Executive Summary / Key Takeaways

• FIGS is executing a deliberate strategic pivot from promotional-driven growth to brand health, sacrificing near-term customer acquisition velocity for sustainable pricing power and margin expansion, with Q3 2025 results showing early success: gross margin expanded 280 basis points to 69.9% while marketing spend fell 17.7% year-over-year.

• The company's premium DTC model is demonstrating operational leverage, with adjusted EBITDA margin surging to 12.4% in Q3 2025 versus 3.4% prior year, driven by a 6.3% increase in average order value to $114 and improved fulfillment efficiency, though this comes amid a 23% inventory build that consumed $50 million in free cash flow year-to-date.

• International expansion represents the largest addressable market opportunity, with 80% of global healthcare professionals residing outside the U.S. yet contributing under 20% of revenue; FIGS is accelerating from 33 to nearly 60 markets by year-end 2025, including high-value entries in Japan, South Korea, and China via Tmall.

• Tariffs pose a severe and quantifiable margin threat, with management estimating 110 basis points of gross margin pressure in 2025 and 440 basis points in 2026 from 10% baseline duties plus 20% Vietnam and 15% Jordan tariffs, making successful supplier renegotiation and potential pricing action critical variables for sustaining profitability.

• Trading at 103.9x trailing earnings and 46.3x EBITDA, FIGS commands a massive valuation premium to apparel peers, justified only by its 68% gross margins and 12% EBITDA margins that dwarf competitors; the investment thesis hinges on whether this margin advantage can withstand tariff headwinds while scaling international operations.

Setting the Scene: The Healthcare Apparel Platform Evolution

FIGS, Inc. operates a direct-to-consumer healthcare apparel and lifestyle brand founded in 2013, fundamentally reimagining medical uniforms as premium, technically-advanced apparel rather than commoditized workwear. The company generates revenue through two primary product categories: scrubwear, representing 80-83% of quarterly sales, and non-scrubwear including outerwear, underscrubs, footwear, and compression socks that complete the "head-to-toe" healthcare professional wardrobe. This positioning within the $13 billion global medical scrubs market exploits a structural shift in healthcare worker expectations, where professionals increasingly demand performance fabrics, modern fits, and brand community that traditional uniform suppliers have failed to deliver.

The business model's core engine is a proprietary DTC platform that eliminates wholesale markups while capturing rich customer data, enabling rapid product iteration and inventory efficiency. This approach contrasts sharply with institutional-focused competitors like Superior Group of Companies (SGC) and VF Corporation (VFC)'s Dickies Medical, which rely on bulk B2B contracts and third-party retail distribution. FIGS's differentiation rests on three pillars: fabric innovation (FIONx , FORMx , and upcoming FIBERx ), community building through "FIGS Giving" philanthropy and ambassador networks, and a digital-first customer experience that drives repeat purchase behavior. The healthcare industry provides a resilient backdrop, with U.S. healthcare jobs projected to grow nearly three times faster than the overall job market over the next decade, creating a stable and expanding addressable market.

History with Purpose: From Hypergrowth to Strategic Reset

FIGS's trajectory reveals a classic direct-to-consumer growth story followed by a necessary strategic recalibration. The company scaled revenue from $110 million in 2019 to $263 million in 2020, capitalizing on pandemic-driven healthcare worker demand and low digital advertising costs. The June 2021 IPO marked a peak valuation moment, but subsequent performance exposed the limits of promotional growth. By 2024, management acknowledged "inconsistencies in performance, AOV pressure, and difficulties in customer acquisition," revealing that heavy discounting had eroded brand equity and attracted price-sensitive customers with low lifetime value.

This recognition triggered a deliberate pivot in 2025. The company slashed promotional cadence, accepting "slower rate of new customer growth and higher churn" in exchange for margin recovery and customer quality improvement. Q3 2025 results validate this trade-off: while active customer growth moderated to 4% year-over-year, net revenue per active customer increased 2% to $209 and AOV jumped 5.6% to $114, indicating that retained customers are spending more per transaction. The August 2024 authorization of a $50 million share repurchase program, increased to $100 million in February 2025, signals management confidence that the strategic reset is working and that the stock represents value at current levels despite premium multiples.

