Member Exclusive   //   March 5, 2024

DTC Briefing: Latest earnings show positive signs in startups’ quest to achieve profitability

This is the latest installment of the DTC Briefing, a weekly Modern Retail+ column about the biggest challenges and trends facing the volatile direct-to-consumer startup world. More from the series →

Recent earnings indicate that public DTC brands may finally be finding their footing.

Companies like Figs, Hims & Hers Health and Warby Parker kicked off the year with an increase in sales, with some reporting narrowing losses while others currently operating profitably. While the current economic factors are impacting soft sales, public DTC brands say that their investments in both retail and e-commerce are beginning to pay off. 

Below is a breakdown of what the latest earnings report means for the DTC industry as a whole.

Signs of healthy growth
Hims & Hers, which was founded in 2017 and went public in January 2021, is one company seeing signs of growth. During its first few years as a public company, its revenue grew at a slow pace. But 2023 catapulted the telehealth startup’s business. 

Last week, Hims & Hers reported a fourth-quarter revenue jump of 47%, hitting $246.6 million. In its 2023 full-year earnings, Hims & Hers recorded $872 million in revenue, a 65% increase over 2022. The fourth quarter also brought the company a modest net income of $1.2 million, an improvement over the $10.9 million in losses during the same period the previous year. 

According to the company, it expects to achieve profitability sometime in 2024, with CEO Andrew Dudum pointing to specific services that are driving the business including mental health, dermatology and weight loss treatments, which launched at the end of last year. Dudum said each of these programs could generate over $100 million in revenue in 2025. Hims & Hers also predicts this momentum will continue in the first quarter of 2024, projecting revenue growth of at least 40% over last year, to between $267 million and $272 million. 

Meanwhile, DTC growth is driving revenue increases for other historic retail brands. Birkenstock, which went public last October after over a century as a family-owned business, reported that revenue was up 26% year-over-year in the first quarter, including sales up by 14% in North America. Birkenstock’s direct-to-consumer business, in particular, accounted for 53% of overall revenue. 

The footwear brand, known for its range of sandals, also credited the growing demand for its closed-toe shoe styles like clogs and boots, unlocking a new segment of winter-time revenue.

Birkenstocks are usually a warm-weather staple, but the company is increasingly growing its winter-friendly footwear, which includes clogs and boots. “It’s a broadly-based closed-toe business right now, and I think that’s quite significant to say that this was the first time that non-sandals were the larger percentage of our business,” David Kahan, Birkenstock’s president of the Americas, said on the earnings call.

The company also stuck to its annual guidance, saying it expects sales this year to come in between 1.74 billion euros and 1.76 billion euros ($1.89 billion and $1.91 billion), which would mean year-over-year growth of between 17% to 18%. In a memo, analysts at HSBC Global Research wrote that Birkenstock’s performance sizable quarterly sales beat expectations and bodes well for the rest of the year’s performance, “pointing to the brand’s resilience in tough times.”

Gradually shrinking losses 
When an influx of DTC startups went public a few years ago, they quickly garnered a reputation for being unprofitable businesses. Since then, these publicly traded companies have begun making strategic investments in an effort to grow their businesses, reach new customers and turn cash losses into consistent profits. 

Over the past year, for example, Warby Parker has been on a quest to ramp down its marketing spend, then started to slowly increase it again, as it sought to find a healthier marketing mix that could drive more profitable long-term growth for the company. Hims & Hers, on the other hand, expanded its platform offerings into mental health and weight loss services to reach new customers.

As a result, these brands’ net losses are shrinking.

Warby Parker’s 2023 net losses shrank to $63.2 million for the full fiscal year, compared to $110.4 million in 2022. Similarly, Hims & Hers recorded a net loss of $23.5 million for all of 2023, compared to $65.7 million in 2022.

