Honest Company, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The company sells clean lifestyle products through Digital and Retail channels, across Diapers and Wipes, Skin and Personal Care, and Household and Wellness.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $78.5 million | $74.6 million | $147.2 million | $155.6 million |
| Gross profit | $23.6 million | $26.9 million | $44.2 million | $55.3 million |
| Gross margin | 30.0% | 36.1% | 30.0% | 35.6% |
| Operating loss | $10.7 million | $19.5 million | $25.3 million | $23.6 million |
| Net loss | $10.0 million | $20.0 million | $24.6 million | $24.5 million |
| Adjusted EBITDA, non-GAAP | $(5.3) million | $(0.8) million | $(15.4) million | $(0.9) million |
Q2 revenue increased 5.3%; six-month revenue declined 5.4%. Q2 Digital revenue rose 8.8% and Retail revenue rose 2.2%, while both channels declined year over year for the first half. Q2 Diapers and Wipes revenue grew 8.5%; Skin and Personal Care declined 2.5%. For the first half, revenue fell in all categories, led by an 11.1% decline in Skin and Personal Care.
Q2 gross margin fell 6.1 percentage points year over year; first-half margin fell 5.6 points. Management cited higher product, freight, transportation and warehouse labor costs, promotional spending, and a one-time fulfillment-center transition cost. 2022 price increases and cost savings partly offset cost pressure. Q2 net loss improved mainly because prior-year SG&A included IPO-related compensation and costs; adjusted EBITDA was lower year over year.
Cash, liquidity and obligations
- At June 30, cash and cash equivalents were $40.3 million and short-term investments were $26.5 million, versus $50.8 million and $42.4 million, respectively, at December 31, 2021.
- Operating cash outflow was $25.4 million for the first half, compared with $32.6 million a year earlier. Inventory increased $12.7 million, primarily to build weeks of supply given longer lead times and anticipated distribution.
- The company had no borrowings under its $35 million revolving credit facility; $28.7 million was available after $6.3 million of letters of credit. It reported compliance with the facility’s net leverage covenant.
- Operating and finance lease liabilities totaled $41.4 million at June 30. The company adopted ASC 842 on January 1, 2022, recognizing operating lease assets and liabilities; prior periods were not restated.
- Management stated that existing cash, cash equivalents and short-term investments should be sufficient for short- and long-term working capital and capital expenditure needs. It also noted that additional financing may be needed if resources and sales growth do not fund future activities.
Changes, outlook and notable items
- Q2 growth reflected stronger wipes sales, improved in-stock inventory and distribution gains, diaper demand, and retail expansion. First-half weakness reflected prior-year beauty liquidation sales, lower diaper sales in Digital, and reduced demand for sanitizing and disinfecting products.
- Management expected elevated digital advertising costs and higher input, labor and transportation costs to continue affecting results through the remainder of 2022. It planned further price increases as needed, productivity efforts, and a shift toward retail marketing. The filing provides no specific revenue, earnings or margin guidance.
- Sanitizing and disinfecting inventory write-downs were $0.2 million in Q2 and $0.8 million in the first half of 2022; the company recorded $5.6 million for this inventory in 2021. Excess inventory, aging products and quality complaints could lead to further write-downs, returns or remediation costs.
- Q2 included $0.7 million of other income for an anticipated Nevada tax and interest refund after the Nevada Tax Commission overturned a deficiency notice. Q2 adjusted EBITDA excluded $0.8 million of securities litigation expense.
- Material risks include supply-chain disruptions and shortages, inflation, product availability and quality, demand forecasting, digital marketing efficiency, consumer shifts between channels, and reliance on third-party manufacturers and logistics providers. Litigation includes securities-related class and derivative actions, a Prop 65 matter, and an August 2022 class action alleging misleading plant-based claims for certain wipes; outcomes and potential losses were not estimable.
Investor verification priorities
- Track whether pricing and cost-saving actions can offset inflation and restore gross margin.
- Assess inventory levels, availability of key products, and exposure to further sanitization-product write-downs.
- Monitor operating cash use and liquidity as cash and short-term investments decline.
- Review the trajectory of Digital and Retail sales, including dependence on key customers and promotional timing.
- Follow developments and potential exposure in the disclosed litigation and any additional product-quality or labeling claims.