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Honest Co Faces Real-World Challenges Like Rising Costs, Declining Diaper Sales

Six weeks after making its much-hyped initial public offering (IPO) trading debut, the natural diaper, skin care and household cleaning product maker Honest Company has swapped the glamor of being founded by a Hollywood actress for the real-world trials of growing a business in a costly and competitive marketplace.

In delivering its inaugural financial report since becoming a public company, Honest said its first-quarter sales rose 12 percent to $81 million for the three months ending March 31, but a 30 percent increase in expenses saw it post a $4.5 million loss compared to a small profit a year ago.

On a category basis, Honest’s diaper and baby wipe unit, which accounts for 60 percent of its revenue, fell 2 percent from a year ago as pandemic-era pantry-stocking disappeared.

On the plus side, the LA-based omnichannel retailer said its skin and personal care business grew 42 percent, accounting for about one-third of total revenues, while its small household and wellness product line, which amounts to about 6 percent of sales, grew by 53 percent.

“What’s going to be important, is to really understand and see where the cost structure is going to be moving forward, [given] the inflation that everyone’s seeing,” Honest CEO Nick Vlahos told investors and analysts on the company’s earnings call. “We’re monitoring that right now and today we have sufficiency within our plans as it pertains to mitigation, but that’s something that we’re closely looking at.”

Digital Versus Retail

Honest did not provide Q2 or full-year guidance but said its Q1 revenue split was 52 percent digital sales and 48 percent of sales done through its retail partners, including Target and Whole Foods. However, on a sales growth basis, Honest’s digital sales rose 2 percent from the peak COVID quarter of 2020, while its retail sales posted a 25 percent year-on-year advance.

“Overall, we have seen increased consumer willingness to get back into stores as consumer behavior in response to the COVID-19 pandemic changes and we’ve seen a channel shift and an acceleration in revenue growth within our retail channels,” Vlahos said, adding that the company was well positioned to capture this growth via with it omnichannel strategy.

As a growing business, Honest is actively pursuing new customers, and according to CFO Kelly Kennedy the company’s share of Generation Z consumers had grown to 14 percent from 9 percent, while its male user base rose to 20 percent from 18 percent the year before.

“We think that’s really exciting because it means we have more appeal across a broader audience and, as you well know, we have predominantly been a female focused brand,” Kennedy told analysts, noting that the firm was working on broader marketing campaigns that appeal to male consumers.

Rocky Start

Honest may have been a publicly traded company for a month but it has been in operation since 2012 when it was founded by actress/activist Jessica Alba, who currently serves as the company’s chief creative officer and is also the “face of the business” and purveyor of wellness, beauty and lifestyle tips.

After pricing its shares at $16 on May 5, Honest saw its newly minted shares rally for about an hour to roughly $24, and then begin a month-long 40 percent slump. The stock has since stabilized at about $17 per share leaving the consumer products outfit with a market valuation of $1.5 billion.

By comparison, Pampers maker Procter & Gamble — which is Honest’s largest competitor in its core diaper business — is worth about $325 billion and delivered over $18 billion in global revenue in its most recent quarter.

Despite being exponentially dwarfed in size, marketing muscle and the ability to get supermarket shelf space compared to many of its rivals, Honest’s leadership team is confident that its in-house product development team and loyal customer feedback loop are competitive advantages.

“We’re focused on disrupting large consumer categories,” Vlahos said, pointing to a $130 billion total addressable market for diapers and wipes, skin and personal care and household and wellness, of which only $17 billion falls into the “natural products” space.

“Importantly, the natural market is projected to grow in the high single digits through 2025, that’s six times the rate of the conventional market, and giving us a unique advantage,” Vlahos added.

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