too technical, too tailored in the literal design sense and in this laser-like focus on our community and its needs. As we move through the second half, we'll continue to update and upgrade our fit in a way that works for all bodies. As a D2C company, we know more about our customers than anyone and our kit upgrades will allow us to direct them to the right fit and sizing with greater consistency. Our other growth initiatives are also progressing well. International had a record quarter with year-on-year revenue growth accelerating to 32% from 29% in the first quarter of 2024, reflecting the reclassification of duty subsidies, which negatively impacted international growth by 12 percentage points. We have fantastic marketing opportunity to go deep in high potential countries that we're going to pursue over time. We sell internationally, but we haven't even come close to fully capitalizing on the potential of international. As we think about the revenue opportunity of our company, there's so much there. And the competitive set oversee is so much more limited. Our brand has amazing cachet and we're just getting started with what we can do. Our TEAMS business also had a record quarter. We launched our expanded catalog, impacting over 2,000 organizations. We also launched an exciting new virtual storefront for team members of VEG, Veterinary Emergency Group, one of our largest TEAMS customers to enable them to use VEG funds to buy FIGS as their uniform. We're excited that this customizable feature can be scaled to support current and future TEAMS customers. It is incredible to see more and more concierge clinics looking to outfit their TEAMS in FIGS and cover the expense for their employees. Our retail push is also continuing to pace. We continue to see 40% of our Community Hub transactions from customers that are new to the brand. Our retail customers proving to be sticky. Customers who makes their first purchase in the store are buying from FIGS more frequently than those who make their first purchase online. Our Century City Community Hub is delivering on its ambitious plan and is achieving a seller $1,800 of sales per square foot. And again, we couldn't be more excited to launch the Rittenhouse House Community Hub in Philly, which is 4x larger than our Century City location and through both products and programming will be a one-of-a-kind hub for our community there. With respect to our operations, we have massively upgraded our logistics infrastructure to improve our cost profile at our current size and enhance our customer and service. We now have the footprint to support a much larger company. We recently opened our new distribution facility in Arizona and have nearly completed our transition out of our legacy facility in California. We've increased our footprint by more than 75%, while reducing our rent per square foot substantially. Our new facility is state-of-the-art with extensive use of robotics. 60% of the facility is completely automated, essentially people-free with over 700 robots picking and allocating products and extensive automated conveyors moving orders through our facility. We've more than doubled our potential throughput and tripled space for embroidery workshop to personalize and customize our products for our health care professionals. As expected, this distribution center move increased our selling expenses as a percent of revenue with our estimated full year transitional costs continuing to be approximately $13 million. Even as we've expanded our product offering, geared up for the Olympics and managed our transition into our new DC, inventory remains in excellent shape. Our inventory declined 29% year-over-year, while revenues grew 4.4%. As a reminder, we're structurally advantaged when it comes to inventory because as the uniform player, the products we sell are relatively nondiscretionary, seasonless and much less subject to fashion risk. Health care professionals need them to do their jobs. We also continue to advocate for our community. We mobilized our Impact effort during Q2 by bringing 16 extraordinary health care professionals at Capitol Hill and White House. Our advocacy resulted in several important wins on our Awesome Humans Bill, including a commitment from Congressional leadership to pass critical mental health support for health care professionals this year. As we enter the back half, we are delighted to welcome Sarah Oughtred as our new Chief Financial Officer. Sarah spent almost 17 years at lululemon. And for the past 3 years, served as Senior Vice President of Financial Planning and Analysis. She has firsthand experience growing in an innovative lifestyle brand as she helped the company grow revenue more than 30-fold to over $10 billion, build a 700-store retail footprint and scaled this in more than 25 countries across the globe. We want to thank Kevin Fosty for stepping up and serving ably as Interim CFO and are delighted that he will continue on in his prior role as VP, Corporate Controller. To summarize our quarter and achievement, our Olympics effort is yielding amazing products in an unprecedented, highly effective marketing campaigns. Our innovation machine is humming and we have impactful enhancements in site for fit and fabrication. Our marketing is resonating and customers are coming back to our brand. International, TEAMS and Community Hubs are all in the early stages of their long-term growth trajectory. And our logistics capabilities set us out to drive powerful growth going forward. Moving to the outlook. I will let Kevin dive in, but would like to briefly touch on revenue, gross margin and adjusted EBITDA margin. We are raising our 2024 full year revenue growth outlook to a range of flat to positive 2% growth from prior range of negative 2% to positive 2% growth. This reflects our second quarter outperformance and our current visibility to Q3 and the second half overall despite a choppy U.S. consumer backdrop. We expect gross margin for full year 2024 to be 150 to 200 basis points lower than 2023. The reason for this is that our unit is working better and faster than we expected with our new pinnacle products, new scrubwear styles and new non-scrubwear products outperforming. The fact that our newness is resonating is very important. 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. Our new pinnacle products also helped drive the core. So over time, we expect our success will help grow our already high gross margin core products. And although our new products have a lower gross margin today, as they gain volume and scale, we expect them to have a margin curve that is similar to the one we have historically experienced with our core scrubwear. All of these factors make us optimistic about our newness strategy and its impact on gross margin over the long term. In terms of our adjusted EBITDA margin outlook, we are not flowing the full gross margin impact to the bottom line as we expect to offset some of the impacts within marketing and G&A. As a result, we are guiding to 9.5% to 10% adjusted EBITDA margin for the year. Our balance sheet is in stellar shape. We ended the quarter with over $268 million in the bank, a record level and with 0 debt. Our shareholders' equity is also at a record and exceeded $400 million for the first time in our history. We have the cash flow dynamics and the capital to fund our growth ambition. With all of this in mind, we're announcing that our Board has authorized a $50 million share repurchase program. We're pleased that our strong financial profile and long-term outlook enable us to evolve our capital allocation strategies and return value to our shareholders through the share repurchase program. With that, I'll turn it over to Kevin.

