When it comes to low-priced small-cap stocks,  FIGS, Inc. (NYSE: FIGS) bears much fruit.

The direct-to-consumer (DTC) apparel maker for healthcare professionals is pursuing growth on multiple fronts. Product extensions, overseas expansion and surprising partnerships with well-known consumer brands. It is even getting into brick-and-mortar retail.

In turn, its stock is quietly bouncing off its October 2023 all-time low. FIGS closed at $7.50 on Friday, roughly two bucks off its bottom — but more than $40.00 away from its record top.

Speaking of tops, FIGS designs and sells a wide range of bottoms and tops for nurses, doctors, dental hygienists and other healthcare workers — including scrubs, lab coats and compression socks, in addition to comfortable ‘off-duty’ attire. It also offers on-the-job necessities like face masks, scrub caps, lanyards and tote bags. Products are sold through the FIGS website and mobile app.

The company is benefiting from strong healthcare labor market trends that have ties to the pandemic. Global attention on disease prevention and the growing need for compassionate workers continues to attract people to the field. At the same time, healthcare settings have normalized post-Covid, allowing the sector to focus on routine check-ups, preventative care and surgical procedures that took a back seat for much of 2020 to 2022. Combined with the aging population trend, healthcare hiring has been, well, healthy.

The latest employment report from the U.S. Bureau of Labor Statistics revealed that healthcare job gains are accelerating. The sector added 58,000 jobs in October after adding 53,000 monthly jobs on average over the prior 12 months. Ambulatory services, hospitals and nursing home facilities are each contributing to the growth. With nearly 4 out of every 10 new jobs being generated by healthcare, investment opportunities in the sector go beyond pharmaceutical giants and medical device makers. 

Enter FIGS, a relatively unknown ‘backdoor’ way to invest in healthcare growth. Part apparel manufacturer, part healthcare sidekick, the company isn’t your typical retailer. While most apparel retailers are slowed by inflation and high credit card rates, FIGS has relative ‘immunity.’ Since healthcare is in constant demand throughout the economic cycle, its defensive nature neutralizes the macro pressures faced by most discretionary clothing retailers.

In contrast to recent performances at Nike, The Gap and V.F. Corporation, FIGS has been a standout.

A loyal, growing customer base

A month ago, FIGS reported that third-quarter revenue rose 11% year-over-year to $142.4 million. Importantly, the growth was driven by both higher order volumes and higher average order value (AOV). And since the uptick in AOV was caused by an increase in “units per transaction,” new and existing customers are ordering more. With FIGS in the process of expanding its merchandise assortment into new and complementary categories, this is a sign of brand strength.

Although Q3 adjusted EPS of $0.03 was a penny above prior year levels, the more encouraging development is that management raised its full year outlook. It now expects 2023 revenue growth of approximately 8.5%. That’s pretty solid given what most apparel manufacturers are expected to deliver.

Another bullish signal — in Q3, FIGS added more healthcare professionals to its customer base than in any other quarter. The company exited the quarter with roughly 2.6 million active customers, 20% more than it had a year ago. Marketing campaigns and word-of-mouth are proving effective.

A contributor to the brand’s growing interest is the FIGS Advocacy Hub. This is where web and app users can go to support industry-related legislative bills and various causes. Making this content available to a passionate healthcare community is driving stronger engagement — a critical component of any successful DTC strategy.

TEAMS, international businesses are thriving

As FIGS connects with more individuals, it is also addressing entire healthcare organizations that want to make their staff look and feel more professional. By outfitting an entire dental office, for instance, growth can happen on a much bigger scale. In supporting healthcare institutions, universities and the booming number of walk-in health emergency care clinics, the company estimates it is tapping into a $2 billion U.S. market. Management sees the opportunity abroad as “significantly larger.”

In Q3, the TEAMS segment posted record growth thanks to rising orders from a broad range of healthcare providers. The fourth quarter TEAMS performance could be even stronger.

