The Honest Company, Inc. (NASDAQ:HNST) Q1 2024 Earnings Call Transcript May 8, 2024
The Honest Company, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by. Welcome to The Honest Company’s First Quarter 2024 Earnings Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the conference over to, Ms. Elizabeth Bouquard, Senior Director, Investor Relations at The Honest Company. Please go ahead.
Elizabeth Bouquard: Good afternoon, everyone and thank you for joining our first quarter 2024 conference call. Joining me today are Carla Vernon, our Chief Executive Officer; Dave Loretta, our Chief Financial Officer. Before we start, I would like to remind you that we will make certain statements today that are forward-looking within the meaning of the Federal Securities Laws, including statements about the outlook of our business and other matters referenced in our earnings release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our earnings release issued today as well as our SEC filings for a more detailed description of the risk factors that may affect our results.
Please also note that these forward-looking statements reflect our opinions only as of the date of this call and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events, except as required by law. Also during this call, we will discuss non-GAAP financial measures which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in the financial results section of today’s earnings release. A live broadcast of this call is also available on the Investor Relations section of our website at investors.honest.com.
With that, I’ll turn it over to Carla.
Carla Vernon: Thanks, Elizabeth. Good afternoon, everyone, and thank you for joining us today. As we kick off the first of 2024, I’m pleased to share that we achieved another quarter of improved financial results and solid growth momentum. As you recall, during our last earnings call in March, I shared several new achievements and announcements. These included key financial milestones we achieved as a management team in 2023, a new long range financial algorithm and an updated strategic plan detailing our key drivers for long term growth. We also reiterated our new operating mindset focused on our transformation pillars. These pillars, brand maximization, margin enhancement and operating discipline are deeply rooted in our enterprise practices, and they will remain an enduring strategic component of building a stronger financial foundation and unleashing the full potential of the Honest brand.
These pillars have enabled us to strengthen our business performance, our operating culture and our financial results. This quarter’s notable financial achievements include delivering a second consecutive quarter of positive adjusted EBITDA and reaching revenue growth in line with our outlook, marking our eight consecutive quarter of positive year-over-year revenue growth. We also achieved a gross margin of 37%, which is a record high for our time as a public company and is an improvement of nearly 1300 basis points year-over-year. In addition to these financial highlights, our brand continues to grow in the number of homes and people we are reaching. Our last 52-week household penetration is 6%, which is up 18 basis points year-over-year. As we begin on the path of executing our long-range strategic plan, our growth with new consumers and new households is delivered through a blend of increasing availability, maximizing our hero products and delivering meaningful new product innovation.
Our wipes portfolio is emblematic of the strategic building blocks that will drive our long-range growth strategy. Our wipes business grew 44% in consumption in 2023. We’re pleased this growth was driven by a combination of strong performance across our core items and successful innovation launches including flushable wipes. Our early indicators of our successful launch into flushable wipes underscore an important principle of our long-range strategic growth plan. We continue to see that the Honest brand can successfully travel across consumer age groups, usage occasions and even parts of the home. As I look out to 2024 and beyond, I continue to remain confident in our ability to further amplify the distinctive elements of the Honest brand and meet the growing consumer demand for a higher standard of clean ingredients in baby and personal care products.
With a clear vision for the future, we will continue to advance and scale Honest’s trusted products and our business model through the power of our brand, our team and our honest standard. And now, I will turn it over to Dave to share the financial details of our first quarter and outlook.
Dave Loretta: Thank you, and welcome, everyone. As Carla noted, we are off to a solid start in the first quarter, giving us confidence in our newly articulated strategy moving forward. We have continued to make progress on improving profitability, while maintaining revenue growth. The significant expansion in operating margin is the result of two drivers: One, meaningful improvement in gross margin of 37% this quarter and two, diligent management of operating expenses, which leveraged 810 basis points over Q1 of last year. We remain confident in delivering the stated results for 2024 and executing our long-term strategy with a clear focus on building a stronger financial foundation. Before I dive into financial results, however, I wanted to address the changes we made in our revenue reporting structure.