Thank you, Trina, and good afternoon. For the second quarter, we are pleased that net revenues and adjusted EBITDA margins came in ahead of our guidance. The inflection of our frequency trends and the return to growth in our U.S. and scrubs business indicate the long-term growth opportunity is still ahead of us. As we reignite industry-leading product innovation and powerful top-of-funnel marketing campaigns, we are confident that we are on the right track to drive long-term sustainable growth. I will begin my discussion with a detailed review of our second quarter results followed by an update on our financial outlook. Starting with our second quarter results. Net revenues increased 4.4% to $144.2 million as compared to Q2 last year. Net revenues reflect higher orders from existing customers offset by lower AOV. Active customers for the trailing 12-month period increased 6.1% compared to the same period last year. Average order value decreased 1.7% to $113 and net revenues per active customer decreased 2.3% to $210 versus the same period last year, mainly driven by the accounting reclass related to duty subsidies for international customers. Looking at product categories. Non-scrubs grew 13%, reaching 18% of net revenues, as Trina noted. Gross margin for Q2 was 67.4% compared to 69.5% in Q2 of 2023. The decline in gross margin rate was primarily due to the product category mix shift that Trina described as well as the reclass to duty subsidies. Our selling expense for Q2 was $36.9 million, representing 25.6% of net revenues compared to 24.4% in Q2 of 2023. The decrease in selling expense as a percentage of net revenues primarily reflects transitory expenses associated with the transition to a new fulfillment center. Marketing expense for Q2 2024 was $23 million, representing 15.9% of net revenues compared to 15.1% in Q2 2023. The increase in marketing expense as a percentage of net revenues was primarily due to our strategic investment in the biggest marketing campaign that we have ever done, our first-of-its-kind partnership outfitting the Team USA medical team at the Olympic Games. G&A for Q2 was $35.8 million, representing 24.8% of net revenues compared to 25.2% in Q2 of 2023. The decrease in G&A expense as a percentage of net revenues was primarily due to lower stock-based compensation expense and lower legal fees. The decrease was partially offset by a one-time scrubwear donation. Taking this to the bottom line, second quarter net income was $1.1 million or diluted EPS of $0.01 compared to second quarter 2023 net income of $4.6 million or $0.02 in diluted EPS. Adjusted EBITDA for Q2 was $12.9 million with an adjusted EBITDA margin of 9% compared to 13.7% in Q2 of 2023. Touching on our balance sheet. We finished the second quarter with cash and cash equivalents and short-term investments of $268.5 million with no debt. Inventory declined 29% to $119.3 million versus Q2 last year as we continue to track to our plan of bringing inventory back to normalized levels by the end of the year. This is our fourth consecutive quarter of improved inventory turns. We are very proud of our ability to significantly reduce inventory while maintaining healthy margins and generating sales growth, illustrating the resiliency in our business model. Capital expenditures for the second quarter totaled $9 million. This is primarily related to the build-out of our new distribution center. And finally, we delivered strong free cash flow of $7.5 million in the second quarter. Turning to our outlook. Based on our Q2 performance and strong response to our product launches and brand initiatives, we are raising our full year net revenue outlook, as Trina noted, to flat to positive 2% growth compared to 2023 and versus prior guidance of negative 2% to positive 2% growth. We are pleased by the momentum of our business coming out of the second quarter and the success of our Olympic campaign. As we mentioned last quarter, we are committed and focused on driving product innovation across scrubs and non-scrubs assortments, including new categories. As we evolve our product mix, we expect to shift into non-scrubwear as well as the shift into new scrubwear styles to impact our gross margin. As a result, we expect our 2024 gross margin to be 150 to 200 basis points lower than the prior year. It is important to note that we remain confident that we can maintain healthy gross margins over the long term. As we invest in new innovation, fabrications and product categories, we anticipate realizing economies of scale over the long run. We expect new innovation to provide a halo effect over our higher-margin core business as we are working on several initiatives, including evaluating our pricing and costing along with optimizing our supply chain strategies, which we believe will enhance margins over time. Regarding selling expenses, transitory costs are still estimated at approximately $13 million. A majority of these costs are now expected in the third quarter, including some costs initially planned for the second quarter. We anticipate the transition to be largely complete by the end of the third quarter. With respect to marketing, our increased investments are beginning to pay off. We are pleased with the results from our Olympic marketing campaign and continue to expect the bulk of this investment to be incurred in the third quarter. For G&A, we continue to carefully manage our expenses as we are identifying further cost efficiencies to offset our reduced gross margin outlook. As a result of these factors, we are updating our full year adjusted EBITDA margin to the range of 9.5% to 10%. Notably, as Trina described, we are not flowing the full gross margin impact to the bottom line, and we are instead expecting to offset some of the impact from marketing and G&A. Turning to our third quarter 2024 outlook. We expect net revenue growth of approximately 1%. We expect gross margin to have a similar trend year-over-year to what we experienced in Q2, largely through our product mix shift that we discussed earlier. Looking at operating expenses. For selling expense, we expect deleverage of approximately 250 basis points compared to the prior year. With respect to marketing, we continue to plan for the highest marketing investment in the third quarter. These higher expenses will be partially offset by continued efficiencies in G&A expenses. To that extent, we expect third quarter adjusted EBITDA margin to be approximately 5.5% to 6%. Our capital expenditures expectations for 2024 continues to be about $18 million and $19 million, including $13 million to $14 million in fulfillment enhancement-related costs. In closing, we're encouraged to see that our strategy around product innovation and top of funnel marketing is working and driving positive trends in our business. Moving forward, we'll continue to capitalize on our robust balance sheet and cash flow dynamics to strategically invest in our future growth and drive long-term shareholder value. With that, I will turn it over to the operator to kick off our Q&A session. Operator?