“If Warby’s trajectory from last year continues and they continue to reduce losses, maybe the operations will stabilize in the next year,” Kirthi Kalyanam, professor and executive director of professor and executive director of the Retail Management Institute at Santa Clara University, who focuses on DTC businesses, said. Kalayanam said some of the latest figures show that brands are figuring out expansion while keeping profitability in mind. 

Kalayanam pointed to the medical apparel brand Figs as an example of a DTC brand that is continuously performing well. Figs has been in relatively good financial shape since going public in May 2021. The company is currency profitable and debt-free, with nearly $250 million in cash, cash equivalents and short-term investments on its balance sheet.

In 2023, Figs saw active customers increase 13% year over year, to 2.6 million customers. For the full year, the company revenue was $545.6 million, an increase of 7.9% over 2022. According to the company, the sales were primarily driven by an increase in orders from existing and new customers, with some being contributed to an increase in AOV.

“Looking back on 2023, we delivered strong growth and profitability, reduced inventory levels by 33% and generated cash flow from operations of $100 million, while advancing a number of our growth strategies,” co-founder and CEO Trina Spear said during the earnings conference.

However, she said that looking ahead to 2024, “we expect demand to be impacted by macroeconomic factors, and we also recognize the healthcare workforce-related stress that is affecting our community.”

“We are taking swift action to rebuild momentum and reignite the word-of-mouth flywheel that has driven our success as a digital brand,” Spear continued. “We are confident that our strategic initiatives, supported by our robust balance sheet will unlock the long-term potential of Figs.”

Kalayanam said that companies like Figs and Warby Parker benefit from operating in categories that are deemed more essential than other consumer products, like beauty or apparel. However, these brands specialize in offering an elevated take on their products, such as stylish medical scrubs and affordable eyeglasses. “In the big picture, this is not a fashion item and is considered essential for the health-care segment,” Kalyanam explained. 

Indeed, Figs has built a strong brand image and branding around the health workers community, which helped it grow exponentially during the early pandemic years. “The concern is whether Figs will max out their potential market cap at some point,” Kalayanam added, as the brand’s growth is largely coming from the medical workforce.

Balancing near-term investments and long-term growth
Unlike Figs, Warby Parker’s growth has largely come from its investment in new stores, which offer both products and services like eye exams. In 2023, Warby Parker opened roughly 40 new stores, 10 of which opened their doors during the fourth quarter — bringing its total count to 237 stores. The company previewed plans to eventually have 900 stores across the country. For the full year 2023, Warby Parker’s average revenue per customer increased by 9.3%, to $287. For the year ahead, the company expects revenue to grow between 12% to 13% as it opens about 40 more stores to help it expand into new markets.

Experts said that companies like Warby Parker are in the growing pains phase, which many retailers go through. Brian Ehrig, a partner in the consumer practice at Kearney, described Warby Parker as “facing a classic retail growth problem.” 

Ehrig explained that when a young business reaches peak sales from its core business but still has to grow, it has to find new ways to reach customers. “Unfortunately, investors aren’t excited about their increasing verticalization at the moment because they deliver lower margin sales,” Ehrig said. “But long term, this makes sense because it’s a better experience for their consumer.”

Still, DTC companies’ losses are generally showing signs of narrowing.

For the direct-to-consumer brands across the board, Kalyanam said, external challenges will likely continue through this year. “As we’ve seen, growth can peter out,” he said. “So it will be interesting to see whether they’ll continue marketing spend or pull back to stay profitable.” 

What I’m reading

  • In a new story, the Business of Fashion asks whether Everlane can still reach its goal of becoming a $1 billion brand.
  • Rent the Runway announced it’s bringing on a new marketing chief to help regrow the company.
  • Piercing studio Studs plans to open 10 stores in 2024, including locations in San Diego, Los Angeles, Atlanta, Boston, New York and Washington, D.C.

What we’ve covered

  • After experiencing some hiccups with the integration, some Shopify brands are warming up to Buy With Prime.
  • A look at why luggage brand Calpak launched a new baby gear collection.
  • At eTail West, DTC brands are thinking about AI, product drops & growth strategies.