We have transitioned away from our prior disaggregated revenue categories and channels to align our reporting structure with how we operate the business and what impacts the timing of our cash flows. We will continue to provide the percentage of revenue from honest.com in our 10-Q given the difference in cash flow timing versus our third-party channels. Now let me dive deeper into our first quarter results. This quarter, through our brand maximization pillar, we delivered revenue of $86 million up 3%, driven by distribution gains and strong velocities across a number of key products, specifically baby apparel, wipes, and baby personal care. We continue to grow the Honest brand through balanced revenue growth of unit volume and pricing. Notably, our total Honest Company ACV or all commodity volume increased to 85% versus 78% a year ago.
Our baby business demonstrated strength across two key areas this quarter, baby apparel and baby personal care. First, our baby apparel business has emerged as a key growth driver as a result of distribution expansion in brick-and-mortar stores, along with consumption growth of 41% at our leading online retail customer. Second, we are pleased with the growth of our baby personal care portfolio that has now become the leading baby personal care brand in our largest brick-and-mortar retail customer. Turning to our second pillar of margin enhancement. Gross margin in the first quarter was 37%, up 1275 basis points from last year and up 350 basis points sequentially. Key gross margin drivers included product and supply chain cost savings, pricing and trade promotion efficiency.
With our continuous improvement mindset, we realized savings across product cost, logistics and fulfillment. As a reminder, the sizable gross margin improvement includes certain onetime inventory write offs related to the transformation initiative in 2023 that amounted to roughly 400 basis points. The remainder of gross margin improvement included approximately 600 basis points in cost savings, mostly as a result of renegotiated product and logistics contracts and 275 basis points in pricing. Operating expenses decreased $6 million in the first quarter compared to last year, reflecting lower SG&A expenses and improved marketing efficiency. SG&A as a percentage of revenue declined 500 basis points compared to last year as we remain focused on ongoing expense management.
Our operating discipline pillar represents our commitment to generating improved bottom line results and continued strengthening of our balance sheet. Adjusted EBITDA for the first quarter was positive $3 million compared to negative $10 million last year. This is our second consecutive quarter of reporting positive adjusted EBITDA and supports our path to profitability as we have now achieved positive adjusted EBITDA on a trailing 12-month basis. On the balance sheet, we ended the quarter with $34 million in cash, an increase of $22 million versus last year and zero debt outstanding. This represents our fourth consecutive quarter of positive operating cash flow. Our cash position continues to benefit from a capital light business model and diligent management of working capital.
Overall, our first quarter financial results support our continued confidence in our long-term strategic plan and our outlook for 2024. Therefore, we are reaffirming our full year 2024 financial outlook that includes net revenue growth of low to mid-single digit percentage and positive adjusted EBITDA in the low single digit to mid-single digit millions range. The combination of the strength of our team, our focus on operating discipline and healthy Q1 results give us growing confidence in the mid-single digit portion of our range in both revenue and adjusted EBITDA. We will continue to closely monitor and react to any changes in the macroeconomic or consumer environment. We are pleased that these three transformation pillars provide us a clear framework for defining and measuring our growth roadmap.
Along with our strategic growth plan, they define and guide our building blocks for growth and our operating approach. Together, they enable us to deliver improved financial results and long-term shareholder value creation through a stronger and more scaled Honest brand and company. And with that, I will turn the call over to the operator.
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Q&A Session
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Operator: [Operator Instructions] Our first question comes from Dara Mohsenian from Morgan Stanley Dara Mohsenian. Your line is now open.
Dara Mohsenian: Hey, guys. First, just a clarity question. Why maintain full year guidance given the Q1 upside to some extent that applies to revenues, but particularly EBITDA given the strong profitability in Q1? Is that just conservatism? Is it early in the year? Is there something about Q1 that comes out of the balance of the year? And then Carla, maybe just given an uncertain consumer environment, can you discuss if you think you’re seeing any impact on consumption for your products from any consumer pressure, trade down impacts on your business? And perhaps give us an update for how things are trending so far in Q2? Thanks.
Dave Loretta: Hi, Dara, Dave here. Thanks for the question. And certainly we’re pleased with the first results. We’re off to a strong start this year, both pleased with the top line, but even the margin expansion was all kind of elements working together as we brought forward. So pleased with that. Now looking at the balance of the year, certainly we want to be a little bit cautious from any uncertainties out there and it’s early. It is really just a function of it’s early in the year and we’re cautiously confident that the range is the appropriate range. As I did highlight in my prepared remarks, leaning towards the mid side of that range is where we’re gaining confidence and the next couple of quarters really will give us a clear roadmap there. But I am so we’ll come back at the next quarter to update any changes we’ve got.