[Operator Instructions] Our first question is from Brooke Roach with Goldman.

Trina, I was wondering if you could elaborate on the consumer engagement metrics and the trends that you saw throughout the second quarter and into third quarter to date. What is your current assessment of the health of the FIGS consumer today in the United States?

Thanks, Brooke, and great to speak with you. We're seeing -- we talked about this in the last call, we continue to see positive trends as it relates to repeat frequency. And that's really being driven by our product innovation coupled with the top of the funnel marketing. You saw this in Q2 with our launch of our Indestructible collection. We tied that in with Dr. Chloe story and that worked really well. And in Q3, I talked a little bit about it, but our biggest campaign ever. We have really incredible pinnacle products around our Olympics collection. That, coupled with all of the marketing we're doing around the Olympics is really driving engagement. It's driving repeat frequency. It's driving a lot of positive trends across the business. In terms of the health of our consumer, I think it's great to see these trends. That being said, there's a lot of uncertainty in the macro environment. Our customer is still buying well below their purchasing from prior to COVID, obviously, less than historical, but even prior to COVID. Prior to COVID, health care professionals are buying about 4 to 6 sets per year. We're well below that level on an industry level. And -- but it's great to see that we're on the direction to normalizing from that perspective. And so still a lot of uncertainty, a lot of noise in the environment. But once again, we serve health care professionals. This is, as you know, the fastest-growing job segment over the next 10 years, incredibly stable consumer base, incredibly stable wages. And so, our goal is to continue to serve them with great products, incredible marketing and get them excited about what we're doing and hope to kind of see that normalization generally across the industry as it relates to purchasing pattern.

