Honest Company, Inc. — 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. The company is a digitally native consumer-products business with one operating segment and three categories: Diapers and Wipes, Skin and Personal Care, and Household and Wellness.
Financial performance and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Revenue | $313.7 million | $318.6 million |
| Gross profit / gross margin | $92.3 million / 29.4% | $109.2 million / 34.3% |
| Operating loss | $49.8 million | $36.8 million |
| Net loss | $49.0 million | $38.7 million |
| Adjusted EBITDA (non-GAAP) | $(22.5) million | $(3.5) million |
| Net cash used in operating activities | $76.3 million | $38.2 million |
At year-end, cash and cash equivalents were $9.5 million, short-term investments were $5.7 million, inventory was $115.7 million, and total liabilities were $94.2 million. Inventory increased $40.0 million from 2021. The company had no balance outstanding on its 2021 revolving facility at December 31, 2022. In January 2023, it replaced that facility with a $35 million revolving facility maturing April 30, 2026, secured by company assets and subject to a borrowing-base formula and financial covenants; the company reported no borrowings under it as of March 16, 2023. Management said existing liquidity, inventory reduction plans, and the new facility should meet near-term and longer-term needs.
Material changes versus 2021
- Revenue fell 1.6%. Retail revenue rose 6.9% to $172.2 million, while Digital revenue fell 10.2% to $141.4 million. Retail represented 55% of revenue and Digital 45%.
- By category, Diapers and Wipes revenue was nearly flat at $200.4 million; Skin and Personal Care declined 12.2% to $89.3 million; Household and Wellness increased 49.2% to $23.9 million. The latter included $10.0 million of Honest Baby Clothing sales after the company shifted from a licensing arrangement to a supplier-services arrangement.
- Gross margin declined 4.9 percentage points, primarily due to higher product, freight, transportation, warehouse labor and other input costs, increased promotions, and fixed-cost deleverage. Price increases and cost-saving projects partially offset these pressures.
- Operating cash use approximately doubled, with inventory growth the principal working-capital factor. The company reported $40.0 million of additional inventory, including $5.5 million of Honest Baby Clothing inventory acquired from Butterblu.
- Adjusted EBITDA deteriorated to a loss of $22.5 million from a loss of $3.5 million. The 2022 measure excludes $3.6 million of securities litigation expense and $5.8 million of CEO-transition expense; it is a non-GAAP measure and should be considered alongside GAAP results.
Outlook, management commentary, risks and unusual items
- Management plans additional price increases in 2023 as needed to offset elevated input costs, alongside productivity and cost-reduction initiatives. The filing provides no numerical revenue, margin, or earnings guidance.
- The company says it intends to prioritize Skin and Personal Care growth, continue product innovation, and support retail marketing and distribution. It also expects higher purchase costs, including under its diaper-supply agreement, to pressure cost of revenue in 2023.
- Retailer inventory reductions and changed fulfillment schedules affected sales and operations. Target, Amazon, and Walmart accounted for approximately 31%, 19%, and 4% of 2022 revenue, respectively. Costco program volatility reduced revenue by $10.0 million in 2022.
- Sanitizing and disinfecting demand declined sharply. The company recorded inventory write-downs of $4.3 million in 2022 and $5.6 million in 2021, and warns further write-downs, donations, returns, or disposal costs may occur.
- A fourth-quarter order-management-system implementation caused $1.3 million in advanced-shipping violation charges. Mold was found on shipping boxes and master cartons in seven ocean shipments of wipes; the company said related product losses and inspection, storage, and remediation costs may affect 2023, and it tendered the matter to insurers and freight forwarders.
- Carla Vernón became CEO on January 9, 2023. 2022 SG&A included $5.8 million of CEO-transition expense. The company also incurred $3.6 million of securities-litigation expense.
- Pending matters include securities class and derivative litigation, a California Prop 65 matter, and a class action alleging deceptive plant-based claims for certain wipes. The company disputes the claims; loss probability and amounts were not estimable for the identified matters.
- The company remains exposed to supply-chain and raw-material costs, consumer price sensitivity, retailer concentration and inventory management, product-quality and labeling claims, and its history of annual net losses. It has incurred net losses since inception.
Important facts for investors to verify
- Whether operating cash use and inventory can be reduced as management plans, and whether further inventory charges are needed.
- Whether price increases, productivity actions, and lower fulfillment costs can restore gross margin without materially weakening demand.
- Retail and Digital sell-through, customer inventory levels, and the durability of Walmart distribution gains, given significant sales concentration among major customers.
- Actual borrowing availability and covenant headroom under the 2023 credit facility, including the effect of its borrowing-base restrictions.
- Developments and potential financial exposure from the pending litigation, and any recovery or costs related to the mold-affected shipments.
- The assumptions behind adjusted EBITDA and its reconciliation to GAAP net loss and cash flow.