Carla Vernon: Hi, Dara. This is Carla. It’s good to hear your voice. Thank you for joining our call. Your question for me was really what am I seeing in the landscape of the categories we play in? Do I feel like there’s indicators from any of the external trends or consumer indicators that concern me. And I will say that, the results you’re seeing are driven by uniformly strong consumption for us across our category portfolio. The real confidence builder for us in the quarter is that if you look at the way our growth shaped up, we were able to actually grow year-over-year on a combination of unit volume and pricing as Dave covered in his remarks. So I think what that really shows us is that the Honest brand is very strong and resonant even in these times, because the benefits we offer for clean, personal care and baby have such a meaning and our brand is such a demonstrated leader in this area.
On top of really strong execution by the team knowing how we need to deploy the way we support the brand is working very well for us.
Dara Mohsenian: Great. And then Dave, if I can slip in one follow-up, just the gross margins were obviously very strong in the quarter, well above what the street expected. It sounded like most of the drivers you mentioned year over year were more sustainable. So maybe can you just talk about that gross margin line and how sustainable the Q1 level is as you think about the go forward over the next few quarters here? Thanks.
Dave Loretta: Yes. Certainly. As you said, the gross margin drivers were a big element of what we saw is the improvement this quarter. And we did call out that improvement over last year benefited from the prior year’s write off due to the transformation initiatives, so roughly 400 basis points, benefit there. But the remaining amount is a function of cost management on product fulfillment logistics and the benefit of pricing. And so if you think about our outlook and driving earnings growth, it will come from a combination of increased revenue, but also the expansion of gross margin. And Q4, our 35% related to a pretty healthy increase in Q1 37%. So we’re comfortable within this range and see that that’s where for the balance of the year we’ll still see meaningful improvement over the prior year, which gets sequentially more tougher with the comps, but we’re comfortable in the range that we’re at.
Operator: Our next question comes from Dana Telsey from Telsey Advisory. Your line is now open.
Dana Telsey: Hi. Good afternoon, everyone. Carla, as you think about the distribution channels in your categories, what changes are you seeing in distribution channels? What changes are you seeing in orders? And then as you think about pricing go forward, what lever on the gross margin does that play going forward as compared to what happened this quarter? Thank you.
Carla Vernon: Hi, Dana. Nice to be with you today. Thanks for joining the call. So as far as distribution, as you pointed out, distribution is such an important part of our overall roadmap for growth. We articulated in our recent investor presentation these three pillars brand maximization, margin enhancement and operating discipline. And that distribution piece really lives for us in that brand maximization pillar and it’s actually been a very strong driver for us. As you may recall, we moved from 78 ACV into the mid-80s this year. And our distribution growth in the quarter, we also grew 9% within the quarter in distribution. So we’re very pleased at the early stages of really delivering on our overall distribution strategy, which internally we have this shorthand, we call it our faces, places and spaces strategy, because there is so much fundamental growth for us available on distribution.
That distribution is actually driven not only by getting into a new door, but by increasing the product offerings available in our hero portfolio. So for example, this year we executed a couple of really strong sizing strategy launches. We launched our gable top refills for our very top selling baby personal care by wash and shampoo line. We also launched a large size of our healing ointment. By being able to bring our hero items forward in larger sizes, we’re really able to bring distribution on proven hits to our retail channels and our current aisles. So we’re very pleased about the early days in which we’re executing our distribution strategy. We continue to expect that to be a leading driver of our scaling of the Honest brand. You know us about pricing.
We have seen our pricing be effective in market that we put in place over the last year, which broadly was across almost all of our categories. As I just said for the last 12 weeks, our growth is really nicely balanced between unit growth and dollar growth. So we feel comfortable that our pricing is being accepted. And then where pricing plays a role in the future will be something we will always consider based on what we’re seeing in our relationship with the categories where we serve a role as a premium brand and what we see as the sort of consumer macroeconomics.
Operator: Our next question comes from Laura Champine from – Loop Capital. Your line is now open.