And then just as a follow-up, can you speak to the current level of margin that you achieved between your core business versus the rate that you're seeing on new innovations that have yet to scale? What's the outlook for narrowing that gap between those 2 product lines going forward? And then can you provide a little bit of color on the marketing pullback that's offsetting some of these incremental gross margin pressures for the rest of the year?

Sure. Okay. So, as it relates to the margin, we have a strategy, that pinnacle is driving core. Pinnacle products as well as non-scrubwear, these are at a bit of a lower margin. There's not a huge delta, but a bit of a lower margin than our core scrubwear product. As we gain scale in our newer products, right, we would look to see similar margin curve as we saw within core scrubwear. And the second piece is that we're already seeing some positive trends as it relates to pinnacle driving core. So, these new launches, these new styles, this new innovation that we're bringing to our consumer base that's also driving them to replenish their core. As our core and core follows pinnacle. As the core continues to build, we'll see the margin from that core pay for that margin on the newness. And so those 2 things kind of combined as well as Kevin mentioned on the call, opportunities around costing around pricing, we're always looking at that as being super data-driven around capitalizing on margin opportunity across the portfolio. Your second question was around how we're making up the margin from a marketing G&A. So, in the third quarter, there are 2 things that are happening. The first one being the gross margin that we talked about for this mix shift, right? This mix shift within scrubwear mix shift to non-scrubwear mix shift to within non-scrubwear. So those 3 things, which is literally all the innovation and newness is driving that gross margin impact. The second thing that's happening in Q3 is this marketing campaign around the Olympics. And so that's driving the bottom line. Going into Q4, offsetting that, there's a number of opportunities that we found to kind of offset the impact on gross margin and that's within marketing in the fourth quarter as well as in G&A. So, I think we're just being strategic about how -- looking across the business to offset that gross margin impact and I think we feel really good about that.

Our next question is from Bob Drbul with Guggenheim.

A couple of questions for me. in The first one is just on -- I know it's early, but the Olympic marketing campaign, I think it's been incredible. What are some of the early learnings that you have been able to take away from it? How will it shape your marketing strategy going forward between brand messaging and performance marketing?

Sure. Okay. So, as I mentioned on the call, this has been our biggest and best campaign we've ever done and we're seeing to pay off. We're incredibly proud that we are the first brand to outfit the health care professional supporting our Olympians. And so it's really a historic moment. I think we've learned a lot. It's been -- this marketing campaign has been really the next level. We have a commercial that's airing in prime spots throughout the Olympics. We have taken over, as I mentioned, buses, subways, billboards. I think there's not a day that goes by that you're not seeing our campaign and we're just getting the feedback from our community and outside of our community, just how, how large scale and how everyone has been really blown away by it. And we've seen the metrics as well. And so we're seeing -- I think this is very much driving what we're talking about in terms of repeat frequency. Also -- we're also seeing our core business improve. And so -- and then in terms of engagement, which I think is really important, we're seeing -- we've been able to see 60 million impressions from out-of-home, over 200 million paid digital impressions, 50 million linear impressions and almost 500 million earned media impressions. And so I do think as it relates to your question around shaping the future of how we think about marketing, top of funnel, top of funnel, top of funnel. We're a real brand, right? And we're building this brand the right way, the hard way over the long run. And so yes, digital marketing fuels that top of funnel, digital marketing fuels what we're doing from a product standpoint. But if you're not kind of building the message in an authentic way with your community in all the places where they are, not just on cell phone, not just on search, right, in all the places they are in the real world, you're kind of missing it. So, we feel really good about our strategy around marketing, around top of funnel, around doing things others can't, right? We have the scale. We have the leadership position to partner with Team USA on this. Not many can do that. And so really just pleased by the team and our -- and all of the things we did to pull it off. And so yes, that's what I'll say about that. I hope that answers your question.

It does.

Bob, I forgot to mention the most important metric. Snoop Dogg does wear FIGS. So, I will check that out on the social as well.

Our next question is from Dana Telsey with Telsey Group.

