Figs (FIGS) Q4 2024 Earnings Call Transcript

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Figs (NYSE: FIGS)
Q4 2024 Earnings Call
Feb 27, 2025, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, everyone, and thank you for joining today's FIGS fourth quarter fiscal 2024 earnings conference call. My name is Raegan, and I'll be your moderator today. [Operator instructions] I would now like to pass the conference over to our host, Tom Shaw, SVP of investor relations. Tom, you may now proceed.

Tom Shaw -- Senior Vice President of Investor Relations

Good afternoon, and thank you for joining us to discuss FIGS fourth quarter and full year 2024 results, which we released this afternoon and can be found in our earnings press release and in the shareholder presentation posted to our investor relations website at ir.wearfigs.com. Presenting on today's call are: Trina Spear, our co-founder and chief executive officer; and Sarah Oughtred, our chief financial officer. 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-K we filed today. 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.

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Definitions and reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in the shareholder presentation we issued today. With that, I'd now like to turn the call over to Trina.

Trina Spear -- Co-Founder and Chief Executive Offiver

Thanks, Tom. Good afternoon, everyone, and thank you for joining us today. Before we get into our results, I'd like to take a minute to talk about the wildfires we experienced in January. Los Angeles is our home, so this crisis impacted us on a particularly deep and personal level.

Like so many in L.A., there are people within the FIGS community who lost their homes and are under incredible stress as they try to put their lives back together. This is also a reminder of how extraordinary our awesome humans are. For most of us, when crisis hits, we go into self-preservation mode. The opposite is true for the healthcare community.

If you are a healthcare professional when the fire struck, you spent 12-, 16-, or even 24-hour shifts caring for everyone else, even while your world was in utter turmoil. Sticking to our roots, we did everything we could to support our community through this crisis. In addition to other relief efforts we contributed to, we immediately set up a dedicated email alias where healthcare workers affected by the fires could reach out for assistance, whether they needed scrubs, PPE, meals, child care support or financial aid. As part of our effort, we responded to over 1,500 messages from healthcare professionals, donated over 9,200 FIGS and delivered over 2,500 meals.

No one sacrifices more of themselves than healthcare workers. And this is why the work we're doing at FIGS to celebrate, empower, and serve them is so important. As we reflect on the past year, we are proud of the important strides that were made as we continue to define what it means to serve the healthcare community. We measure this quite simply across three measures: one, how we bring great innovative products to address customer needs; two, how we develop deep authentic connections; and three, how we find new ways to expand our reach and impact.

On the product side, we elevated our core scrubwear business, delivering pinnacle offerings like our Team USA collection and our extreme line, as well as differentiated silhouettes such as the wide leg Isabel scrub pants and straight and flare scrub leggings. We continue to expand the brand's opportunity beyond the core, building out product solutions across a range of exciting categories underscrubs, outerwear, and even loungewear in Q4. And we leveraged product partnerships to extend our opportunity even further, including unique development work with New Balance and Eko, our digital stethoscope partner. We built authentic connections as we continue to elevate, serve, and support healthcare professionals.

This work was highlighted by our work to put healthcare professionals in the spotlight through our Olympics campaign, which was our largest brand campaign ever. We made investments to support better customer experience through our transition to a scalable, high-tech fulfillment center. And most important to who we are, we supported our community in unique, powerful ways, including our partnership to open the FIGS operating theater and ICU in Kenya, as well as the ongoing advocacy on our Awesome Humans Bill on Capitol Hill. To magnify these efforts, we focused on expanding how and where we reach customers.

As we think globally, we entered 10 new countries in 2024 while continuing to scale the 20-plus international markets. We continue to test the pinnacle retail experience through the opening of our second community hub in Philadelphia, and we evolved our B2B teams platform to open access to more customers, offer a full range of products and offer new solutions like our gifting platform. Narrowing our focus to Q4, we are energized to end the year on a positive note. Revenues grew 5% year over year, outpacing our implied range for the quarter with positive signs that our strategies are taking hold.

This includes the ongoing upswing we are seeing in repeat frequency, supported by impactful products and color launches and a higher level of non-promotional sales. Looking at some of the standouts for the period, scrubwear was positive for the third straight quarter, while non-scrubwear snapped back to strong growth after some of the pressure points we outlined on our Q3 call. Our international business was a standout, growing 45% for the quarter to represent 16% of our net revenues, an all-time high for the brand. And strong teams momentum continued, delivering over 20% growth for the year and driving some of our excitement ahead of this year's initiatives.

On the margins side, gross margins came in at the high end of our outlook despite the impact from mix. While marketing and G&A expenses showed leverage, selling expenses deleveraged significantly for the period, given the duty reclass impact last year and fulfillment center inefficiencies. Supported by our top line, our overall adjusted EBITDA margins came in above our expectations for the period. We also ended the year in an incredibly strong financial position.

Supported by positive operating cash flow for the year of approximately $81 million, $45 million of share repurchases and our equity investment in OGG, we finished the year with just over $245 million in net cash and investments on the balance sheet. Despite clear progress in the quarter, we acknowledge not all went to plan during the year. We saw inconsistencies in our performance throughout the year with AOV pressure, more challenging customer acquisition, and a range of pressures and distractions impacting healthcare professionals. We also experienced gross margin pressure from the changing product mixes within our business and absorbed the impact of strategic SG&A investments in marketing and fulfillment.