Technology, Products, and Strategic Differentiation: Fabric as a Moat

FIGS's product innovation strategy centers on proprietary fabrications that create tangible performance differentiation and pricing power. The FIONx fabrication established the technical foundation, while Q1 2025's FORMx launch targets "comfort in lower impact environments," expanding the addressable use case beyond high-intensity hospital shifts to clinic and administrative settings. The planned FIBERx debut at the 2026 Winter Olympics represents a deliberate brand elevation play, associating FIGS with elite performance in a way that traditional uniform brands cannot replicate.

This fabric innovation directly supports the 69.9% gross margin achieved in Q3 2025, a level that is not merely high but structurally superior to the entire competitive landscape. Superior Group of Companies reports 37.7% gross margins, VF Corporation 54.0%, and Under Armour (UA) 47.4%—each at least 1,500 basis points below FIGS. The significance is clear: FIGS can invest more aggressively in R&D, marketing, and customer acquisition while maintaining profitability, creating a self-reinforcing cycle of product leadership. The non-scrubwear category, while growing slower at 2.6% year-to-date, serves a critical strategic function by increasing purchase frequency and reducing customer churn; customers who buy head-to-toe solutions have measurably higher lifetime value.

The TEAMS B2B business, though "well under 10% of our business today," represents a latent growth vector with accretive economics. Institutional sales carry lower gross margins due to volume discounts but generate favorable operating expense leverage through reduced shipping and marketing costs per unit. The Q4 2025 technology deployment, adding capabilities like "sipeins" and gifting, aims to transform TEAMS from a transactional uniform supplier into the "employee store" for healthcare organizations, capturing recurring revenue from uniform allowances and personal purchases. This positions FIGS to compete directly with Superior Group's institutional business while maintaining its premium brand positioning.

Community Hubs provide physical touchpoints that drive digital customer acquisition, with approximately 40% of visitors being new to the brand and 30% becoming omnichannel purchasers. The three new stores opening in Q4 2025—New York's Upper East Side, Houston, and Chicago—apply learnings from the first two locations, featuring stronger core scrubwear mix, higher men's penetration, and increased adoption of FORMx fabrication. These hubs serve as both revenue centers and brand amplifiers, addressing the 60% of healthcare professionals who prefer to try products before purchasing while generating valuable customer behavior data that informs online merchandising.

Financial Performance: Evidence of Strategic Execution

Q3 2025's 8.2% revenue growth to $151.6 million, combined with 280 basis points of gross margin expansion, provides the first clear evidence that the promotional reset is working. The mechanism is straightforward: fewer discounts improved unit economics while better inventory management reduced return rates and processing costs. Marketing expense fell 17.7% year-over-year as the company lapped 2024 Olympics campaign spending and improved digital advertising efficiency, yet revenue still grew, indicating that prior marketing dollars were subsidizing low-quality traffic rather than driving incremental sales.

The segment dynamics reveal a balanced recovery. Scrubwear revenue grew 8.4% in Q3, with management noting that "the majority of growth was driven by core products and colors, with newness and innovation creating a 'halo effect' for the overall core business." This demonstrates that FIGS can grow without relying on constant new product introductions—a sign of brand maturity and customer loyalty. Non-scrubwear grew 7.2%, with particular strength in underscrubs and the Q3 launch of ArchTek compression socks, which management expects to become a "significant core offering." The geographic split shows U.S. revenue growing 7.5% while international accelerated 11.7%, with international AOV up in all regions and strong "business as usual" growth during non-promotional periods.

Profitability inflection is stark. Net income of $8.7 million in Q3 2025 versus $1.7 million prior year represents a fivefold increase, while nine-month net income of $15.7 million compares to just $0.8 million in 2024. Adjusted EBITDA margin of 12.4% is up 900 basis points year-over-year, driven by gross margin expansion and operating leverage.

Selling expense decreased 7.1% despite revenue growth, reflecting fulfillment and shipping efficiencies from the new Goodyear, Arizona facility. General and administrative expense increased only 4.5% in absolute terms while declining 80 basis points as a percentage of revenue, showing disciplined overhead management.

The balance sheet provides strategic flexibility but reveals a critical trade-off. Cash and cash equivalents of $46.5 million plus $195 million in short-term investments create a net cash position of $241.5 million, with minimal debt (debt-to-equity of 0.13).