Trina, as you think about -- just one follow-up on the Olympic marketing campaign, which loved the commercial, thought they are great. What doors is this opening for you for other marketing campaigns and how you see the brand resonating? And next, with the new product that you're introducing in the innovation, how do you see the price points of the innovation product versus the core in essentials? What is the consumer willing to accept? And how do you think about it? And lastly, with transitory fulfillment expenses, it sounded like there's a bit more in the third quarter that maybe it came out of the second quarter. How should we be thinking of that for the balance of the year?

Okay. So the first, in terms of this campaign and what it does, I mean we're still in it, right? So, I think there's going to be a lot of more learning to come as it relates to what this is going to enable us to do. I think it's giving us a lot of authority to work with others, right? We have an incredible partnership with New Balance, super authentic, creating footwear for the best people we know and really designed to develop with them. We're now outfitting Team USA medical teams in Paris, right? And that just delivers so much credibility in terms of what we do and really opens the door to your point for future collaborations with the best of the best, right, across landscape beyond health care. And I think that's how we're thinking, how are we taking this brand beyond health care. In terms of the price point within our new product innovation, our new product, as I mentioned, is outperforming and demand is there. And so we are being strategic and thoughtful around pricing just given even -- I think you saw, right, the first day of our Olympics collection, most of the products sold out before the first day was even over. So, just being really strategic and thoughtful around our pricing. At the same time, obviously, being affordable and accessible is truly very important to who we are and what we do. And so we need to ensure that our price points are in line with our community and want to ensure that we can serve everyone. But I do think there's a lot of opportunity there as we continue to see our new innovation outperform. Finally, your third question around transitory fulfillment. So, we -- our transitory costs, we said on the last call, were expected to be $13 million. That's not changing. We're just seeing a shift between the second to third quarter and so that's all that is.

We have a question from Adrienne Yih with Barclays.

Great. And nice to see the progress Trina. Can you talk about sort of the trends in your [ TAC ] metrics? Where do you see those -- how are they trending? Secondarily, it sounds like you haven't talked about promotionality. So, I assume that, that has been anniversaried successfully. And then third, if you can talk about kind of from a longer-term perspective, the non-scrubs is closing in on 20%. How do you see that kind of over the longer term? Like where do you want that to be in terms of kind of the mix between scrub, non-scrub?

Thanks, Adrienne. Okay. So, as it relates to TAC metrics, we feel really good about our marketing efficiency. You're going to -- in the first quarter, we talked about how our marketing expense is higher and that's a strategic investment as it relates to true top of the funnel marketing as it relates to -- when we think of TAC, we really think of that as digital TAC, right? How much are we spending across paid -- social paid and that has been stable and efficient. And it gives us the opportunity to send from a top of funnel perspective. And so over the last, I would say, in 2024, we really shifted funds to more top of funnel, which once again a few can do, right? It's because we've been so efficient on our digital marketing, we are able to invest the top of funnel and really show up in big amazing ways with our community. As it relates to the promotions, our promotional calendar this year is actually pretty similar to 2023. That is -- we're still working through our inventory balance. You saw our inventory balance come down by 29% in the quarter year-over-year and even while we [indiscernible] revenue. And so we feel good about the cadence of promotions, we feel good about our ability to continue to move through our inventory. At the same time, bring innovation, bring awesome product and also campaigns to our community. As it relates to non-scrubs, we are really proud, right, that only a few years ago, people said, are we really going to be able to be more than a scrub company. And so the fact that 20%, almost 20% of our business is non-scrub is a testament to our layering system really resonating with our community. Health care professionals are coming to FIGS for their under scrubs, for their outerwear, for their fleeces, their vests, their compression socks. By the way, Snoop Dogg does lot of our compression socks as well for the footwear, right? So, this is all really great. This is sorry. This is really great as it relates to the whole business. That being said, core scrubs, we're seeing incredibly positive trends. Scrubwear in general seeing positive trends. So, scrubwear, we expect to continue to scale and grow, right? That's the -- people are coming back more for their scrubs than the other pieces, right? So, as repeat frequency dynamics continues to improve, scrubwear across core and limited edition will improve in addition to non-scrubs. Non-scrubs, as a reminder, is on-shift. These are also [indiscernible] pieces. And so we look to see that grow over time. But it's not -- we're not looking over time for this to be 50-50. I think we're going to see where this goes, but I think both are growing and both are trending positively.

