Honest Company, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are with FY2020 unless noted. Honest is a single-segment consumer products company selling through Digital and Retail channels across Diapers and Wipes, Skin and Personal Care, and Household and Wellness. Its IPO closed in May 2021.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $318.6 million | $300.5 million | +6.0% |
| Gross profit / margin | $109.2 million / 34.3% | $107.9 million / 35.9% | Profit +1.2%; margin down 1.6 percentage points |
| Operating loss | $(36.8) million | $(13.5) million | Loss widened |
| Net loss / net margin | $(38.7) million / (12.1)% | $(14.5) million / (4.8)% | Loss widened |
| Adjusted EBITDA (non-GAAP) | $(3.5) million | $11.2 million | Declined $14.7 million |
| Net cash used in operations | $(38.2) million | $(12.1) million | Use of cash increased |
Revenue by category: Diapers and Wipes $200.9 million (+6.6%); Skin and Personal Care $101.7 million (+27.9%); Household and Wellness $16.0 million (−50.8%). Revenue by channel: Retail $161.1 million (+20.4%); Digital $157.5 million (−5.5%). Retail represented 51% of revenue and Digital 49%; Honest.com alone contributed 27%.
At year-end, cash and cash equivalents were $50.8 million and short-term investments were $42.4 million. Current assets were $213.8 million versus current liabilities of $48.5 million. The $35.0 million revolving credit facility had no borrowings outstanding; $28.7 million was available at year-end. The company reported a $37.5 million long-term lease financing obligation. IPO proceeds to the company were approximately $91.1 million; it also paid a $35.0 million dividend in 2021.
Material changes and unusual items
- Gross margin fell as cost of revenue rose 8.7%, faster than sales. A $5.6 million write-off of excess sanitizing and disinfecting inventory accounted for 174 basis points of the margin decline; inflation in materials, freight, and labor also pressured costs.
- Household and Wellness sales contracted as pandemic-related demand for sanitizing and disinfecting products receded. Diapers and Wipes and Skin and Personal Care grew, supported by product launches, retail distribution and in-store demand.
- Operating expenses rose 20.2%, including higher marketing, research and development, public-company costs and stock-based compensation. Management reported paid advertising increased and contributed to lower Digital revenue.
- FY2021 revenue included $4.2 million recognized from exchanging legacy beauty inventory for future marketing and transportation credits; related cost of revenue was $2.2 million.
- IPO-related costs and bonuses contributed to reported expenses and adjusted EBITDA reconciliation. Adjusted EBITDA is non-GAAP and excludes specified items, including stock-based compensation and IPO-related expenses.
Outlook, commentary and risks
- The filing provides no formal numerical revenue, profit or adjusted EBITDA guidance. Management expects elevated commodity, labor, input and transportation costs to continue into 2022; purchase-price increases agreed with two manufacturers are expected to raise 2022 product costs. Price increases and productivity initiatives are intended to offset inflation, but management cautions that margin expansion may be constrained.
- Planned initiatives include prioritizing Skin and Personal Care growth, expanding distribution and innovation, and introducing four vitamin and supplement products in Q2 2022. Management also described strategies to clear excess sanitization inventory; further write-downs or returns remain possible.
- Fourth-quarter fulfillment was affected by COVID-related staffing absences, quarantine protocols, truck-driver shortages and supply delays. Supply constraints also contributed to wipes out-of-stocks. Price increases announced in 2021 prompted customer forward buys.
- Customer concentration is material: Target represented approximately 28% and Amazon approximately 22% of FY2021 revenue. The company also relies on a limited supplier base, including a single diaper supplier and substantially one wipes supplier, and one logistics provider for its warehouses.
- Pending matters include a California Proposition 65 complaint and securities and derivative lawsuits related to the IPO; the company says outcomes are uncertain and cannot estimate potential losses. A Nevada tax matter resulted in a $0.7 million loss, of which $0.6 million had been paid by year-end; the company appealed.
- Other key risks include persistent losses and operating cash outflows, competition and consumer price sensitivity, product safety and labeling claims, supply-chain and inflation exposure, privacy/cybersecurity, and dependence on key personnel and retail partners. The company stated existing cash, cash equivalents and investments should meet its working-capital and capital needs, while noting future funding needs depend on growth, margins and spending.
Investor verification priorities
- Review whether revenue growth, particularly in Skin and Personal Care, can offset continued weakness in Household and Wellness and declining Digital sales.
- Track gross margin, inventory aging and any additional write-downs, returns or discounting related to sanitizing and disinfecting products.
- Assess the effects of 2022 supplier price increases, freight and labor inflation, customer price responses and promotional spending.
- Monitor Target and Amazon purchasing, channel concentration, supplier continuity and fulfillment performance.
- Review operating cash burn, liquidity and credit-facility availability alongside lease commitments and the company’s path toward profitability.
- Follow developments in the IPO-related lawsuits and Proposition 65 matter, and confirm whether any material loss estimate or reserve is subsequently disclosed.