Is HIMS Spending Too Much on Marketing?
This article was originally posted on X as a thread on August 14, 2024.
Yesterday, I posted a thread outlining a few reasons to buy Hims & Hers (HIMS), my second-largest position. As I expected, there were many comments from people concerned about its substantial marketing expenses. Let's briefly address that.
Yes, HIMS’ marketing spend is high, but it's all about creating brand awareness in a market with over 100M potential customers.
Here’s what Founder & CEO Andrew Dudum says about it:
"You know, we just believe we are in the earliest innings of the adoption curve for this business. Like we were talking about, there are 100M potential households in this country struggling with a condition that Hims & Hers can solve, and they are not getting treated. So when we think of the duration and the vision for this business, we're operating under a 10-year horizon. Being able to deploy that capital and build that brand across new categories like weight, dermatology, or mental health is incredibly strategic.
We know, and you can see this from the margins of the business, that there's room for improvement. We are verticalizing our infrastructure, automating solutions, and investing in CapEx for robotics. We know there's margin room and efficiency gains to be made over the coming years. We believe there's a clear path to achieving 20 to 30% long-term EBITDA margins. As we move towards that, we're not going to be shy about investing in the brand and pursuing that big opportunity."
I agree that this is the right strategy for $HIMS, and the operating leverage speaks for itself.
Over the last 2 years, HIMS has grown its Adjusted EBITDA margin from -6.6% to 12.5%.
Meanwhile, FCF has also improved and is now at a double-digit margin. HIMS has stated that it’s generating more cash than needed to sustain its rapid expansion.
With its impressive gross profit margin of ~80% (even if it decreases to the 70s), HIMS still has significant efficiencies to achieve.
It’s completely false to claim that the company cannot make a profit due to high marketing expenses.
It’s also worth noting that many companies around the world have successfully adopted strategies similar to HIMS.
To illustrate this, let’s consider L'Oréal, a globally recognized company that I have a strong appreciation for.
L'Oréal spends around 40-45% of its gross profit on marketing expenses, and it is logically a much more mature and established company than Hims & Hers.
For comparison, last quarter HIMS spent approximately 56% of its gross profit on marketing. Given that HIMS has greater efficiencies in terms of G&A costs compared to L'Oréal — due to their very different business models — this higher marketing spend is manageable. It is also normal for an early-stage company to invest more in marketing compared to a mature company like L'Oréal.
I am NOT comparing the two companies directly, as it wouldn’t make any sense. What I want to convey is that a significant marketing spend can benefit companies that need to create and maintain brand awareness. It is entirely possible to build a sustainable business with healthy bottom-line margins using this strategy.
Time will tell if this proves to be the best choice. This is just my opinion.
A significant concern raised is customer retention, which could be problematic if it’s too low. Here are some of the measures HIMS is taking to improve this metric:
• Personalization: As of last quarter, ~42% of customers are using a personalized solution, up from about 23% a year ago. This number is expected to exceed 80% in the short term.
• Multi-products: HIMS has recently begun developing multi-condition offerings, which increase value for customers and consequently enhance retention. These offerings are essentially pills that address two conditions in one, making them both more affordable and convenient for customers.
• Cheaper long-term solutions: As HIMS’ operating leverage improves, the company is passing on cost savings to its customers, particularly in its longer-term plans.
This doesn’t guarantee that the company will succeed in improving customer retention, but I believe things are moving in the right direction.
To wrap up, I believe HIMS is pursuing the right strategy to build the brand awareness needed for long-term success.
It’s perfectly fine if you disagree, but many other companies have successfully followed this path. You can’t claim that HIMS is doomed to fail solely because of this approach. As I mentioned, its operating leverage speaks for itself.
Thanks for reading! Let me know your thoughts on this.