Kevin, just a quick question on the supply chain. Obviously, we're seeing cost -- container cost increase. So, 2 quick questions here. Are you seeing any -- I know you're probably on contract, but you can people who are on contract on the other edge of the end of the year are starting to see a little bit of pressure build. Can you speak to that? And then secondarily, do you do a lot of manufacturing in Bangladesh? And if so, do you have any impact from what's going on there?

So, in terms of the supply chain, we're very focused on what's happening and we do have contracted rates. So, we're in a good position. We do feel as though we're being strategic across our global supply chain in terms of where we're producing all of our different categories and how we can gain efficiency across that. We do not produce in Bangladesh.

Our next question is from [ Andy Wynn ] with Raymond James.

It's Rick Patel. I had a question on international markets. Can you impact the growth that you're seeing there? How do trends look like in like-for-like market for some of the areas where you've been in for a longer period? And how should we think about the contribution of newer markets to the overall growth?

So, international growth for the quarter is 44%. So, I just want to highlight this because it's important to adjust for the duty reclass. So, really encouraged by what we're seeing in terms of our international business. We're continuing to localize by market and managing a number of different websites across markets, which has been an incredible undertaking. As I mentioned on the call, we're still early days. There's so much opportunity and we're excited to see the growth. Canada, U.K., Australia, are 3 like most tenured markets, they are performing and have very similar dynamics to the U.S. in terms of how often people come back, AOV, how much they're spending it. So that's great to see. The newer markets, there has been a few really big highlights. I know we talked about Mexico continues to be performing extremely well, the Philippines. And then in terms of opportunities going forward, we're not really other than the Philippines and Asia. So, a huge opportunity there. And I think there's a lot more we can do in terms of the EU. We're working on a number of initiatives. Actually from a TEAMS perspective as we see a number of private practice and other concierge clinics really looking to outfit their TEAMS. So, the TEAMS opportunity isn't just the U.S. We're seeing a lot of opportunity internationally as it relates to TEAMS as well.

And you also touched on the potential to go deeper in international markets that are higher potential countries. Maybe some additional color there would be great.

Yes. I mean it's early days in a number of the newer countries that we've launched this year. And I think you know our strategy, our strategy around it is to really see that demand. We see the traffic coming to our site. We turn on these countries. We really see that demand before we invest behind it. And so like I said, early days, we're seeing that demand. We're seeing the growth and we look to invest in the highest potential market. And we'll definitely give more color on them as we go on our upcoming calls.

Nice progress.

Thanks, Rick.

We have a question from Ashley Owens with KeyBanc.

I just kind of wanted to ask really quick, could you speak on your more functional consumer, like the one who more needs their scrub uniforms, how often they're buying? Maybe are there any dynamics there that set them apart that are a bit different from the more non-scrubwear oriented, if you're seeing any of that? And then secondly, there's been a good amount of exciting innovation and new sales just flared. So, just kind of wanted to ask if you could put out some pockets within that outperformance. Where you've been seeing the most excitement among consumers and what they're gravitating towards to maybe inform more of that lifestyle opportunity within the non-scrubwear categories?

Okay. So, in terms of our -- just thinking broadly about our health care professionals, they are buying the full layering system. So, most of the time, they're kind of coming in and starting with our core scrubwear. Next purchase, maybe they are purchasing an outerwear item on or under scrub, then they're coming back again to replenish those scrubs. And so that journey is very much the full layering system. We have very few customers that are only non-scrub, so only scrubs. It's really about that full journey of coming to FIGS for your whole uniform on-shift, right? You are wearing under scrub on-shift, you are wearing your scrubwear on-shift, you are wearing outwear pieces on-shift. And so, that's how to think about like who we're serving. As it relates to replenishment, how many sets a year are they buying? They're buying and industry-wide, they're -- prior to COVID, they're buying about 4 to 6 sets a year. The industry is below that today. Just given COVID overhang, there was a stocking up during COVID. And we're still at this kind of lower point. It's been great to see some of that normalizing and that trend heading in a more positive direction. I think a lot having to do with our new products and driving that forward. But to see they're engaging with our newness on the scrubwear, they're engaging with our newness on non-scrubwear is great to see. As it relates to what is outperforming within, I would say both, right? Outperforming within scrubwear, we're seeing our Isabel Wide Leg outperform. Wide Leg is a hot style and our health care professional love it. I would check it out, it's super cool. And then our ScrubLegging, our ScrubLegging, not our -- regular and then our Flare. Both are performing incredibly well and outperforming expectations. Our Indestructible fabric was an awesome collection. It was more durable on the outside, soft on the inside, really meant to be more outside on-shift in different environments that it's really demanding and having products that help you perform is what we're all about having functional durable comfortable product. That is what we do. And so, it's exciting to see all this innovation. I would say finally, our Olympics collection. I don't know if you saw our stadium jacket. I don't know if you saw our scrub jump suit, but these items are killer. I think they're both sold out. So, I don't know if you can that those, but I look forward to seeing what comes next. But thank you so much, [ Chandana ].

