Business context and reporting period
The Honest Company, Inc. is a digitally native consumer-products company selling Diapers and Wipes, Skin and Personal Care, and Household and Wellness products through digital and retail channels. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $86.2 million | $84.6 million | $254.1 million | $231.8 million |
| Gross profit / margin | $27.2 million / 31.6% | $25.6 million / 30.3% | $70.3 million / 27.7% | $69.8 million / 30.1% |
| Operating loss | $(8.0) million | $(11.7) million | $(40.0) million | $(37.0) million |
| Net loss | $(8.1) million | $(11.8) million | $(40.4) million | $(36.4) million |
| Adjusted EBITDA (non-GAAP) | $(1.1) million | $(5.6) million | $(15.5) million | $(21.0) million |
| Operating cash flow | Not separately presented for the quarter | $9.4 million | $(50.7) million |
At September 30, cash and cash equivalents were $23.1 million, with no short-term investments; total current assets were $149.6 million and current liabilities $51.5 million. Inventory was $79.5 million, down from $115.7 million at December 31, 2022. The company reported $31.8 million of lease liabilities. It had no borrowings under its $35 million revolving credit facility; $3.9 million of letters of credit were outstanding and $19.2 million was available to draw. The facility matures April 30, 2026, is secured by substantially all company and relevant subsidiary assets, and includes financial covenants. The company said it was in compliance with all covenants.
Material changes versus the prior comparable period
- Q3 revenue grew 1.9%; nine-month revenue grew 9.6%. Digital revenue rose 18.7% in Q3 and 16.7% year to date, while Q3 retail revenue fell 9.3% but was up 3.6% for the nine-month period.
- Q3 Household and Wellness revenue rose 67.9%, principally reflecting Honest Baby Clothing retail launch and digital customer sales. Q3 Diapers and Wipes revenue fell 4.8%, and Skin and Personal Care fell 3.5%. Nine-month Household and Wellness revenue rose 78.1%; the filing cites clothing growth and the impact of category changes.
- Q3 gross margin improved 1.3 percentage points, attributed to price increases, lower fulfillment costs, reduced trade spending and savings. Nine-month gross margin declined 2.4 points, reflecting Transformation Initiative costs and higher product and transportation costs.
- Marketing expense declined 25% in both the quarter and nine-month period. SG&A rose 2.8% in Q3 and 18.9% year to date, including higher Honest Baby Clothing service fees, executive transition and stock-based compensation, donations, and legal expenses.
- Nine-month operating cash flow improved to a $9.4 million inflow from a $50.7 million outflow, primarily due to a $36.2 million reduction in inventory and other working-capital changes. The company still reported a $40.4 million net loss for the period.
Outlook, management commentary, risks and unusual items
- The 2023 Transformation Initiative is intended to focus on higher-margin areas, strengthen the cost structure, and improve execution. Management estimated full-year 2023 initiative costs of $11–$13 million, including $10.5 million recognized through September, and expected annualized Adjusted EBITDA benefits of $15–$20 million. Expected 2023 cash costs were $4–$5 million; restructuring was expected to be substantially complete by year-end. Management said benefits were beginning to appear in late 2023. These are forward-looking estimates, not guarantees.
- The company said cash, cash equivalents and short-term investments, together with working-capital actions and the initiative, were expected to meet projected needs for the next 12 months from issuance of the statements. It cautioned that additional financing may be needed if resources and sales growth are insufficient, and financing may not be available on favorable terms or at all.
- Key uncertainties include persistent losses, inflation and transportation, labor and product costs, consumer demand and retailer ordering patterns, customer concentration and a customer bankruptcy, supply-chain dependencies, inventory valuation and liquidation, and execution risks from restructuring. Management noted continued price increases may not offset cost inflation and could affect demand.
- Transformation-related costs totaled $10.5 million through September, including $3.9 million in cost of revenue, $2.1 million in restructuring, and $4.2 million in other costs; inventory write-downs and donations were among the unusual items. The filing reports $3.4 million of inventory write-downs and $3.1 million of earmarked donations related mainly to exits and SKU rationalization.
- Legal matters include a California Prop 65 claim concerning lead in Diaper Rash Cream, securities and related derivative litigation, and a putative class action over plant-based claims on wipes. Outcomes and potential losses were uncertain; the company said it could not estimate probability or loss ranges for the described matters.
- The company disclosed that it was renegotiating founder Jessica Warren’s likeness agreement and that termination or new terms could adversely affect the brand, margins or cash flow. It also highlighted Nasdaq minimum-bid-price delisting risk; the filing cited a $1.11 closing price on October 27, 2023.
- Management concluded disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2023. No material change in internal control over financial reporting was reported during the quarter.
Important facts investors should verify
- Whether revenue growth and the shift toward digital sales can continue, especially given Q3 retail declines and the reported timing and customer-related sales impacts.
- Whether gross margin recovers as initiative costs, input inflation and logistics pressures evolve, and whether the targeted $15–$20 million annualized Adjusted EBITDA benefits are realized.
- Whether inventory reduction and working-capital improvements translate into sustained positive operating cash flow rather than a temporary cash release.
- Available liquidity under the borrowing-base facility, covenant compliance, and the company’s ability to fund operations if losses continue.
- Potential financial and reputational effects of the pending litigation, founder likeness agreement negotiations, restructuring execution, and Nasdaq listing requirements.
- Share dilution: 95.6 million common shares were outstanding at September 30, 2023, and 20.8 million potentially dilutive shares were excluded from diluted loss-per-share calculations as antidilutive.