The Honest Company, Inc. — Q1 2021 Form 10-Q
Business context and period: The company sells consumer products through digital and retail channels in Diapers and Wipes, Skin and Personal Care, and Household and Wellness. This unaudited report covers the three months ended March 31, 2021, compared with the same period in 2020. The company operates as one segment.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $81.0 million | $72.4 million |
| Gross profit / margin | $28.4 million / 35.0% | $25.8 million / 35.7% |
| Operating income (loss) | $(4.1) million | $0.7 million |
| Net income (loss) | $(4.5) million | $0.6 million |
| Adjusted EBITDA, non-GAAP | $(0.1) million | $4.5 million |
| Cash used in operating activities | $(12.0) million | $(1.7) million |
Revenue increased 12.0%. Retail revenue rose 24.9% to $38.6 million; digital revenue increased 2.3% to $42.5 million. Skin and Personal Care grew 42.0% to $26.2 million and Household and Wellness grew 53.0% to $5.2 million, while Diapers and Wipes declined 1.8% to $49.6 million. Gross margin contracted 0.7 percentage points as cost of revenue grew faster than sales, reflecting higher input costs and more normalized promotional activity. Operating expenses increased 29.7% to $32.5 million, particularly marketing expense, which rose 54.2% to $14.2 million.
At March 31, 2021, the company reported $39.0 million of cash and cash equivalents, $12.4 million of short-term investments, and $6.6 million of restricted cash. Current assets were $163.8 million and current liabilities were $50.8 million. Total liabilities were $97.7 million, including a $38.2 million long-term lease financing obligation; the company reported no borrowings under its former ABL facility before its termination. Redeemable preferred stock had a $376.4 million carrying value and $396.7 million liquidation preference before its conversion in connection with the IPO.
Material changes and unusual items
- Q1 net income turned to a loss, and operating cash outflow increased substantially year over year. Management attributed the Q1 2021 operating cash use in part to payment timing and working-capital changes.
- Revenue included $3.4 million recognized from a non-monetary exchange of legacy beauty inventory for future marketing and transportation credits; associated cost of revenue was $1.8 million. Credits had not yet been used at quarter-end.
- After quarter-end, the May 2021 IPO raised approximately $91.1 million in net proceeds for the company. Existing stockholders sold most of the IPO shares, and the company received no proceeds from those sales. Preferred shares converted into common shares at IPO closing.
- In April 2021, the board declared a $35.0 million cash dividend, payable by June 30, 2021. The company also reported paying $9.5 million in IPO-related employee bonuses after closing.
Outlook, risks, and contingencies
- Management said existing cash, cash equivalents, and short-term investments were expected to cover working-capital and capital expenditure needs for at least the next 12 months. It provided no specific revenue or earnings guidance in this filing and noted that future capital needs depend on growth, margins, and spending.
- Management prioritized growth in Skin and Personal Care, citing its margin characteristics, and said it expected marketing, general and administrative, and research and development expenses to increase as the business grows and operates as a public company.
- The company reported volatility in orders from a key customer in Q2 2021 that could have a potentially material effect on that quarter’s revenue; management expected shipments to stabilize but cautioned that this was uncertain.
- COVID-19 effects remain uncertain. The filing cited potential impacts on consumer demand, collections, suppliers, and operating conditions, while noting limited material disruption to inventory availability and delivery capacity to date.
- In April 2021, the company entered into a $35.0 million revolving credit facility, maturing in April 2026, secured by substantially all company and material domestic subsidiary assets. It includes a 3.50:1.00 maximum total net leverage covenant and restrictions on dividends and other actions. The company stated it was in compliance as of June 9, 2021.
- After quarter-end, a Nevada tax-abatement dispute was decided against the company; the stated loss was $0.6 million plus interest, and the company had accrued $0.6 million at March 31. The company had not decided whether to appeal. A California Prop 65 claim concerning lead in Diaper Rash Cream remained unresolved, with loss exposure not estimable. A putative class action concerning automatic renewals was settled in April for an immaterial amount.
- The filing identifies risks including consumer preference and spending shifts, competition, supply-chain and retailer dependencies, seasonality, and the potential inability to sustain growth or achieve profitability. Management reported disclosure controls were effective at the reasonable assurance level.
Important facts for investors to verify
- Whether the post-quarter IPO proceeds and $35.0 million dividend materially changed liquidity, especially alongside operating cash burn and IPO-related payments.
- Whether revenue growth can continue and whether the shift toward Skin and Personal Care improves margins enough to offset higher marketing and operating expenses.
- The duration and financial impact of key-customer order volatility, and whether retail growth offsets slower digital growth and weaker Diapers and Wipes sales.
- How the $35.0 million revolving facility is used, covenant headroom, and the effect of its collateral, pricing, and dividend restrictions.
- Developments in the Nevada matter and the Prop 65 claim, including any appeal, settlement, or additional accruals.
- The recurring versus unusual components of adjusted EBITDA and the stock-based compensation and dilution associated with IPO-triggered awards and new equity plans.