Our next question is from Matt Koranda with Roth Capital Partners.

So, super exciting to hear about the success with the Olympic campaign. And I guess that bodes well for growth. I'm just curious about how that fits into sort of the third quarter top line guidance that you provided. So, do we have a thought process where maybe we grow a little bit better than that 1% in kind of the campaign period in July and August? And then we're assuming a drop-off after that? Maybe just unpack for us the third quarter guidance and maybe why some conservatism could be baked in there?

Sure. I take that. Okay. So, we increased our revenue guide for the year. We're very encouraged to see the positive trends in our business in creating the frequency trends. And so definitely said, the trends are recent and we're cognizant of the broader environment. It is an election year and there is a lot of news about a potentially choppy economic environment. So that's what you're seeing in the guidance.

And then maybe just around any behaviors you could highlight for your core consumer. I know you mentioned sort of repeat is coming back a bit and we're normalizing in terms of total scrubs that's being purchased. But what are you seeing from the consumer in promotional periods, non-promotional periods? Are you seeing sort of more concentration around those promotional periods that you run and then a drop off? Just curious like kind of the cadence of how things go when you're promoting and when you're off promotion?

Sure. I mean I think it's been great to see the last 2 quarters is really around our health care professionals in our community engaging with us in non-promotional time in a way that would be is beyond expectation. So, it really is tied to launches of new product, new styles within scrubwear, new collections like what we mentioned with the Olympics and it's great to see. And so I would say, we've talked a lot about in the past, specifically in 2023 around how our community would engage in during promotional periods, more than expectations given the environment. And I think this year, it's great to see that it's the non-promotional times where the engagement is beyond the expectation.

Can I sneak one more in just on the DC shift. I just wanted to make sure I understood. So the $13 million, we're assuming all falls in the third quarter. I guess maybe just a little more detail on why that spilled out of the second quarter into the third. And just any potential that you see for those costs maybe to split between the third and fourth, like is there a risk that anything slips? Or how should we think about that?

So, there's a little bit -- actually, that $13 billion is across Q4 last year, Q1 this year, Q2 this year and Q3 and actually a little bit in Q4. So, that is not all in the third quarter. We're just saying that there was a shift between some of that transitory between Q2 and Q3. But that $13 million -- sorry, that $13 million isn't about Q4 last year, it's just 2024, but that $13 million is gross this year, just a portion of it shift from Q2 to Q3.

We have a question from Nathan Feather with Morgan Stanley.

Really, encouraging signs of the business and particularly helpful to see frequency to turn the quarter. I understand volatile macro and things going on. But does it feel like you finally reached the trough here? And how should we think about that metric picking up over the next kind of 12 to 24 months as you continue to inject new products? And then just one on the share buyback program. Interested to hear how you're thinking about potentially running the cadence [indiscernible].

Sure. Thank you so much, Nathan. So, I think we are encouraged by the trends that we're seeing in repeat frequency. We're encouraged by a number of leading indicators around I mentioned branded search, open rates around our e-mails, net subscriber rates, all of these indicators are headed in the right direction, but it's the recency of these metrics that we're just being mindful of. And so -- but it is encouraged to see and we'll keep you updated as we as we continue to go. As it relates to the share buyback, we're really excited to announce this our strong financial profile and long-term business outlook give us the confidence to be able to evolve our capital allocation strategy. As you know, we have sufficient liquidity and cash flow generation to both invest for growth and also return value to our shareholders. And so this buyback is going to allow us to do that. And we're going to be opportunistic over time. There's no end date on the program. And as we go here, we'll update you.

Our next question is from John Kernan with TD Cowen.

Trina, what do you think about the operating leverage in the business as top line eventually reaccelerates? There's obviously been some deleverage on the adjusted EBITDA margin in the last 2 years. Just curious where you think that you see the biggest opportunity over a multiyear period.

