The beauty industry has a bad habit of labeling everything as a trend, even eliminating toxic ingredients. Clean beauty is no exception of this phenomenon, resulting in many brands using the term vaguely without a real green commitment. However, consumers are demanding better quality, cleaner and more eco-friendly beauty products. Jessica Alba's Honest Company HNST was one the first brands to lead the way back when the state of clean beauty was both expensive and terrible. Not to mention that not everything natural is necessarily good, not to mention that some natural ingredients such as almonds are being overused and linked to deforestation.
Unveiled in 2015, revamped in 2018 when the company opened its in-house lab, it's been a bit more than two months after Honest made its public debut.
The IPO
Honest was able to sell nearly 26 million shares at $16 each (19.4 million of those coming from selling stockholders) raising $412.8 million at a reported valuation of $1.44 billion upon launch. With its public debut, the company's mission, "to drive the clean lifestyle conversation in the industry, inspiring everyone to love living consciously" accelerated to new heights. At the time of the IPO, the case was made for an established clean brand in its niche, a reasonable valuation and significant room for expansion. So why did the stock head in the wrong direction after its big first-day pop?
Q1 Figures
Honest's share of the diaper market is under 1.5%. International revenue in 2020 was 2% of the company's total, or in the range of just $6 million. There are new retail partners to find, and new doors and shelf space to add with existing distributors, with Honest citing success on both fronts with Target TGT. Marketing spend rose $5 million YoY with revenue excluding the inventory transaction increasing about $5.3 million, our a significant part was due to the launch of the company's new Clean Conscious Diaper so part of the return on that spend will be seen in the second quarter. Still, to some extent, Honest paid up for at least some of its top-line growth.
Management warned on the call that consumption is outpacing shipments in the second quarter which means that some shipments slipped into the tail end of the first quarter. All told, looking closer the top-line performance does not look nearly as strong as the 12% figure suggests.
There are also bottom-line concerns. Adjusted EBITDA dipped from a $4.5 million profit the year before to a modest loss of $132,000.
In simple words, this is a company that still has a lot of work left to do. Despite being helped by the pandemic ‘big time', 2020's revenue of $300 million is less than four years ago. But then again, $28 million was forfeited by ceasing sales of ‘non-core' products. However, even when this is taken out of the equation, the annualized revenue growth rate was a low-single-digit.
Revenue increased 12% YoY and that growth came off the top of difficult comparison: sales increased 36% YoY during the first quarter of 2020.
New Packaging
The latest launch is a collection that also features sustainable packaging from compostable "tree-free" cartons made from upcycled sugarcane byproducts. Alba described secondary packaging as dope, because it's taking basically something that would be used as trash, sugarcane husks, and then turning it into paper. No one can disagree that turning garbage into something beautiful is pretty cool. This innovative packaging will be rolled out to other products as well. Yes, you've read it right: Honest Beauty products are wrapped by 100% recyclable or compostable cartons, and completely tree-free as literally no trees were harmed.
The new range, which launched on July 19th on Honest.com, uses the boxes, as well as aluminum tubes, tin compacts, glass, PCR, and refillable jars. Additionally, all orders from Honest.com are now carbon-neutral. Moreover, that's just a snapshot of the changes the brand is implementing,
The company, which launched direct-to-consumer, has an omnichannel approach and can be found in about 32,000 retail locations across the U.S., Canada, and Europe, partnering with Costco COST, Target, and Amazon.com Inc AMZN since 2013, 2014 and 2017, respectively, while continuously improving its website experience to better understand and track shopping behavior.
Takeaway
There's no arguing that Honest has clear opportunities for growth but until then, it needs either a cheaper price or accelerated growth to kick in. Revenue growth has been solid, but the pandemic fueled 2020 results and the long-term trend looks far more muted. Despite being a brand ahead of its time and definitely worth watching, Honest still needs to impress with its figures.
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