Nonetheless, we ultimately reached record revenue in 2024 and have growing conviction that the industry and our company will continue to normalize following the recent COVID overhang on demand. As we weigh all these factors, we exited the year with a clear view on how our priorities would evolve in 2025. This is guided by two simple principles to drive the long-term health and growth of the brand. First, we need to take near-term actions to prioritize and rebase our efforts.

And second, we need to move with more conviction and speed to invest in the opportunities at hand. The near-term action includes three calibrations to our original plan, starting with our promotional positioning. We have seen improvements in our inventory positioning over the past six quarters at the same time our product introductions are resonating. While we are still focused on optimizing our inventory, we are in a position to become increasingly selective in our promotional cadence.

To be clear, this move is planned to have a negative impact on our top-line performance this year, but it is absolutely the right decision to align with our focus on long-term brand health. Second, we are further calibrating fit. Our work standardizing fit continues, and we have found opportunities to further refine our efforts this year. As we consider the entire range of our product portfolio, we now expect to fully execute and market our fit story in the back half of 2025.

While a longer journey than we initially planned, I'm even more excited with how this additional work and direction will play out as we look to consistently delight our full range of existing and future customers. Finally, we are pausing our planned work to open a Canadian DC. This will reduce unneeded complexity this year, so that our team can focus on driving efficiency from our new domestic network. At the same time, we expect to offset some of the planned savings of the Canadian DC with additional initiatives across our supply chain.

And we still see the opportunity to evolve our global supply chain as we move into 2026 and beyond. In tandem with these actions, we are moving with greater urgency to invest across our core strategies. Starting with our efforts to continue to exceed customer expectations through relevant innovation. Complementing our work to standardize fit, we are excited to advance our fabric story this year.

As we have detailed, our product has largely been based on our proprietary FIONx fabric. This is what we're known for and has been the standard for our industry. At the same time, customer feedback has shown the opportunity to drive greater functionality across a range of activities and roles. This month, we were excited to launch a brand-new fabrication called FORMx, designed for greater comfort and lower-impact environments with an exceptional hand feel, enhanced stretch, and a clean modern design aesthetic.

We plan to methodically expand this platform throughout the year and expect the line to further differentiate our brand in the market. We believe there are additional opportunities to evolve and elevate our fabric stories and look to test additional solutions as we move throughout the year. Beyond fit and fabric, category expansion remains a focus as we address head-to-toe solutions, both on and off shift. We have meaningful opportunities ahead to build out some of our less-developed categories, outerwear, underscrubs, socks, footwear, each in focus this year and each unlocking new growth opportunities for the brand.

It is important to reiterate that these efforts are supported by our ongoing focus on optimizing our inventory and color strategies. Our intentional action in recent quarters has provided a better understanding of where we need to lean in further versus where we need to continue to demonstrate discipline, and we will continue to balance each as we move through 2025. As we strive to deepen our connections with healthcare professionals, we're really excited with how we are evolving our marketing approach this year. After what we would call a more aspirational positioning throughout 2024, we're going back to our roots a bit to focus on showing the everyday moments, whether big and inspiring or small and intimate.

We know the job of a healthcare professional is not bound by a clock or a location. So our year-long exploration of where do you wear FIGS is designed to celebrate all the moments that matter to healthcare professionals. We believe these authentic moments will coincide well with our innovation agenda and help reach and inspire a broad range of healthcare professionals, especially as we think with a global mindset. Customization and personalization are two other areas that we believe will drive engagement and relevance across our community.

On the customization side, we have seen the power of this added level of engagement. While we have steadily added options, we still have limitations on how our customers can customize products across color, bond placement, and character count. These are all areas we plan to advance this year, along with better placement of these options in the buy flow. Additionally, we're looking at a range of functions this year that can further broaden both what can already be customized and what we have yet to tackle.

On the personalization side, we have opportunities to build more powerful customer journeys. Being a D2C business that is built on data, we have a unique understanding of how -- of our community, who they are, where they work, what products they like, how and when they like to shop, and what their replenishment cycle is. Ultimately, we have the ability to say one step ahead, so that we can drive increasingly engaging experience for our community, both on and offline. Combining all these elements, we are hyper-focused on building off our lessons last year, and you should see us better align our storytelling, our product innovation, and the timing of our messaging when it matters most to healthcare professionals.

Looking at our reach, we expect to make important strides this year in better reaching new and existing customers. I've discussed some of these compelling data points in the past. Over 80% of our healthcare professionals are outside of the United States. Over 60% of non-fixed customers want to try and feel the product before they purchase.

And an estimated 15% of the industry is B2B with institutions buying for their teams with an outsized international opportunity. Simply put, we have not moved fast enough to support these initiatives. There are significant pockets of customers that are just not reaching in an optimal way today. You will see us take more action and accelerate our investment across each of these channels this year to unlock growth in 2026 and beyond.

Starting with our international expansion opportunity. A key focus this year is to execute our push into Asia, starting with our planned opening of Japan in Q2 and South Korea later this year. These are inherently more complex markets, and we're investing to support localized language translation, dedicated creative and marketing support. While near-term expectations are modest for these markets, we believe these markets are well-positioned for brand success as we look to make an impact with the local healthcare community.