Sure. If you look at our financial profile, we have a structurally advantaged financial profile. A lot of the decisions that we've made have been real strategic investments for growth. And so from a gross margin perspective, as the pinnacle keeps driving core, there's leverage there. From a selling perspective, those transitory costs are going to roll off and we are in a facility where it's super automated. And as we scale, there's a ton of leverage there. From a marketing perspective, as we continue to gain efficiency on digital, we're going to invest in top of funnel, but still overall, from a marketing perspective, there's leverage there. And then G&A, I would say we've been really disciplined around people, around spending, around just total like G&A. And I think there's leverage there. So, I know you asked for like where is the most leverage. But I do think, I would say in this year is selling because it's transitory, it's like fully traded like all the extra cost is transitory.

And then just while you're on the topic of top of funnel marketing and some of the increase in marketing dollars in Q2 and Q3 of this year, you did see a nice sequential uptick in active customers from Q1. And just curious how should we think about active customers as we get into the back half of the year given the marketing dollars are going to rise again pretty significantly in Q3?

Yes. I mean I think active customers is a great lagging indicator or a lagging metric. It's an important metric, but it is an LTM metric. And so when you look at LTM active customers, which is what that is, you're basically still comparing it -- and so to answer your question, we're proud of the growth in active customers. But we're comparing -- we're being compared to still like a Q3, Q4 2022 is still being pulled into that year-over-year growth metric. And so as we continue to grow here, that metric, we're super excited to have that incorporate a lot of the repeat frequency that we've seen recently. And so I think we're excited about what's to come in terms of active, what's to come in terms of new customer growth and what's to come in terms of resurrected, we've had an incredible number of resurrected customers. And so it's, I think, overall, active customers going forward will follow a lot of the more recent trends we're seeing in repeat frequency.

Our next question is from Brian Nagel with Oppenheimer.

Congrats on the success here.

Thanks, Brian.

Trina, I want to dabble deeper into the gross margin dynamic you're discussing with some of the new products. Just the question I have. Is the impact of business we're seeing or you're telegraphing is that simply a function of this product selling better than expected? Or is there some type of shifting dynamic that caused this to happen?

Yes. I mean I think there's -- it is exactly that, right? Our new styles, our new innovation, our new fabrication are outperforming expectations. And so this gross margin is impacted by essentially 3 mix shifts. There's a mix shift within scrubwear from core to limited edition, limited edition mean the newness, the innovation. There's a mix shift between scrubwear and non-scrubwear. People buying more of the layering system and wanting our outerwear, wanting our under scrubs, wanting our footwear. There's a mix shift within non-scrubwear that's driving that as well. And so those 3 pieces together are driving the gross margin. That being said, there's so much that we're doing that we're excited about. So, this pinnacle in newness is will, over time, drive more core and because health care professionals are not only coming back for what's new, once they're there, they're coming also back for the core. And core, as you know, Brian, is at a much higher margin. So, having the pinnacle drive the core leads to higher gross margin over time. Second, our new products, well, I think I mentioned this, but as they have lower gross margin today, we will gain volume and scale from these new categories, from these new products that we expect to see that margin curve grow in a way like what we've seen within our core scrubwear. Finally, we do believe there is opportunity within pricing, within costing, given how well these products are performing. And so we're going to be really strategic in looking at those opportunities. And with Sarah Oughtred just joining us, we have a lot of opportunity there. And so this is all exciting and over the long term, gross margin, we really are optimistic about the opportunity.

And then my follow-up question, so you discussed tonight, some of your inception here, some of the more upbeat, few more consumer metrics. But I guess, question. So, last time, on the last quarterly report, you were discussing at that point, I think it was late in the quarter, maybe even early in Q2 that you saw this improving consumer frequency and this being coincided with some of these new product launches. So, the question I have is, as Q2 progressed and now as we moved into Q3, are you still seeing that same improvement in frequency?

We are. We are. And Olympics has been just an incredible campaign that once again is taking the strategy we talked about, right; pinnacle, awesome, limited edition, innovative products combined with top of funnel, great storytelling in an awesome campaign. And so those 2 things together, the strategy of really these 2 things combining, driving the core, driving people back, it's working, and we've continued to see that trend that we talked about last quarter.

We have no further questions at this time. So, I'll pass it back to the management team for any closing remarks.

Thank you so much for joining our second quarter conference call. We look forward to seeing you again soon and have a great night.