Meanwhile, the international division is also experiencing record growth. This gives FIGS not one but two surging businesses to complement its core DTC platform. International revenue soared 81% in Q3 and accounted for 13% of total revenue. It entered seven new international markets in the quarter alone (including Poland, Singapore and Kuwait), a testament to the torrid pace at which FIGS is spreading its wings overseas.

The really good news? FIGS market share in the international healthcare apparel market is still less than 1%. It has only scratched the surface in non-U.S. growth potential, an underappreciated long-term catalyst for the stock. In addition to various localization efforts, the company plans to build brand awareness outside the U.S. largely through collaborations with influential ambassadors.

A gutsy (game-changing?) move into physical stores

Yet another element of the FIGS growth strategy is to lean on the strategies of winning retailers. Some of this year’s most successful brands have invoked the psychology of limited-edition product ‘drops’ that drive brand excitement and engagement. FIGS has tapped into this playbook by offering limited-edition flutter sleeve Natal scrub tops, Lesage scrub joggers and other buzzworthy apparel.

The company’s highest-profile shopping tie-up is with mainstream sneaker brand New Balance. Four years into the partnership, the duo has rolled out a number of comfort-first, fashion-second sneakers for men and women healthcare professionals (and those who want to dress like them). The FIGS x New Balance collection now contains more than a dozen styles in a bunch of unique colors that are especially popular with Gen Z. The latest release? The $148 XC-72 in auburn, bonsai and gray. Having its toes in the lucrative sneaker market is a wise move — and one that could lead to tie-ups with other popular sneaker brands.  

FIGS is also partnering with complementary healthcare brands outside of the apparel space. It recently formed a product collaboration with medical instrument specialist Eko on the FIGS/Eko CORE 500 digital stethoscope. If it can successfully leverage the brand into non-apparel categories, the complementary revenue sources could become significant.

Long an e-commerce only brand, FIGS is taking a bold step into the world of physical retail. Last month, it opened its first brick-and-mortar store at the Century City Mall in Los Angeles. The outlet is within 10 miles of six major healthcare organizations and adjacent to five healthcare clinic tenants. 

It is a risky move for FIGS to branch outside its digital model, but one that could easily be repeated in other major markets — and provide a major boost to brand recognition and revenue. The next FIGS ‘Community Hub’ is slated to open in the first half of 2024 in Philadelphia.

High volume bounce presents a ‘healthy’ entry point

FIGS shares gapped up 21% on the November 3rd earnings release while daily trading volume reached a 12-month high.

Following a brief ‘profit-taking’ pullback, the stock has continued to run higher. This suggests that the bulls are firmly in control — and on the heels of the market’s best day of 2023 on Friday, risk-on trading could keep a low-priced, small cap stock like FIGS in favor well into the new year.

Since FIGS is in the early stages of profitability, valuation metrics based on sales are more ‘fitting’ at this stage. The stock has a 2.4x price-to-sales (P/S) ratio that is well above those of small cap apparel peers like Canada Goose (1.3x) and Oxford Industries (1.0x). However, given FIGS’ leadership position in a niche market and multiple growth levers, it may be a premium worth paying for.

Seven Wall Street research firms have offered an opinion on the company since its Q3 update. Four are bullish and three are neutral. The average price target implies more than 25% upside over the next 12 months. But if FIGS can execute on its growth initiatives and show signs of accelerating adoption, a multiyear run back to 2021 IPO levels in the $40’s holds 5x to 6x return potential. 

A good resource for evaluating small cap stocks across several metrics is MarketBeat’s Small Cap Companies portal. Here, growth and value investors alike can explore thousands of stocks using things like our proprietary MarketRank, Media Sentiment and Analyst Consensus — all in one place.

Bottom Line

FIGS is an emerging healthcare apparel pure play benefitting from a strong healthcare jobs market. A widening product assortment, clever collaborations and a move into traditional retail hold the potential for tremendous DTC growth. Fast-growing TEAMS and international businesses make this small cap a three-headed growth monster to keep a pulse on over the next few years.