In addition to Asia, we plan to leverage our technology platform to better activate our work with many of our global markets. This includes developing ways to drive deeper connections in these markets, further localizing our messaging, our assortment, and our on-the-ground impact. Channel expansion will be a focus as we look to build out our teams business and leverage other locally relevant pathways to the consumer. Speaking of teams, the global opportunity has been apparent for a while now.

To build off our strong foundation, we recently brought in a dedicated leader with 20 years of sales and leadership experience across the healthcare industry. This role includes both our existing inbound efforts and also the formulation of an outbound sales function. Notably, we started building an outbound customer pipeline in 2024 and plan to jump-start these efforts this year with the creation of an outbound team. Beyond this outbound initiative, we also plan to execute additional solutions to simplify and expand the team's experience.

On our nascent retail store side, we continue to see the value of having an impactful physical presence in the market, and we will extend our test, learn, apply, and win approach in 2025. To start, we're currently planning on at least two new community hubs in the back half of the year while also implementing operational tools to ensure an omnichannel mentality. We believe there's a lot more to come here and look forward to providing updates in the future. As we first disclosed last quarter, we also expect our long-term efforts to be supported by leveraging our minority investment in OGG, an AI-powered multidisciplinary education platform for healthcare professionals.

We expect this platform will debut later this year. Before passing along to Sarah, I would like to provide a few closing comments on our cash, our team, and our conviction. Our balance sheet strength is a competitive advantage, and we plan to prioritize our use of cash in the near term to accelerate investments. We have consistently discussed the opportunities in areas like international, teams, and retail.

And as discussed, it is now time to move faster with conviction. It also means targeted investments in the core, ensuring we take bold steps to drive brand awareness and activations, each with a global mindset. Bold moves require a bold team, and we have been actively fortifying our leadership over the past year and change. Most recently, we have brought in Jon Tam as our new chief operating officer and Michelle Armstrong as our new chief product officer.

Jon joined us with over 11 years at Revolve Clothing, where he most recently led operations for this dynamic online platform. Michelle most recently served as chief product officer at Arc'teryx after serving in a variety of roles for over a decade at lululemon. I'm incredibly excited to officially welcome both to the team and look forward to their contributions. Finally, I want to reiterate our confidence in driving our mission and extending our leadership position over the long term.

Product innovation is at our core, and we remain maniacally focused on the intersection of fabric, fit, and function. Our connections and approach to community building drive deep relationships that build frequency and create a halo of awareness. Our channel approach provides powerful feedback and insights that will continue to allow us to extend and personalize our approach globally. And our team is as strong as ever, bringing a multitude of experiences that will help us move quickly but thoughtfully in a rapidly evolving world.

These are all competitive advantages in how we will continue to differentiate our brand to drive lasting impact to our customers and communities. With that, I'll turn it over to Sarah to review the quarter and our 2025 financial plan.

Sarah Oughtred -- Chief Financial Officer

Thanks, Trina. I'll start with some of the drivers for our strong fourth quarter performance where we experienced better-than-planned results across most of our P&L. I'll then provide our first look at 2025 and some of the key considerations during the year. Finally, we will open up the call for questions.

Looking at Q4, net revenues increased 5% to $151.8 million, above our implied outlook for the period. Returning customer traffic and purchase frequency powered our growth for the period with frequency notably remaining positive for the third straight quarter and strengthening relative to recent trends. This positive trend was tempered by customer acquisition trends. Additionally, we are seeing several churn dynamics play out.

While this includes a higher rate of customers falling out of the active base, it also includes a higher rate of lapsed customers coming back to the brand, which we believe is indicative of some of our marketing and product initiatives throughout the year. AOV decreased 1% to $116, primarily reflecting lower units per transaction, offset by a higher rate of non-promotional sales. Overall, our active customers for the trailing 12-month period increased 3% year over year to $2.7 million, while net revenues per active customer decreased 1% to $208. Looking at revenues by category, scrubwear increased 2%, representing 76% of net revenues for the period.

Similar to last quarter, we saw positive trends in both our limited edition and core styles, which were supported by a strong slate of color launches throughout the period. However, performance remained somewhat constrained as we lapped our prior-year efforts to move through older products and colors. Non-scrubwear increased 13%, representing 24% of net revenues. While we were prudently cautious with our Q4 planning following last quarter's performance, we saw outperformance in both footwear and underscrubs during the period.

Growth in footwear was supported by our efforts to drive better in-stocks in our key 327 and 3447 styles. We are also excited to build our underscrubs opportunity as we added new ribbed and waffle fabrications to the assortment. Gross margin for Q4 contracted 20 basis points to 67.3%, driving the full year rate in range of our expectations. On the positive side, we received a larger onetime benefit from duty drawback claims from prior periods that we highlighted on our prior earnings call.

Offsetting this benefit, we continue to see several mix headwinds, including the overall higher sales mix of the non-scrubwear category, as well as the product mixes within both our scrubwear and non-scrubwear categories. Our selling expense for Q4 was $37.9 million, representing 25% of net revenues compared to 19.4% in Q4 of 2024. As a reminder, we lapped the outsized favorable selling expense impact of $4.7 million as a result of the inception of our duty reclassification method in Q4 last year. From an operational standpoint, we continue to see higher logistics costs, including fulfillment expenses, as we ramp the operations of our new facility, as well as elevated shipping expenses.

