The Honest Company, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Honest sells consumer products through digital and retail channels, primarily in Diapers and Wipes, Skin and Personal Care, and Household and Wellness. Results are unaudited and presented against Q1 2021.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Revenue | $68.7 million | $81.0 million; down 15.2% |
| Gross profit / margin | $20.6 million / 30.0% | $28.4 million / 35.0% |
| Operating expenses | $35.2 million | $32.5 million |
| Operating loss | $14.5 million | $4.1 million |
| Net loss | $14.6 million; $0.16 per share | $4.5 million; $0.13 per share |
| Adjusted EBITDA (non-GAAP) | $(10.3) million | $(0.1) million |
| Net cash used in operating activities | $14.7 million | $12.0 million |
| Cash and cash equivalents; short-term investments | $44.7 million; $33.4 million | At March 31, 2022 |
At March 31, 2022, current assets were $201.8 million and current liabilities were $52.3 million. The company had no borrowings under its $35 million revolving credit facility; $28.7 million remained available after $6.3 million of letters of credit. It reported compliance with the facility’s net leverage covenant. Operating lease liabilities totaled $43.0 million, recognized following adoption of ASC 842 in January 2022.
Material changes and management commentary
- Revenue declined across all categories: Diapers and Wipes fell 12.7%, Skin and Personal Care 19.0%, and Household and Wellness 20.1%. Digital revenue decreased 19.3%; Retail decreased 10.7%.
- Management attributed lower sales to reduced digital traffic amid higher digital advertising costs and consumers returning to stores; supply-related out-of-stocks; the absence of prior-year beauty liquidation sales and a retail sanitization program; and weaker demand for sanitizing and disinfecting products.
- Gross margin contracted 5 percentage points. Higher input, freight, transportation and warehouse labor costs, trade promotions, and fixed-cost deleverage outweighed price increases, favorable product mix and cost savings.
- SG&A rose 17.5%, primarily reflecting increased stock-based compensation and public-company insurance costs. Marketing expense fell 5.0%; research and development expense rose 27.3%.
- Inventory increased to $83.4 million from $75.7 million at year-end, principally reflecting purchase timing. The company recorded a $0.6 million write-down for sanitizing and disinfecting inventory in the quarter; it had recorded $5.6 million for this inventory in 2021.
- Operating cash outflow exceeded the prior-year period, with inventory purchases a significant use of cash. Investing activities provided $8.6 million, primarily from maturities of short-term investments. Management stated existing cash, cash equivalents and investments should cover short- and long-term working capital and capital expenditure needs, while noting that future requirements depend on operating performance and spending.
Outlook, risks and unusual items
- No numerical revenue, margin or earnings guidance is provided. Management expects elevated digital advertising costs and higher input, labor and transportation costs to continue affecting results in 2022. Price increases and productivity initiatives are intended to offset cost pressure, but management cautioned that margin expansion may remain difficult.
- Key uncertainties include supply-chain disruption and out-of-stocks, limited supplier and fulfillment-provider dependencies, demand forecasting and excess inventory, retailer order timing, inflation, consumer spending, and changes in channel and product demand. Management noted supply constraints in several core products and raw materials.
- On April 20, 2022, the company signed a three-year distribution agreement, with a potential two-year extension, for Greater China, including Hong Kong, Taiwan and Macau.
- On May 2, 2022, after quarter-end, the Nevada Tax Commission overturned a tax deficiency decision against the company. The company said it intends to request a refund of taxes and interest paid; the amount of any refund is not stated.
- Other unresolved matters include a California Proposition 65 suit concerning lead in Diaper Rash Cream and securities and derivative litigation related to the IPO. The company said outcomes and potential losses could not be estimated.
- ASC 842 adoption changed lease balance-sheet presentation and reclassified the build-to-suit arrangement; management said the adoption did not materially affect the income statement or cash flows. The quarter included $0.8 million of revenue recognized through an inventory-for-marketing and transportation credits arrangement.
Important facts for investors to verify
- Whether revenue stabilizes, particularly digital sales and the core Diapers and Wipes and Skin and Personal Care categories.
- Whether price increases and productivity savings can offset inflation and restore gross margin.
- Inventory levels, sell-through and potential further write-downs as sanitization demand remains weak.
- Cash burn and liquidity trajectory, including operating cash flow and the availability and covenant conditions of the revolving facility.
- Developments and possible financial effects of the litigation, Nevada refund request, and Greater China distribution agreement.
- Stock-based compensation and dilution: $44.5 million of unrecognized compensation for unvested RSUs was expected to be recognized over a weighted-average 3.5 years.