Honest Company, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Honest sells diapers and wipes, skin and personal care, and household and wellness products through digital and retail channels.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $82.7 million | $77.9 million | $238.3 million | $222.7 million |
| Gross profit / margin | $29.8 million / 36.0% | $29.4 million / 37.7% | $85.1 million / 35.7% | $81.7 million / 36.7% |
| Operating loss | $4.6 million | $1.7 million | $28.2 million | $1.2 million |
| Net loss | $5.1 million | $2.0 million | $29.7 million | $1.8 million |
| Adjusted EBITDA | $1.2 million | $2.1 million | $0.3 million | $10.1 million |
- Q3 revenue rose 6.1%; nine-month revenue rose 7.0%. Diapers and Wipes and Skin and Personal Care grew, while Household and Wellness contracted sharply.
- Channel mix shifted toward retail: Q3 retail revenue increased 28.1% to $43.5 million, while digital revenue declined 11.0% to $39.1 million. Nine-month retail revenue rose 33.7%; digital declined 11.5%.
- Gross margin fell 1.7 percentage points in Q3 and 1.0 point for the nine-month period. The company cited higher freight, transportation, warehouse labor and other input costs, and more normalized trade spend.
- Operating expenses increased 10.3% in Q3 and 36.7% over nine months. Nine-month SG&A included public-company costs and a $9.1 million IPO-related employee bonus; stock-based compensation was $13.2 million for the period.
Cash, liquidity and obligations
- At September 30, cash and cash equivalents were $27.7 million and short-term investments were $62.7 million, totaling $90.3 million. Current assets were $213.6 million and current liabilities were $49.3 million.
- Nine-month operating cash flow was negative $36.4 million, compared with positive $5.1 million in 2020. Investing cash flow was negative $28.7 million; financing cash flow was positive $55.6 million.
- Financing included $96.5 million of IPO proceeds, offset partly by the $35.0 million dividend and $5.5 million of IPO costs. The company said existing cash, equivalents and investments should fund working capital and capital expenditures for at least 12 months.
- No borrowings were outstanding on the $35.0 million revolving credit facility, which matures in April 2026; the company reported covenant compliance. The balance sheet included a $37.8 million long-term lease financing obligation. No other outstanding revolving-facility debt was reported.
Business developments, outlook and risks
- Management attributed retail growth to consumers returning to stores, expanded retail distribution and merchandising, and stronger sales in diapers and skin care. Orders from a key digital partner recovered in Q3 from Q2 levels but its inventory had not returned to prior levels.
- Household and Wellness revenue fell 71.1% in Q3, reflecting reduced demand for sanitizing and disinfecting products as pandemic-related demand eased. The company reported elevated category inventory and said markdowns, liquidation, new product development and advertising were among its response measures; additional inventory reserves or returns remain possible.
- Management expected commodity, labor, input and transportation cost increases to continue at least through Q4 2021, with productivity measures or pricing adjustments beginning to take effect in Q1 2022. No numerical revenue or earnings guidance was provided.
- In exchange for legacy beauty inventory, the company recognized $4.5 million of revenue and $3.8 million of associated cost of revenue during the first nine months, receiving future marketing and transportation credits rather than cash. These credits are generally usable over four years, with a possible extension.
- The May 2021 IPO generated approximately $91.0 million net proceeds to the company; preferred stock converted to common stock. The company also paid a $35.0 million dividend in June. The nine-month net loss per share was $0.33; the preferred-stock conversion affected the EPS calculation, and the reported $29.0 million conversion gain was an EPS adjustment rather than operating revenue.
- Contingencies include an appealed Nevada tax-benefit ruling with a $0.7 million loss, of which $0.6 million had been paid, a California Prop 65 complaint concerning diaper rash cream, and two putative securities class actions relating to the IPO. The latter matters’ outcomes and potential losses could not be estimated.
- Key operating risks include reliance on third-party manufacturers and a limited supplier base, dependence on a single logistics provider, pandemic-related supply and demand uncertainty, product quality complaints involving sanitizing products, and the ability to pass cost inflation through to consumers. Management reported disclosure controls were effective.
Important facts for investors to verify
- Whether retail growth and the shift from digital are sustainable, and how the key digital partner’s inventory and ordering evolve.
- Whether weaker sanitization demand leads to further markdowns, returns, inventory write-downs or margin pressure.
- Whether pricing and productivity measures offset continuing input-cost inflation without weakening demand.
- How operating cash burn, losses and stock-based compensation develop relative to the company’s stated minimum 12-month liquidity outlook.
- Developments in the Nevada appeal, Prop 65 complaint and IPO-related securities litigation, including any financial exposure.