Marketing expense for Q4 was $19.8 million, representing 13% of net revenues, compared to 13.9% in the prior-year period. The decrease in marketing expense as a percentage of net revenues was primarily due to lower digital marketing spend, particularly following the outsized Q3 investments in conjunction with our campaign during the Olympic Games. G&A for Q4 was $35.6 million, representing 23.4% of net revenues, compared to 24.5% last year. The decrease in G&A expense rate was primarily related to lower stock-based compensation expense and overall expense management efforts.

Combining these items, our adjusted EBITDA for Q4 was $21.1 million with an adjusted EBITDA margin of 13.9%, compared to 18.4% last year. Net income for the quarter was $1.9 million or diluted EPS of $0.01, compared to Q4 2023 net income of $10 million and diluted EPS of $0.05. Recapping the full year, net revenue reached a record $555.6 million, an increase of 2% year over year. Gross margin contracted 150 basis points to 67.6%, largely due to the product mix shift.

Operating expenses deleveraged to 67.2% of net revenues, compared to 62.8% in the prior year. As a reminder, this increase included the outsized impact from higher selling expense for the transition to our new distribution center and higher marketing expense to support our Olympics campaign. Adjusted EBITDA margin was 9.3% as compared to 15.8% in the same period last year. Looking at our balance sheet, we finished the fourth quarter with cash, cash equivalents, and short-term investments of $245.1 million, along with no debt.

This total position held essentially flat year over year as our strong cash flow supported our efforts to invest a cumulative $90 million this year for share buybacks, our equity investment in OGG, and elevated capital expenditures. Inventory declined 3% year over year to $115.8 million and is down 35% on a two-year basis. After six quarters of targeted inventory reductions and disciplined buying, we are starting to reach a healthier level of inventory as we plan our go-forward business. As we move throughout 2025, we will continue to work through smaller pockets of inventory, including items with older fit profiles.

At the same time, we will look to strategically invest in areas where we have seen stronger customer demand and to support key growth drivers across our business. Combined, we expect inventory growth to modestly outpace revenue growth during the year. Looking closer at capital allocation, we repurchased $38.2 million worth of shares during the quarter at an average price of $4.87, ending the year with approximately $4.6 million remaining under our previously announced $50 million share repurchase program. Rounding out our financials, capital expenditures for the year were elevated at $17 million, with the majority related to the build-out of our new fulfillment center.

And we delivered another quarter of strong free cash flow at $27.1 million, driving our full year total to $64.1 million. Now turning to our outlook. We expect net revenues for fiscal 2025 to be down in the low single-digit range year over year, reflecting headwinds from less promotions and the potential for a decline in active customers. Regarding promotions, while we will retain some flexibility and responsiveness based on market conditions, we are coming into the year expecting a meaningful reduction in how we plan our promotional composition.

This means curtailing sitewide promos that are not aligned with our long-term brand positioning. Relatedly, we are factoring in the potential for a slower rate of new customer growth and higher churn, particularly as we work through this new promotional baseline. Our efforts will continue to focus on building upon our recent successes, driving frequency of our existing customers and reengaging lapsed customers. At the same time, we will more heavily invest in areas that will help support future customer growth and engagement, including channel growth across international teams and retail, all of which are expected to have a much more meaningful impact beyond 2025.

While we typically do not provide intra-quarter commentary, year-over-year net revenue growth had trended positive to start the year, though we expect the change in our promotional stance to negatively impact the balance of the quarter. As such, we expect Q1 net revenue to be approximately flat year over year. Turning to gross margins, we expect full year gross margins to be approximately flat from the 67.6% level achieved in fiscal 2024. This is an area where we should see a positive impact from our actions to dial back promotions, which we expect to be largely offset by some ongoing product mix headwinds.

For Q1, we expect gross margins to be down approximately 100 basis points year over year to a level which is more in line with recent trends with better performance for the balance of the year supported by full-price selling. On the expense side, we expect total SG&A leverage for the year, though as I'll discuss, this is driven by lower stock-based compensation. In selling expense, we will be lapping last year's transitory expenses at the new fulfillment center, though expect some offset from the ongoing inefficiencies at this facility as we work to improve our top line. Additionally, we expect to incur higher shipping costs to service our growing mix of international.

In marketing, we expect a modestly lower expense rate with the outsized Olympics investments from last year to be largely offset by incremental investments across our marketing funnel and to accelerate our channel strategy. In G&A, we will incur higher people costs as we annualize 2024 hires, support our 2025 investment plans, and stabilize incentive compensation. We expect these investments to be more than offset by an estimated reduction in stock-based compensation of approximately $13 million due to the roll-off of certain long-term grants associated with our IPO and the completed vesting of grants made to our executive chair upon her transition to that role. Together, we expect adjusted EBITDA margins for full year 2025 of between 9% to 9.5%.

Notably, this range straddles our 2024 performance, which just came in meaningfully higher than our prior outlook. For Q1, we expect adjusted EBITDA margins of between 5.5% to 6%. We would note two additional nuances as you consider your models, both influenced by stock-based comp. First, given our adjusted EBITDA targets adjust for stock-based comp, we would expect a stronger GAAP operating margin improvement for the year relative to the implied change in adjusted EBITDA margin.

Second, the improved pre-tax income, combined with the significant reduction in nondeductible stock-based comp, will have implications on our effective tax rate, which we estimate will be closer to 45% for the year as opposed to the 81% effective tax rate in fiscal 2024. As we look at our capital allocation plans, we continue to operate from a position of strength given our clean balance sheet and strong cash flow. Our capital expenditure requirements will be more modest in 2025 at approximately $5 million, primarily to support our retail expansion and other foundational investments. Cash deployment overall will be prioritized to accelerate our investments to support growth, yielding lower free cash flow in 2025 relative to prior years.

