Shares of Figs (NYSE:FIGS) are in full focus after Spruce Point Capital released a 113-page short report on the scrubs company. The short seller alleges that Figs has no competitive advantage, inflated revenue and gross margins, and will see slower growth, which will subsequently compress valuation multiples. As a result, FIGS stock is at risk of a 45% to 60% drawdown, which would bring down the price of FIGS to between $4.40 and $6.05. Spruce also questions co-founder Heather Hasson’s business background, which it believes can harm Fig’s tidy brand image.
The short report comes about two weeks after billionaire Ron Baron disclosed a $100 million position in the healthcare apparel company. Baron characterizes Figs as a disruptor in the scrubs industry with a strong brand image.
With that in mind, let’s get into the details of the short report.
Spruce Point Issues Short Report on FIGS Stock
First, Spruce brings up Hasson’s background. Before Figs, Hasson claimed to run a successful handbag business in Italy and lived there for seven years. However, through a review of legal and corporate documents, Spruce believes that Hasson lived in California for most of those seven years. In 2009, Hasson filed for personal bankruptcy and was also accused of making false statements. These events have contributed to Spruce’s belief that Figs often engages in unrealistic statements.
After reviewing press stories between 2018 and 2019, the short seller concluded that Figs estimated revenue of $100 million by 2018. However, it only brought in $55 million that year. Meanwhile, Spruce accuses co-founder Trina Spears of making unrealistic statements as well. She claimed that more than half of Figs’ customers order products every month. This seems to conflict with Spruce’s proprietary calculation that only 22% of Figs’ customers place a fourth-order.
Figs claims to have a total addressable market (TAM) of $12 billion. Yet, in a review of Bureau of Labor Statistics data, purchase volume, and selling prices, Spruce contends that the TAM is actually $5.1 billion, or 57% lower. At the time of writing, FIGS had a market capitalization of $2.1 billion, which seems “disproportionally high.” Spruce also believes that Figs manipulates its gross margins, explaining:
Compared with DTC peers, FIGS allocates nearly all fulfillment and distribution expenses to the operating expense lines, instead of COGS. This results in FIGS gross margins being overstated by 2,040 bps.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.