The Honest Company, Inc. (HNST) Earnings

Management highlights

- **Overall Strategic Progress * The company's 3.5-year transformation is complete, resulting in a fundamentally stronger enterprise with clear strategic focus, sustained consumption growth, and structurally higher profitability. Since 2022, the company has delivered an 11% consumption CAGR, and underlying adjusted gross margin has increased 1500 bps to ~44% in Q2 2026. * Core strategic pillars remain brand maximization, margin enhancement, and operating discipline, supported by an asset-light operating model and pristine balance sheet (end-Q2 cash of $105.9 million, zero debt). First half 2026 free cash flow was $35.3 million, a substantial improvement from negative $3.8 million in the prior year period. - **Brand Maximization Progress * Overall household penetration reached 8.1% in Q2, an increase of 100 bps YoY, with nearly two-thirds of penetration growth coming from no-kid households, demonstrating the broad appeal of the Honest brand beyond traditional baby product consumers. Overall consumption grew 8%, outpacing category growth of 2%, with volume-led growth. * The flushable wipes 'It's Time to Get Honest' campaign generated over 3 billion media impressions and drove significant viral engagement, expanding brand awareness to new, broader audiences. Flushable wipes recently added distribution in the feminine care aisle at CVS. * The big kid personal care collection, launched in partnership with Disney/Pixar for *Toy Story 5*, has had a strong launch and is expanding to additional retail channels including HEB and Ahold Delhaize banners. * Tentpole merchandising events like Amazon Prime Day are leveraged strategically to acquire new customers: 58% of visitors to the Honest storefront during Prime Day were first-time customers. - **Operational and Financial Highlights * Operating expenses decreased $4.1 million YoY to $30.8 million, with targeted 20% YoY increase in marketing spend focused on high-growth Wipes and Personal Care segments. The company repurchased 5.6 million shares year-to-date for $18.7 million at an average price of $3.35 per share, with $6.3 million remaining in the current repurchase authorization. * The 'Powering Honest Growth' restructuring program is largely complete, delivering more net cost savings than originally guided, with warehouse consolidation already implemented and savings starting to be realized in Q2.

Guidance

Management raised its full-year 2026 guidance based on strong first half execution and improved profitability: - Reported full-year revenue is guided to a range of $319 to $325 million, including an approximate $10 million benefit from apparel inventory liquidation. - Organic revenue growth guidance was raised to 5% to 7% from the prior 4% to 6%, reflecting expected accelerated momentum in the second half of the year. - Adjusted gross margin guidance was raised to the mid-40s from the prior low 40s, driven by ongoing favorable product mix and supply chain efficiencies. - Adjusted EBITDA guidance was raised to $23 to $25 million from the prior $20 to $23 million. - Management confirmed the new apparel licensing agreement will be immaterial to 2026 results.

Segment performance

Overall reported Q2 2026 revenue was $83.3 million, a 10.9% year-over-year decrease driven by strategic underperforming business exits and diaper category declines, partially offset by growth in higher-margin segments. Organic revenue overall increased 6.7% YoY. Reported gross margin was 48.4%, adjusted gross margin was 50.1% (up 970 bps YoY), and underlying adjusted gross margin (excluding one-time items) was 43.8% (up 340 bps YoY). Net income was $10.7 million, up from $3.9 million YoY. Adjusted EBITDA was $14.5 million (17.3% margin), with underlying adjusted EBITDA margin of 9.8% (up 160 bps YoY, an all-time high). - **Wipes Portfolio**: Delivered 26% consumption growth (vs category growth of 2%). Clean conscious baby wipes grew 16%, flushable wipes grew over 200% (fastest-growing branded player in the segment), and sanitizing wipes grew 55% (second largest hand sanitizing wipes brand in the category). This segment is a high-growth, high-margin core platform. - **Personal Care Portfolio**: Grew 19% (vs category growth of 5%), maintains position as the number two brand in total baby personal care. This is also a high-growth, high-margin core platform. Together, Wipes and Personal Care represent over 70% of total company revenue. - **Diaper Segment**: Experienced structural headwinds shared by all major national branded players in the category, contributing to overall reported revenue decline. The company continues to invest in product improvements and value positioning for diapers while managing the business strategically amid industry pressures. - **Apparel/Baby Bedding Segment**: The company is transitioning to an outbound licensing model for this category. Liquidation of existing apparel inventory contributed an approximate $10 million benefit to full-year 2026 reported revenue, and the new licensing agreement is expected to be immaterial to 2026 results.

Risks & headwinds

- The diaper category is facing structural industry headwinds, with all major national branded players experiencing unit declines and share losses, a dynamic the company expects to persist for the foreseeable future, creating ongoing pressure on this segment. - All forward-looking results are subject to inherent risks and uncertainties that could cause actual performance to differ materially from guidance, as outlined in the company's SEC filings and safe harbor disclosures. - Investments in marketing and operational capabilities in the second half will increase SG&A and may not deliver the expected returns in terms of customer acquisition, penetration growth, or long-term profitability.

Analyst Q&A

• Q: Clarify whether the 2026 profit guidance includes the impact of the Q2 tariff refund, and provide color on expected marketing spend ROI and second half marketing/SG&A increases. /

  A: Full-year adjusted guidance includes both the favorable tariff impact and the negative drag from apparel liquidation, with the same adjusted metric definition used consistently quarter-over-quarter. Underlying gross margin is expected to be stronger in the second half than the first half. Increased marketing spending is focused on Wipes and Personal Care to drive household penetration, with additional SG&A investments in operational capabilities to support scaling. Early results are positive: the flushable wipes and Toy Story big kid campaigns have already driven stronger than expected penetration growth, particularly among no-kid and big kid households, demonstrating strong ROI on the incremental spend.

• Q: Why is the company switching to an outbound licensing model for apparel, and how will this segment evolve moving forward? /

  A: The licensing model aligns perfectly with the company's core asset-light strategy. It allows Honest to continue offering baby apparel and bedding to consumers who want the Honest standard in this category, without requiring the company to hold inventory or operate the capital-intensive direct retail apparel business. This structure benefits both the company and consumers long-term, and will have no material impact on 2026 results.

• Q: Update current distribution for high-growth categories, and how much room does expanded distribution have to drive future growth? /

  A: Distribution dynamics vary dramatically across the company's multiple product categories and aisles, so household penetration is now used as a more holistic, uniform metric that includes both brick-and-mortar and e-commerce performance. Overall brand penetration is 8.1% (up 100 bps YoY), but individual high-growth segments have very low penetration with enormous runway: baby personal care penetration is less than 3%, while flushable wipes penetration is less than 1%. Every 1 percentage point gain in segment penetration is estimated to add $20 to $30 million in annual revenue, creating very large long-term growth upside as awareness expands.

• Q: What is the split of Q2 organic growth between distribution gains and velocity improvements, and how durable is this acceleration? /

  A: The sequential acceleration from Q1 to Q2 followed the expected pattern: distribution gains were secured in Q1, and these gains took hold to drive accelerated velocity and growth in Q2, a trend expected to continue through the second half. Innovation launches are typically scheduled earlier in the year to align with retail reset timelines, and the company then leverages tentpole merchandising events to drive awareness, trial, and velocity for new products. The consistent 8% overall consumption growth confirms this is sustained, durable momentum rather than a one-time spike.