Supported by these factors, our board of directors has authorized an additional $50 million share repurchase program. We will remain opportunistic with our approach in the market as we look to return value to shareholders over time. Overall, we believe we are in a strong position to take decisive actions this year to support the long-term health and growth of the brand. As we rebase and begin to strengthen some of our top-line drivers this year, we are fueling future momentum by leveraging some of our margin tailwinds coming off of 2024.

While these actions will limit near-term EBITDA margin expansion, we are opportunistic that these investments to support a stronger top line will start to support fixed cost leverage. This will put us in a position to balance margin flow with additional opportunities to accelerate the flywheel. And with our balance sheet and cash flow, we see ongoing optionality to drive performance and shareholder value over time. With that, I will turn it back over to the operator for Q&A.

Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Brooke Roach of Goldman Sachs. Your line is now open.

Brooke Roach -- Analyst

Good afternoon, and thank you for taking our question. I was hoping you could speak to your plans to maintain and reengage lapsed customers as you move through a promotional reset, which typically does come with a period of higher churn. You also spoke a little bit about a lower trend of new customer acquisition. Can you speak to your plans for marketing to that -- to those customers so that you can reaccelerate that acquisition trend? Thank you.

Sarah Oughtred -- Chief Financial Officer

I can take that. Hi, Brooke, it's Sarah. So yeah, we have been seeing some headwinds on acquisition, and we believe that is partly impacted by our promotional cadence. As we head into 2025, we are looking to readjust that promotional outlook, and that was outlined in the script there.

And we are going to be making investments into both our existing brand efforts, plus adding on to upper funnel to increase our awareness and consideration. And we'll also be making targeted investments into the customer funnel to help with our retention trends.

Brooke Roach -- Analyst

Great. And if I could just follow up on the supply chain. You talked about some investments that you're continuing to make there. I think I also heard you say that you're pausing the Canadian distribution center investment.

A lot of investors had expected supply chain to become a bigger source of opportunity for margin expansion this year. Can you talk about what those investments are and your opportunity to leverage that supply chain and distribution center fulfillment over time?

Sarah Oughtred -- Chief Financial Officer

Yeah. So we have a new COO that has come in and really evaluated our road map, and that road map has just been reassessed for where we think there's the best opportunity, both in terms of optimization and savings opportunities, as well as opportunities to focus on some bigger pieces. And so we actually see that there is a really good opportunity for improvement by just focusing on our current distribution facility to optimize and transform there. So the Canada DC will be parked but not in 2025.

Brooke Roach -- Analyst

Great. Thanks so much. I'll pass it on.

Operator

Thank you. Our next question comes from Brian Nagel of Oppenheimer. Your line is now open.

Brian Nagel -- Analyst

Hi. Good evening. So a couple of questions. I mean, first, I know we somewhat discussed this in the prepared remarks, but I just want to -- I guess, I want to understand better.

Just help me explain -- or help me understand the kind of the dynamic between your fourth quarter, a nice beat sales acceleration or profit acceleration, but then more downbeat guidance for '25. So what's the bridge there? And then, I guess, the way I'm asking with that, too, as you look at that initial guidance, I mean, recognizing it's early in the year, it's a fluid backdrop, etc. But is the guidance you outlined for '25 consistent with what you're seeing in the business now? Or is there some degree of conservatism based on that versus what we saw in the fourth quarter?

Sarah Oughtred -- Chief Financial Officer

Great. Hey, Brian. So in terms of the fourth quarter, so we went into the fourth quarter with prudently cautious guidance as we came out of Q3 that did miss our expectations. As we went through Q4, we did see some performance gains on color, but we did see a softer Black Friday, Cyber Monday performance.

And so the beat really came in December as we had additional color launches this year, and that's where we really started to see some traction on our business-as-usual days. And we did see outperformance in our December promo that happened very much at the end of the quarter. And so, as we go into 2025, our guidance does reflect a few different dynamics. So one, we have been seeing headwinds and lower growth rates in our active customer base.

So playing that forward, there is the potential for that to decline. And then, we also are making a shift in promotion. And so, you can expect that that will have a few points headwind on growth for 2025. And I think those are the main pieces that bridge you from some outperformance in Q4 to how we're positioning 2025.

And what we're putting in front of you here is a forecast that we feel confident executing against and continue to play that out over the year.

Brian Nagel -- Analyst

No, that's very helpful. That's helpful. And then, I guess, the follow-up question I have, and it's going to be a follow-up to that. But longer term, I know we've discussed this in the past, but as you look at the business today and again, the guidance you've laid out there for '25, what are the building blocks to get FIGS back to that normalized growth algorithm? I mean, what has to happen? And I guess, within that context of that question is how much of it is the environment versus levers that you as the management team can pull here?

Sarah Oughtred -- Chief Financial Officer

Great. So how we're thinking about those building blocks is, first and foremost, the U.S. business is the biggest part of our business, and it has been declining. And so, our efforts here and the investments that we are making are really about reinvigorating growth in our U.S.

business, and that will be really important for the long-term algorithm. I think within that, we've also seen declining growth rates in our active customer base. So it's really important that we reinvigorate growth there as well. So those are two important blocks just in terms of driving the upside ahead of where it has been, along with continuing to build out our retail, international, and teams channels.

