The Honest Company, Inc. (HNST) Earnings Call Transcript & Summary

Inflation is moderating in consumer products like apparel and personal care items. And we saw sales for those items this morning, a little mix clothing sales touch lower compared to the month prior. But personal care items remains strong, showing people still spending on those small everyday items. For more on this, let's bring in Carla Vernon, who is the CEO of The Honest Company. Carla, great to have you here on the program with us, and thanks for taking the time. It's amazing.

There are so many different directions that we could go, but in the limited amount of time that we have, first, just want to start out with asking what your readthrough is right on the consumer, given that we've heard from CFOs, like that of John David Rainey over at Walmart saying, consumers are trading into Walmart. Does that mean that they're trading down from The Honest Company or other quality manufacturers out there?

Brad, thank you so much for having me. It's a pleasure to be here. What a perfect day for us to be having this conversation. What we've been seeing at The Honest Company is that the strong performance that we delivered this recent quarter with our all-time record revenue of $93 million in the quarter, expanding gross margin by 1,100 basis points is a further emphasis on the fact that the consumer is willing to pay for products. When that product is a quality that they believe in, and delivers against the need that they have. That's really the magic and the commitment we have to consumers. And what we're seeing is that our performance is strong across the board, across our retail set of partners, we're having very strong consumption. In the quarter, our consumption was up 7%, and that's very broad-based.

And so when you think about where the consumer is still willing to pay in for premium, where does that kind of signal to you and the leadership at the company that you need to add on, that you need to lean in? And where are those categories?

Yes, absolutely. One of the pieces of information that really guides us has been true for Honest since the start. Honest was built as a baby and personal care company that could bring to people products that had a higher standard for sustainably designed and for clean. And what we've been seeing in the research is that there is a continuing increase in the interest in sensitive skin care products. That market of sensitive skin care is expected to nearly double to $80 billion by 2030. There's also an increasing incidence of allergies in children. The amount of allergies reported in children has doubled since 1997. And that's really where our products come in. So we have something we call The Honest Standard. 3,500 ingredients we do not allow in our products. So our standard for clean exceeds both U.S. and EU requirements, and that is something shoppers are willing to pay for. We have seen successive quarters of growth and success even throughout these economic times.

You took over a CEO beginning of 2023, Carla. And since then, I mean, I'm looking at a 52-week chart for the company here just because that's an easy chart to pull up. And the company -- the stock is up about 200%. Since the time you took over as CEO, I think it's up still about 50%, all things accounted for. When you think about the new transformation pillars, how do you unlock that next leg of growth for The Honest Company? And what is the core pillar that this brand needs to lean into at a time where the consumer is very choosy?

Yes. Thank you. We have 3 transformation pillars we put in place about 1.5 years ago when we realized that what we have is a gem of a brand, beautiful collection of products, but our financial foundation needed strengthening. And so we identified 3 things we wanted to focus on. The first is things that drive the brand and the top line, and we call that brand maximization. This is a brand that has not yet fully manifest or crack the code of availability. It just even has opportunity to further push into brick-and-mortar retail, so more people can find these products where they shop. The second place we put our focus is in margin expansion. As I told you, we've really done a great job, and that is a team effort of getting costs under control and really being efficient in how we operate, which has enabled us to hit a margin of 38% in the quarter. That's 1,100 basis points of year-over-year for us in the quarter. And then lastly, we have something we call operating discipline. This is how we show up to work and how we operate as a team as well as some of the discipline we put in our cost structure. When we do those things altogether, we are really able to give this business and this enterprise, the foundation they can stand on and it can scale from. That brings me right back to you said what's the most important pillar, I believe this brand is still at the early innings of where it can be and will be. So that brand growth, that brand availability we connect that to our first priority pillar, which we call brand maximization.

Carla, since the midpoint of last year, we'll call it, a lot of analysts, the bullish case that they were for the company is for Honest Company to be acquired. What do you say to those who are just waiting and thinking that the only way that this company is going to continue to be able to compete against some of the behemoths in the space is if there is an acquisition because in some frame of mind, that would say, hey, they're positive that you can do it, but that it's going to be a long uphill battle.

Well, of course, what we will always do is what's in the best interest of shareholders and of consumers. What you can see is as we put this new management team in place 1.5 years ago, the execution and the clarity with which we are operating is showing that we are delivering something the market values and wants. That's a pleasure and a privilege for us. We think we've got a lot more opportunity, just staying focused on exactly what it is we're doing. We -- as you know, we recently raised guidance. So we believe there is really more where this came from. We raised guidance on both top and bottom line because I love the way the teams are executing the strategy.

Just lastly, I only got about 30 seconds left here. We're going into overtime. This is a digital-first company as people have known it for years too, and the company has leaned into that. How do you lean further into that, knowing some of the trends that are drawing more people into online realms, not full on Metaverse style, but really more so in the engagement of where we're doing that product discovery point and the point of discovery being more digital now.

I've always believed the consumer is the boss, where they want to shop, that's where we need to be. Thankfully, I came from Amazon, as I'm sure you know, before I was at Honest. So we really understand the growth of the e-tailing and omnichannel environment, and we're able to execute that both through really online specialists like Amazon as well as our brick-and-mortar partners are really driving a ton of growth for us on their e-commerce portion of their brick-and-mortar sites. And then honest.com is always available where we have the full selection of available for people to buy. So we are there with this generation of shoppers. And as you probably know, 50% of our revenues from online shopping. So we're great at that.

Carla, great to have this conversation with you. Would love to check back in the future. Carla Vernon, who is The Honest Company's CEO, thanks so much.

Thank you.