The Honest Company, Inc. — Q2 2021 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and six months ended June 30, 2021, compared with the same 2020 periods. Honest sells consumer products through digital and retail channels across Diapers and Wipes, Skin and Personal Care, and Household and Wellness. The company completed its IPO on May 7, 2021.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $74.6 million | $72.4 million | $155.6 million | $144.7 million |
| Gross profit / margin | $26.9 million / 36.1% | $26.5 million / 36.6% | $55.3 million / 35.6% | $52.3 million / 36.1% |
| Operating income (loss) | $(19.5) million | $(0.2) million | $(23.6) million | $0.6 million |
| Net income (loss) | $(20.0) million | $(0.4) million | $(24.5) million | $0.2 million |
| Adjusted EBITDA (non-GAAP) | $(0.8) million | $3.5 million | $(0.9) million | $7.9 million |
Q2 revenue grew 3.1%; six-month revenue grew 7.5%. In Q2, Skin and Personal Care revenue rose 16.1%, while Diapers and Wipes fell 1.9% and Household and Wellness fell 5.7%. Retail revenue increased 51.2% in Q2 as consumers returned to stores; digital revenue declined 24.4%. Management attributed the digital decline partly to a key partner reducing its consumables inventory ahead of a promotion, with shipments down $6.4 million year over year despite higher end-consumer consumption.
Operating expenses increased substantially: Q2 SG&A rose 101.4% to $30.1 million, marketing rose 31.8% to $14.0 million, and R&D rose 113.2% to $2.3 million. SG&A included a $9.1 million post-IPO employee bonus; R&D included a $0.4 million bonus. Q2 stock-based compensation was $6.6 million. Gross margin declined 0.5 percentage points in Q2, reflecting more normalized trade spending and higher input costs.
Cash, debt and liquidity
- At June 30, 2021, cash and cash equivalents were $41.4 million and short-term investments were $53.7 million, totaling $95.1 million. Current assets were $215.6 million and current liabilities were $51.1 million.
- Operating cash outflow was $32.6 million for the first six months, compared with $13.5 million of operating cash inflow in 2020. Investing activities used $19.5 million; financing activities provided $56.4 million, primarily from IPO proceeds, partly offset by the dividend.
- The company raised approximately $91.0 million net in its IPO. It also paid a $35.0 million cash dividend on June 29, 2021.
- No borrowings were outstanding under the $35.0 million revolving credit facility; approximately $38.0 million of lease financing obligations remained. The company reported compliance with its leverage covenant and said it expected existing cash, cash equivalents and investments to fund working capital and capital expenditures for at least 12 months.
Outlook, risks and unusual items
- No numerical revenue, earnings or margin guidance was provided. Management expects SG&A, marketing and R&D spending to increase in absolute dollars as the business grows, invests in brand awareness and innovation, and bears public-company costs.
- Management described ongoing channel shifts, lower sanitizer and disinfectant demand as vaccination and in-store shopping increased, and uncertainty from COVID-19. The company noted that retailers’ order timing and inventory needs can fluctuate.
- Q2 and first-half revenue included $0.5 million and $3.9 million, respectively, from exchanging legacy beauty inventory for future marketing and transportation credits. These credits are usable over four years, with a possible two-year extension; recoverability is assessed periodically.
- The IPO triggered $9.5 million in employee bonuses, IPO-related costs and stock-based compensation. A $29.0 million gain on preferred-stock conversion affected the EPS calculation, while the reported GAAP net loss remained $20.0 million for Q2.
- Risks include reliance on third-party manufacturers and suppliers, including an exclusive diaper supplier, and on a single logistics provider. The filing also cites product-quality complaints involving sanitizing products amid slower demand and inventory turnover.
- A Nevada tax-benefit dispute resulted in a $0.7 million assessed loss, with $0.6 million accrued; the company appealed in July 2021. A Prop 65 claim concerning diaper rash cream remained uncertain, and the company could not estimate a potential loss.
Important facts for investors to verify
- Whether retail growth can offset digital weakness, particularly if the key digital partner maintains lower inventory.
- Whether gross margins and operating results improve as input costs, trade spending, marketing investment and public-company expenses evolve.
- Inventory quality and recoverability, including sanitizer products and the future use of the marketing and transportation credits.
- Cash burn, liquidity runway and the terms and covenant headroom of the revolving facility.
- Developments in the Nevada appeal and Prop 65 matter, and any further supplier, logistics or product-quality disruption.