And then, as that flows through the P&L, it's really going to be that top-line expansion that's really going to help us leverage our bottom-line costs and help us reinvest into the growth for future.

Brian Nagel -- Analyst

Got it. OK. Appreciate it. Thank you very much.

Sarah Oughtred -- Chief Financial Officer

Thanks.

Operator

Thank you. Our next question goes to John Kernan of TD Cowen. Your line is now open.

John Kernan -- Analyst

Hey, good afternoon. Thanks for taking my questions. Sarah, how should we think about both selling and G&A? You gave some color earlier in the prepared remarks. Selling, obviously, has the several hundred basis points of supply chain fulfillment costs in fiscal '24 in it.

How does that unwind, so to speak? And then, within G&A, what are the drivers of G&A outside of stock-based comp in fiscal '25?

Sarah Oughtred -- Chief Financial Officer

Yes, for sure. So as you -- we have the transitory costs related to our DC transition this year. Those should normalize into next year. That does get partially offset with just our higher fixed costs from operating a much bigger and state-of-the-art facility, as well as our increased mix of international and the impact of that on our selling costs.

So still some leverage overall year over year expected, but there are still added costs related to operating this new facility. And then, as we go into G&A, I mean, first on marketing, so we will have a lower rate of marketing, which is recovery of where we invested into Olympics, but then now reinvesting back into the business to really drive top-line growth. And then, into the other components of G&A within our total and our people costs, we do have the run rate of investments that we've made into -- from 2024, and we'll continue to invest in resources to support the build-out of our teams needed to grow the business, and so, there will be an impact there. And then, I did outline already the stock-based compensation, so that will go down by $12 million year over year.

And so, just something to consider is 13 -- I'm sorry, it was $13 million year over year that it's going to go down. And so, something to consider is that while the adjusted EBITDA guidance is flat year over year, because the add-backs into the adjustments are lower this year, our EBITDA is actually going to be up year over year. And so, that is supported by the reduction in stock-based comp with the other factors that I've outlined here.

John Kernan -- Analyst

Sure. Got it. Just a quick follow-up. It looks like rest of the world and non-scrubwear lifestyle are going to take an increasing portion of the mix as they did in the fourth quarter.

Just curious how both the international channel and these non-scrubwear categories from a profitability standpoint, particularly on the gross margin line, flow through.

Sarah Oughtred -- Chief Financial Officer

Yes. So for international, so we have been steadily increasing our proportion of international and expect that that will continue into 2025. International is profitable for us. We do have a different cost profile with some added costs as it relates to duty and shipping and marketing but still really happy with the profitability there.

And in terms of non-scrubwear, so about each year, we've been increasing the proportion of that business by about a point, and we would play forward that same expectation for -- as we go into 2025.

John Kernan -- Analyst

Got it. That's helpful. Thank you.

Sarah Oughtred -- Chief Financial Officer

Thanks, John.

Operator

Thank you. Our next question goes to Dana Telsey of Telsey Group. Your line is now open.

Dana Telsey -- Analyst

Hi, Trina. Hi, Sarah. I hope your homes and everyone's homes are OK in L.A. and that everyone is all OK.

Trina Spear -- Co-Founder and Chief Executive Offiver

Thank you.

Dana Telsey -- Analyst

On the product side, Trina, you had mentioned about other categories and the opportunities. As you think about reactivating customers, where are you on that journey? And what should 2025 be like in terms of those new product category opportunities? Or is 2025 more a year of execution? And then, just following up on that, any tariffs, China, how are you preparing? And is there anything in the guidance for tariffs?

Trina Spear -- Co-Founder and Chief Executive Offiver

Thanks, Dana. I'll start with the product question, and then, you can take the tariffs, Sarah. So Dana, we're seeing really great signs of normalization in actually our repeat frequency and our kind of business-as-usual days, which is great to see, and that is a function of awesome style and color launches. And you saw our Isabel wide leg last year, that was incredibly successful.

Our scrub legging, which I mentioned, our rib and waffle underscrubs are new additions to our underscrub category, those are really taking off. Our float jacket, I don't know if you have our float Dana, but you should try it out in the outerwear category, as well as our new 3447 through our partnership with New Balance. So we're really focused across the layering system. What are our healthcare professionals wearing to work, at work, from work, on shift, off shift, head to toe.

And building out these fabric platforms across category is where we're focused. It's where we really built a lot of foundation in '24, and there's more to come in terms of building out these platforms in 2025. And so, very much focused on testing new fabric platforms, testing new products, and then, leaning in and doubling down on what's working. And so, that's what you'll continue to see throughout the year.

It's all about, obviously, innovation and execution, and balancing those two as we go. So I'll pass it over to Sarah.

Sarah Oughtred -- Chief Financial Officer

Yes. So on tariffs, we have minimal direct exposure to China on our finished goods. We have some indirect exposure from partners like New Balance that would have exposure to China. We have no exposure to Mexico or Canada.

So overall, immaterial exposure to the current tariff plans.

Dana Telsey -- Analyst

Got it. And then, just, Sarah, as you think about the cadence of the year and improving the business, are there any meaningful things as you think of the quarterly things? Obviously, going up against the Olympics advertising from last year, which was more one-off, how do you think about the cadence of the year? Anything we should be mindful of? Thank you.