However, inventory increased 23% year-over-year to $151.2 million, driven by product introductions and higher in-transit inventory. This inventory build consumed operating cash flow, with free cash flow declining from $37.1 million to $5.1 million year-to-date. FIGS is sacrificing near-term cash generation to fund strategic growth initiatives—international expansion, new fabric launches, and retail store openings—that must deliver future returns to justify the investment.

Outlook, Guidance, and Execution Risk

Management's updated 2025 guidance reflects growing confidence in the strategic pivot, with full-year revenue growth now expected at approximately 7% versus prior "low single digits" outlook, and adjusted EBITDA margin guidance raised to 10.3% from 8.5-9.0%. The CFO explicitly stated, "We now expect Q4 to be our strongest net revenue growth of the year, driving our full-year estimate to approximately 7% growth," indicating accelerating momentum. More importantly, management sees "opportunity for 2026 adjusted EBITDA margins to be within range of current 2025 expectations" despite an estimated 440 basis points of unmitigated tariff impact.

This 2026 margin outlook is the single most important forward-looking statement in the investment case. It implies that FIGS believes it can fully offset tariff costs through supplier renegotiation, sourcing diversification, and potential pricing actions. However, management has been explicit that pricing increases are a "last resort," with co-founder Catherine Spear stating, "We're not going to be taking pricing in 2025. If we were to take any future pricing, that decision would be held to share with our healthcare professionals first so that we can control the narrative." This commitment to customer-centric pricing creates execution risk—if supplier negotiations fail to deliver sufficient cost savings, FIGS must either absorb margin compression or risk brand damage by raising prices.

The international expansion strategy employs a "go broad, go deep" framework that balances capital efficiency with market penetration. The "go broad" approach uses low-touch market openings leveraging technology and regional commonalities to rapidly scale to nearly 60 markets, while "go deep" focuses direct investment in established markets like Canada, the U.K., Mexico, Japan, and South Korea. The Q2 2025 Japan launch and October 2025 South Korea debut provide early data points, with management noting that international growth in Q3 was led by new customers with AOV up in all regions. The planned Q4 2025 China entry via Tmall represents the most significant market opportunity, given China's massive healthcare workforce, but also the highest execution risk due to regulatory complexity and different consumer behavior.

Risks and Asymmetries: What Can Break the Thesis

Tariffs represent the most immediate and quantifiable threat to the investment case. The universal 10% baseline tariff plus 20% on Vietnam and 15% on Jordan production creates an estimated 110 basis point gross margin headwind in 2025 and 440 basis points in 2026. Management's mitigation strategies—optimizing supplier base, negotiating discounts, and driving logistics efficiency—have shown "strong progress to-date," but the magnitude of the 2026 impact suggests pricing action may become unavoidable. The asymmetry here is stark: successful mitigation supports the premium valuation, while failure could compress margins by nearly one-third from current levels, fundamentally altering the investment proposition.

Supply chain disruptions from Middle East conflicts create secondary risk, causing shipping delays and forcing increased air freight usage. While FIGS has diversified shipping methods, the concentration of production in Vietnam and Jordan leaves it vulnerable to regional instability. Consumer confidence represents a macro variable that could undermine the premium pricing strategy; if healthcare professionals face wage pressure or job insecurity, the willingness to pay premium prices for technical scrubs may deteriorate, particularly as competitors like Superior Group and VF Corporation offer lower-priced alternatives through institutional contracts.

Competitive dynamics present a longer-term risk. FIGS's 4% estimated U.S. market share in a fragmented industry provides ample room for growth, but scale disadvantages relative to VF Corporation's global manufacturing network and Superior Group's established B2B relationships could limit institutional penetration. The TEAMS business, while growing over 20% in 2024, remains "well under 10% of our business," and scaling this while maintaining premium brand positioning requires careful execution. Additionally, digitally-native competitors like Jaanuu and Mandala, though smaller, can replicate FIGS's DTC model with lower overhead, potentially pressuring customer acquisition costs.

Competitive Context: Margin Advantage as a Moat

FIGS's competitive positioning is best understood through the lens of profitability differentiation. The company's 68% gross margin is not slightly better than peers—it is 1,800 basis points higher than VF Corporation, 3,000 basis points higher than Superior Group, and 2,000 basis points higher than Under Armour. This margin premium reflects genuine product differentiation and DTC efficiency, not accounting anomalies. The significance for investors is that FIGS has substantially more capital to reinvest in innovation, marketing, and international expansion while maintaining profitability, creating a self-reinforcing competitive advantage.

