Honest Company, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The company sells baby care, beauty, personal care, wellness, and household products through digital and retail channels.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $84.5 million | $78.5 million | $167.9 million | $147.2 million |
| Gross profit / margin | $22.9 million / 27.1% | $23.6 million / 30.0% | $43.1 million / 25.7% | $44.2 million / 30.0% |
| Operating loss | $13.4 million | $10.7 million | $32.0 million | $25.3 million |
| Net loss | $13.4 million | $10.0 million | $32.3 million | $24.6 million |
| Adjusted EBITDA (non-GAAP) | $(4.1) million | $(5.3) million | $(14.4) million | $(15.4) million |
| Operating cash flow | Not presented by quarter | $3.8 million | $(25.4) million |
Q2 revenue grew 7.7%; first-half revenue grew 14.1%. Digital and retail each represented about half of first-half revenue. Diapers and Wipes remained the largest category (65% of revenue in both periods); Household and Wellness rose to 8% from 5% in the first half of 2022, while Skin and Personal Care was 27% versus 30%.
Revenue growth reflected new distribution, stronger consumption, price increases, and Honest Baby Clothing. Q2 growth in Diapers and Wipes and Household and Wellness was partly offset by lower Skin and Personal Care sales, including reduced club-channel personal-care sales. Lower marketing spend reduced traffic and sales at Honest.com, while a key digital customer contributed to growth.
Gross margin contracted as cost of revenue rose faster than sales, reflecting higher product and transportation costs and, year to date, inventory reserves tied to product exits and SKU rationalization. Price increases and reduced trade spending partly offset these pressures. SG&A increased 25.4% in Q2, including higher stock compensation, legal expense, and baby-clothing service fees; marketing expense fell 26.0%.
Financial position and liquidity
At June 30, 2023, cash and cash equivalents were $17.8 million, with no short-term investments, versus $9.5 million of cash and $5.7 million of short-term investments at December 31, 2022. Current assets were $144.5 million and current liabilities $41.8 million. Inventory fell to $82.1 million from $115.7 million. Total liabilities were $68.1 million, including operating lease liabilities; the filing reports no credit-facility borrowings.
First-half operating cash flow turned positive, principally reflecting lower inventory, receivables, and prepaid assets, partly offset by reductions in accounts payable and accrued expenses. Investing cash flow was $4.5 million, mainly from investment maturities; financing cash flow was $0.1 million. The company said available cash and investments, working-capital actions, and expected initiative benefits should fund projected needs for the next 12 months, but noted additional financing could be needed if resources and sales growth are insufficient.
A new $35 million asset-secured revolving facility matures April 30, 2026. At June 30, $19.3 million was available to draw and $3.9 million of letters of credit was outstanding. Availability is borrowing-base dependent, and covenants include a minimum fixed-charge coverage ratio. The company reported compliance with covenants at quarter-end.
Outlook, initiatives, and material items
- The 2023 Transformation Initiative is intended to prioritize higher-margin products and North America, reduce costs and inventory, and improve execution. Management estimated full-year initiative costs of $10 million–$13 million, including $8.3 million recognized in the first half; expected 2023 cash costs are $4 million–$5 million.
- Management expects annualized adjusted EBITDA benefits of $15 million–$20 million and said benefits should begin in late 2023. Restructuring is expected to be substantially complete by year-end. These are forward-looking estimates, not guarantees; management did not provide a full-year revenue or GAAP net-loss outlook.
- The company is exiting low-margin international activity and certain household cleaning and sanitizing products, and is rationalizing SKUs. Subsequent to quarter-end, it terminated its Asian distributor agreement on July 26 and exited its Netherlands fulfillment center on July 31.
- Q2 net loss included $2.6 million of accelerated stock compensation related to the former CEO’s RSUs. First-half adjusted EBITDA excludes stock compensation, securities litigation expense, CEO-transition costs, and restructuring costs, among other items.
Risks and contingencies
Key risks include continued losses, uncertain profitability and cash generation, inflation in product, labor, and transportation costs, consumer and retailer demand or order variability, customer concentration, supply-chain and fulfillment costs, and execution risk in the Transformation Initiative and international exits. Management cautioned that restructuring could cost more than expected or fail to deliver projected savings, and could disrupt operations or affect employee retention.
Several legal matters remain unresolved, including a securities class action and related derivative cases, a California Prop 65 claim concerning diaper rash cream, and a consumer class action alleging misleading plant-based claims for wipes. Outcomes and potential losses are uncertain, and the company said it could not estimate probability or range of loss for these matters. It intends to defend them. The company also disclosed that it is renegotiating its founder’s likeness agreement, whose termination or changed terms could affect the brand and operating results.
Most important facts for investors to verify
- Whether revenue growth and planned pricing increases persist without weakening consumer demand, and whether Honest.com sales stabilize.
- Whether gross margin recovers as inventory reserves, input costs, and international exits affect results.
- Whether the Transformation Initiative meets its cost, cash-spending, timing, and $15 million–$20 million annualized adjusted EBITDA benefit targets.
- Whether inventory and working-capital reductions can support liquidity while the company continues to report GAAP losses.
- Current borrowing-base availability and covenant headroom under the revolving facility, as well as developments in disclosed litigation and the founder likeness agreement.