Sarah Oughtred -- Chief Financial Officer

Yes. Sure. So the promotional adjustments will be more outweighted impact in 2H. From an adjusted EBITDA perspective, Q1 will likely be our lowest, Q4 next lowest, and then Q2, Q3 should be fairly consistent.

Dana Telsey -- Analyst

Thank you.

Operator

Thank you. Our next question goes to Lorraine Hutchinson of Bank of America. Your line is now open.

Lorraine Hutchinson -- Analyst

Thanks. Good afternoon. I wanted to focus on marketing for a minute. As you lap the Olympics marketing, was the message that you will take those savings and reinvest them? Or do you expect some rate leverage on that line item?

Sarah Oughtred -- Chief Financial Officer

We do expect some rate leverage on that line item but not down to historical levels as we will be reinvesting a portion of those to drive the growth plans for future.

Lorraine Hutchinson -- Analyst

And then, can you talk about where some of those incremental marketing investments will be focused?

Sarah Oughtred -- Chief Financial Officer

Yes, definitely. So we will be investing into top of funnel to drive our brand forward. We're going to be making some strategic investments across the customer funnel. We have opportunity to add more personalization to our digital experience, more localization internationally.

And it's really about building the teams needed to scale our international teams and community hub businesses. So overall, we need brand marketing and people, and we need those to work together faster.

Lorraine Hutchinson -- Analyst

Thank you.

Operator

Thank you. Our next question goes to Matt Koranda of ROTH Capital. Your line is now open.

Matt Koranda -- Analyst

Hey, guys, good afternoon. Maybe if we could just spin back to the change in promotional strategy. I guess the question I have is why now? Like why do we need to shift away from the prior promotional stance? Was it hurting the brand? Were we acquiring sort of less-desirable customers through those promos that you did? I just wanted to get a sense for also what the new promotional posture could look like. It sounds like no sitewides necessarily, but will there still be promotions around Nurses Week and sort of the other typical events?

Sarah Oughtred -- Chief Financial Officer

Yeah. So it's really about shifting away from the transactional approach that was needed to reduce our inventory balance. more toward strategic promos that celebrate healthcare professionals and more custom strategies along the funnel. We've made really good strides in the past two years in working down our inventory position that did require certain promo levels to achieve that, which we can shift away from now because we are in an improved inventory position.

So we're still going to be having promos that celebrate our healthcare professionals, but we can't pull back in other areas. We are excited that we're seeing great strength in our business-as-usual days, and so, we want to continue to support that. And overall, it's really about solidifying our long-term brand positioning, which we think is very important.

Matt Koranda -- Analyst

OK. That makes sense. And then, just on the overall healthcare apparel industry, I'm curious for 2025. What do you think scrubwear demand should look like for the year overall? I guess, you guys have been talking about and others have talked about sort of an extended replacement cycle on scrubs for the last couple of years.

But it does seem like we should be getting a refresh over the next year or so that should help with some growth. So what's embedded in your expectations just for the industry overall and for healthcare professionals' sort of behavior?

Sarah Oughtred -- Chief Financial Officer

Yeah. So I mean, the guidance would imply a negative decline in scrubwear, but we really feel that is more to do with our promotional cadence. So outside of that, we are seeing improvements in our customer trends. Traffic is up.

Our repeat frequency is up. We are seeing great improvement in our lapsed guests coming back, and we are driving more business outside of our promotional period. So our customer is very engaged with that -- with us, and we are seeing good trends start to happen there. And yeah, I think those are the main pieces there.

Tom Shaw -- Senior Vice President of Investor Relations

Operator, we'll take the next question, please.

Operator

Thank you. We'll now be moving on to our next question. Our next question comes from Ashley Owens of KeyBanc Capital Markets. Your line is now open.

Ashley Owens -- Analyst

Hi. Good afternoon. I wanted to start on non-scrubs in the quarter. I think you mentioned it came in at 24% of the business.

In the past, I think the highlighted target was to have an 80-20 split longer term. Is that still the goal here? And then, within the gross margin guide, I'm more curious about, are you planning the mix to be similar to what we saw in 4Q? Or what are you assuming there?

Sarah Oughtred -- Chief Financial Officer

Yeah. So just something to keep in mind is that each Q4, we do see that proportion of non-scrubwear increase, but on the year, we were still 80-20. And that proportion has been increasing about a point each year. So we would expect that to continue forward where we will likely see a small increase in the proportion of non-scrubwear, and then, that will over-index in Q4 of next year as well.

And sorry, can you just -- you had a question on -- you got it. Yes. OK. So what was your question on gross margins, sorry?

Ashley Owens -- Analyst

I think that answers it because it shifts -- effective shifts longer term, just how that backs into the gross margin guide, basically, for the year. But I think I can piece that together. So I did have a second one just on the sizing initiatives you talked about. I know it was aimed for January 2025, but you highlighted some further calibration needed on the fit side.

You'll be marketing the change in the back half of '25. So from where we were three months ago, maybe just where you identified some of those additional opportunities that led to your decision to further calibrate the assortment and push out some of that new messaging?

Trina Spear -- Co-Founder and Chief Executive Offiver

Yeah. I mean, I think fit is super important. As you know, we've talked about it a lot. It's really important for our healthcare professionals of all sizes, and it's important to look at where we are.

