Honest Company, Inc. Q3 FY2024 earnings call

• Delivered highest quarterly revenue in company history at $99 million, up 15% YOY.
• Achieved gross margin of 39%, expanding 710 basis points YOY.
• Generated adjusted EBITDA of $7 million, fourth consecutive quarter of positive adjusted EBITDA.
• Raised full-year 2024 guidance for revenue and adjusted EBITDA.
• Consumption of Honest products stronger than competitive personal care categories; Honest's portfolio grew 9% YOY vs. 2% decline in comparative sector; at Amazon, consumption up 19%.
• Shared customer testimonial about Hydrogel Cream helping a cancer survivor; Hydrogel Cream growing 34% YTD at Amazon.
• Supply chain optimization seen in pallet management improvement, saving labor and reducing order turnaround time.
• Marketing efforts included partnerships with retailers, strong performance in Prime Days and Target Circle Week, and a wipe box ranking in Top 100 performing deals on Amazon Prime Day.

For the third quarter of fiscal 2024, Honest Company achieved several key financial milestones. Net revenue was $99 million, representing a 15% year-over-year increase, which is the highest quarterly revenue in the company's history. Gross margin was 39%, an expansion of 710 basis points year-over-year. Adjusted EBITDA was $7 million, marking the fourth consecutive quarter of positive adjusted EBITDA. The revenue growth was balanced across distribution and velocity gains, with strong performance in baby products and wipes portfolios. Retail tracked channel consumption grew 9% compared to a 2% decline in the comparative personal care sector, and at Amazon, consumption was up 19%.

• Raising full-year 2024 guidance for revenue to high single-digit percentage growth range, up from mid-to-high single-digit previously.
• Adjusted EBITDA guidance raised to $20 million to $22 million, up from $15 million to $18 million.
• Annual gross margin expected in range of 37% to 38% due to supply chain efficiencies and product cost savings.

• Macroeconomic factors and consumer spending pressures.
• Potential for new tariffs, commodity price increases, or disruptions to logistics.

Q: Could you quantify how much shipment benefits impacted the quarter and implied softer growth for 4Q?

A: Dave Loretta said roughly 3 to 4 percentage points of revenue growth attributed to supplying inventory for retail events like Target 10th anniversary collection, Walmart Hispanic Heritage Month, and Amazon Prime Day events.

Q: How much confidence do you have to keep pushing marketing or investing in gross margin to drive growth vs. bottom line?

A: Dave Loretta said comfortable with flexibility to dial up marketing to drive brand awareness and trial, with household penetration at 6.7% increasing 2023 basis points, and comfortable with trade promotion to drive velocities.

Q: How sustainable is consumption and gross margin?

A: Carla Vernon said consumption driven by 5% unit growth and 4% price increase, with repeat rates and fundamental drivers indicating strong alignment; Dave Loretta said gross margin improvements from product cost savings and supply chain efficiencies are sustainable and structural, with teams aggressively going after cost savings and portfolio mix supporting margin expansion.

Q: Update on China sourcing for wipes and potential tariffs?

A: Dave Loretta said wipes are sourced in China, team working on diversification and cost reductions, nimble sourcing organization not heavily concentrated in China, prepared for uncertainty but timing and level of tariffs unclear.

Q: How much lift from price mix to gross margin in Q3 and ability to shift production for wipes?

A: Dave Loretta said gross margin lift mostly from cost savings, pricing largely lapped; Laura Champine asked about shifting production, Dave Loretta said working on other supply locations and cost reductions, but no immediate material impact expected in 2025.