Superior Group of Companies, with $556 million in annual revenue and a 1.0% net margin, competes primarily on price and institutional relationships. Its B2B focus creates stable but low-margin revenue, while its minimal DTC presence leaves it vulnerable as individual healthcare workers increasingly prefer direct purchasing. VF Corporation's Dickies Medical benefits from global scale and brand recognition but operates within a turnaround framework, with overall revenue declining 3.5% and net margins in low single digits. Under Armour's 47.4% gross margin reflects its athleticwear positioning, but its healthcare crossover products lack the specialized design and community focus that drive FIGS's premium pricing.

FIGS's moats center on brand community and fabric innovation. The "healthcare hero" branding, reinforced by FIGS Giving philanthropy and professional ambassador networks, creates emotional loyalty that transcends transactional relationships. This translates to pricing power—scrub sets priced 20-30% above traditional alternatives—and high repeat purchase rates. The proprietary DTC platform captures customer data that enables rapid product iteration, while the forward-deployed product team, led by new Chief Product Officer Michelle Armstrong, continuously refines fit and function based on direct feedback. These advantages are amplified in international markets, where traditional competitors lack brand recognition and local community presence.

Valuation Context: Premium Multiples Require Premium Execution

At $11.43 per share, FIGS trades at 103.9x trailing earnings and 46.3x EBITDA, multiples that demand flawless execution and sustained high growth. The 3.24x price-to-sales ratio appears more reasonable but still reflects a 300% premium to Superior Group's 0.28x and a 400% premium to Under Armour's 0.38x. The valuation question is not whether FIGS is expensive—it clearly is—but whether the business model's unique economics justify the premium.

The 12.4% adjusted EBITDA margin achieved in Q3 2025, if sustainable, supports a higher multiple than traditional apparel peers. VF Corporation's 11.3% operating margin includes the benefit of multiple billion-dollar brands, while Superior Group's 3.3% operating margin reflects commoditized competition. FIGS's 68% gross margin provides 2,000-3,000 basis points of additional buffer to absorb tariff costs or invest in growth, a structural advantage that traditional valuation multiples fail to capture. The company's net cash position of $241.5 million and debt-to-equity ratio of 0.13 provide strategic flexibility that levered competitors like VF Corporation (D/E 3.92) cannot match.

Free cash flow generation, however, presents a cautionary signal. The decline from $37.1 million to $5.1 million year-to-date reflects the inventory build and international expansion investments. This translates to a price-to-free-cash-flow ratio of 85.5x, indicating that the market is pricing in a rapid return to historical cash generation levels. The $52 million remaining on the $100 million share repurchase authorization suggests management believes the stock offers value at current levels, but continued cash flow deterioration would undermine this confidence.

Conclusion: The Premium Pricing Equation

FIGS has successfully executed a strategic pivot from promotional growth to brand health, delivering Q3 2025 results that validate the premium valuation thesis through 280 basis points of gross margin expansion and 900 basis points of EBITDA margin improvement. The company's 68% gross margin and 12% EBITDA margin create a competitive moat that traditional apparel manufacturers cannot replicate, while international expansion into nearly 60 markets by year-end offers a clear path to double-digit revenue growth.

The investment case hinges on two critical variables: tariff mitigation and international execution. Management's guidance that 2026 EBITDA margins can remain at 2025 levels despite 440 basis points of tariff headwind implies $15-20 million of cost savings or pricing actions that have not yet been fully negotiated or communicated. The Japan and South Korea launches must demonstrate that FIGS's community-driven model translates across cultures, while the China Tmall entry represents a make-or-break opportunity to access the world's largest healthcare workforce.

Trading at 103.9x earnings, FIGS offers no margin of safety for execution missteps. Yet the company's net cash position, low debt, and superior unit economics provide the strategic flexibility to invest through near-term headwinds. For investors, the question is whether FIGS can widen its competitive moat faster than tariff pressures and competitive threats narrow it. The Q3 2025 results suggest it can, but the 2026 margin guidance—if achieved—will be the definitive proof that premium healthcare apparel commands premium valuations not just in product pricing, but in stock market multiples.