We've made a lot of progress with our fit efforts, but we really want to ensure that we get it right. And so, we're taking a bit more time and recalibrating a few pieces of it. And so, we'll be coming out in the second half of this year with the full transition and related messaging. And despite this timing push, we think the extra work is the right move.

And ultimately, we really want to get this right for all of our new and existing healthcare professionals.

Ashley Owens -- Analyst

Appreciate the color. Thanks.

Operator

Thank you. Our next question comes from Adrienne Yih of Barclays. Your line is now open.

Angus Kelleher -- Barclays -- Analyst

Hi. This is Angus Kelleher on for Adrienne. Thanks for taking our question. I'm going to ask a follow-up on Ashley's question and ask if you could provide some more details on the non-scrubwear category seeing as it posted a quick recovery, as you pointed out.

Just what drove that, and if there's any exciting launches planned on that front that you could share? And finally, how are the in-stock levels trending, particularly for the footwear category? Thank you.

Sarah Oughtred -- Chief Financial Officer

Yeah, sure. So in Q3, we did have the impact from footwear performing below our expectations, and that was partly related to supply on footwear. That was rectified in Q4, and we did see outperformance versus our expectations in the footwear category, and that was part of what drove our beat within the quarter as well. And so, as you move into Q4, you have two factors happening as it pertains to non-scrubwear.

So we did see the return of footwear in terms of its penetration. And then, we also saw good success with our loungewear, with our waffle and ribbed underscrubs, and outerwear. And typically, Q4 has a higher penetration of non-scrubwear, so it will be quite high in Q4. And as we go into 2025, Q1, that will moderate.

But overall, we expect there to be a proportion shift to a slightly higher proportion of non-scrubwear versus the annual of 2024. And in terms of what we were excited about within footwear in the quarter and more recently, we have launched the 3447 with the zipper, and that saw a good success in the quarter and something that we're excited about going forward, along with our continued excitement around our 3447, which is our proprietary design shoe with New Balance for healthcare workers.

Angus Kelleher -- Barclays -- Analyst

Great. Thank you. I'll pass it along.

Operator

Thank you. Our next question comes from Nathan Feather of Morgan Stanley. Your line is now open.

Nathan Feather -- Analyst

Hey, everyone. Thanks for the question. Maybe to go a little higher level. We've seen some conflicting signals on consumer spend more broadly.

Interested to hear, what are you seeing in the health of consumer? Anything to read into kind of the 4Q strength there, and any key differences by income to call out? Interested to hear how that's evolved over the past few months and into 4Q. Thank you.

Sarah Oughtred -- Chief Financial Officer

Yes. So our AOV within the quarter was down 1%. That was the lowest decline rate of any quarter within 2024. And our trailing 12-month revenue per customer is also down 1%.

A lot of that is being driven by our UPT, but we are seeing -- starting to see some more recent favorability in terms of how frequency gets interplayed in there. So that is a dynamic. Frequency isn't going to show up in the average customer base because it's just those existing customers that are buying more frequently. Yeah, I think those are the main points there.

Nathan Feather -- Analyst

That's helpful. And then, on the inventory, you mentioned pulling back on promotions that's partially due to the better inventory position. Would you characterize -- are you back to normal inventory levels? And if not, how far are you? And what's the path to return there now that you're stepping back from promotions a little bit?

Sarah Oughtred -- Chief Financial Officer

Yeah. Sure. You did cut out there, so I'm going to go with just giving you some color on inventory, and then you can let me know if there was something that I missed. But our inventory was down 3% year over year, and we've been spending the better part of two years to really bring down that inventory position.

So we are down 35% from our highs, which is great. And to get there really require discipline within our buys, as well as promotions to exit that inventory. So we are at a better level. I think there's still pockets of inventory that we can continue to work with, but we are buying with more conviction, buying into our new innovation, including formats, and continuing to buy into our color that has been really successful.

So what we outlined in the script is that we expect the growth rate of inventory to moderately exceed our revenue expectations.

Nathan Feather -- Analyst

Great. And that's it. Thank you.

Operator

Thank you. There are currently no questions waiting at this time. [Operator instructions] There seem to be no questions waiting at this time, so I'll pass it back over to Trina for any further remarks.

Trina Spear -- Co-Founder and Chief Executive Offiver

Thank you. I'm just going to pass it over to Tom Shaw for one point of clarification.

Tom Shaw -- Senior Vice President of Investor Relations

Thanks, Trina. Just to clarify a question that Dana had around EBITDA margins throughout the year. As we indicated, our EBITDA margin would be the lowest in the first quarter. You should see it step up in the second and third quarters with the strongest year-over-year improvement in the third quarter, but the highest EBITDA margin will be planned in the fourth quarter.

So I just want to make sure we clarify that. I'll pass it back to Trina.

Trina Spear -- Co-Founder and Chief Executive Offiver

OK. Thank you so much, everybody. We'll see you on the next one.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Tom Shaw -- Senior Vice President of Investor Relations

Trina Spear -- Co-Founder and Chief Executive Offiver

Sarah Oughtred -- Chief Financial Officer

Brooke Roach -- Analyst

Brian Nagel -- Analyst

John Kernan -- Analyst

Dana Telsey -- Analyst

Lorraine Hutchinson -- Analyst

Matt Koranda -- Analyst

Ashley Owens -- Analyst

Angus Kelleher -- Barclays -- Analyst

Nathan Feather -- Analyst

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