The Honest Company, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; filed May 8, 2024. Honest sells clean- and sustainably-designed personal care products through direct-to-consumer, retail and third-party ecommerce channels. It reported one operating segment.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $86.2 million | $83.4 million |
| Gross profit / margin | $31.9 million / 37.0% | $20.2 million / 24.2% |
| Operating loss | $1.3 million | $18.7 million |
| Net loss | $1.4 million | $18.9 million |
| Adjusted EBITDA (non-GAAP) | $2.6 million | ($10.3 million) |
| Cash from operating activities | $0.3 million | ($2.8 million) |
Cash and cash equivalents were $33.6 million at quarter-end, versus $32.8 million at December 31, 2023. Current assets were $156.4 million and current liabilities $53.7 million. The company had no borrowings under its $35 million revolving credit facility; $17.7 million was available to draw, with $3.7 million of letters of credit outstanding. It was in compliance with facility covenants. Operating lease liabilities totaled $27.9 million. No formal quarterly or annual revenue or earnings guidance is provided in the filing.
Material changes and drivers
- Revenue rose 3.4%, mainly from a $5.4 million increase in baby apparel and a $1.6 million increase in wipes, partially offset by declines in diapers and color cosmetics. Prior-year price increases contributed an estimated $3.3 million.
- Gross margin increased 12.8 percentage points. Management attributed the improvement to pricing, lower transportation, product and fulfillment costs, efficient trade spending, and a $2.6 million one-time cost reduction recorded in Q1 2023.
- SG&A declined 13.2% and marketing declined 11.1%; R&D increased 15.2%. There were no restructuring costs in Q1 2024, compared with $1.35 million in Q1 2023.
- Direct sales through Honest.com represented 15% of revenue, down from 18% a year earlier. The company changed its revenue disaggregation in Q1 to direct-to-consumer and retail/third-party ecommerce, removing product-category detail; this did not affect revenue recognition or results.
- Management reported operating cash generation versus cash use in the prior-year quarter. Improved collections helped, while changes in operating assets and liabilities used cash.
Outlook, risks and notable items
- Management believes cash on hand and expected operating cash generation will fund projected short-term operations for the next 12 months from issuance of the financial statements. It says longer-term working capital and capital expenditure needs require sufficient operating cash flow or additional capital.
- The 2023 Transformation Initiative focuses on brand maximization, margin enhancement and operating discipline. Its restructuring component was substantially completed by year-end 2023; management expects to continue pursuing growth in higher-margin products, cost savings and working-capital improvements.
- Management cites inflation, product and labor costs, transportation and supply-chain pressures, customer order timing, changing consumer demand, competition, and the ability to sustain brand awareness and profitability as risks. It notes that future pricing may not fully offset cost increases and could affect demand.
- Founder Jessica Warren left her Chief Creative Officer role on April 9, 2024 and remains on the board. Termination of her likeness agreement requires removal of certain licensed material and sale of existing inventory bearing licensed intellectual property; the company warns this could affect margins, cash flow, goodwill and consumer perception.
- Litigation includes a California Proposition 65 matter and IPO-related securities and derivative actions; outcomes and potential losses are uncertain and not estimable. A wipes-related consumer case reached an agreement to settle on an individual, non-class basis, subject to finalization. In a separate subsequent development, the court denied a motion to dismiss by additional defendants in the securities matter on April 22, 2024.
- The company reported no material change to critical accounting estimates, and management concluded disclosure controls were effective at a reasonable assurance level.
Key facts for investors to verify
- Whether the improved gross margin and positive adjusted EBITDA are sustainable, particularly as prior-period one-time savings and pricing effects change.
- Whether revenue growth can continue across channels and products, given declines in diapers and color cosmetics and lower Honest.com share of sales.
- Cash conversion, inventory levels and the company’s ability to fund longer-term needs without additional capital.
- The financial and operational effects of Jessica Warren’s departure, the likeness-agreement termination and related inventory requirements.
- Progress and potential exposure in the disclosed litigation, and compliance with the revolving facility’s borrowing-base and financial covenants.