Hims & Hers is a picture of DTC health, despite the economy

In the most recent quarter revenue was $145M, growing 95% YoY as subscribers nearly doubled to 991,000. Average order value outperformed inflation, expanding 12% while total orders grew 73%. These drivers are the primary metrics the company uses to track top line performance, with Orders Per Subscriber, Items Per Order, and Average Subscriber Length being secondary metrics that saw significant discussion on recent earnings calls. The management team pointed to longer average subscription times (more months purchased) and customers mixing toward higher priced products as primary drivers of increased AOV.

In Q3 2022 gross margin was their highest on record at 79%, with margin expansion coming from higher mix of online vs wholesale and increased scale in fulfillment operations. Gross margin has been extremely stable over the course of the last two years, with each quarter landing between 73.5% and 79%. Adjusted EBITDA in the quarter was -$6M and the company is forecasting its first quarter of Adj. EBITDA profit in Q4 2022. The standout in their expense base were the very high marketing costs as a percentage of revenue, typically averaging in the mid 50s and acts to offset their very high gross margins.

While the company has forecasted ever higher sales throughout the year, increases to full year Adj.EBITDA projections have not occurred at the same rate. Impressive top line performance has undoubtedly been a good thing in this case, however the significant deviation from their initial February forecast does imply limited visibility on sales trends.

The company’s growth pillars include Brand, Technology and Experience. Investments in these focus areas are stress tested using a robust investment framework where new initiatives must meet certain requirements:

1. Payback periods that are under 1 year.

2. Must drive long term growth while capturing improved unit economic benefits from increased scale.

3. Higher ROI if it is a long term investment.

On Brand, the company has pursued a similar pivot as other DTC companies, moving toward at scale brand awareness marketing. Their pursuit of high visibility and high impression brand placements is intended to drive long term brand equity. They’ve rolled out HIMS hair ads starring Rob Gronkowski during NFL Football games and HERS online video placements on Disney’s Hulu streaming platform. Their Technology investments have also been heavily touted by the executive team, as Q1 2022 saw the rollout of their iOS platform and during Q3 2022 their Android platform was released. Early responses to the Android app have been “extremely positive”. In addition to these mobile apps, they’ve pursued improved routing technology to support customer care questions. This system directs online customers to the right products and consultation offerings and creates the feel of a personalized platform.

Their Experience pillar has been focused on their new 25,000-square-foot owned pharmacy in Phoenix, where they are seeing significant gains in margins and customer experience performance by interacting directly with customers in person. Their broader national business is supported by the 300,000-square-foot Columbus, Ohio, fulfillment facility. The HERS product line has also been significantly expanded this year with 6 new Wellness Supplements and a skincare product line. Both of these new product lines are available at CVS Pharmacy, which is expected to drive growth in Wholesale Revenue.

It is impressive to see their growth completely unaffected by recent macro trends, which was a point of repeated questions from Wall Street analysts on their most recent earnings call. The company is maintaining impressive growth and raising guidance as other consumer categories appear to be wavering. We believe that this is attributed to their unique subscription-based business model that solves a “high need” in a market (health) and their competitors like Teladoc are not exactly aligned to pose direct competition. Management seems to see benefits of scale playing out going forward and predicts Adj. EBITDA profitability will continue going forward. They intend to show a full picture of their steps to operating profitability during the Q4 earnings call. We’ll be watching for continued subscriber growth and leverage gains in marketing spend.