Honest Company, Inc. Q1 FY2025 earnings call

• Carla Vernon noted Dave Loretta's planned retirement and introduced Curtiss Bruce as the new CFO. - The company delivered solid first quarter results with double-digit revenue growth, gross margin expansion, and positive operating income. - Transformation pillars: - Brand maximization: Wipes and baby personal care growth, focus on sensitive skin products with household penetration at 7.3% (55 basis points growth y-o-y). - Margin enhancement: Gross margin of 39% with 170 basis points expansion, driven by supply chain cost savings and product mix changes. - Operating discipline: Improved cross-functional model and integrated processes for forecast accuracy, inventory management, and customer service levels. - Tariff management with a three-pronged strategy: agile annual plan, inventory management to delay tariff impact, and cost savings through collaboration with suppliers.

In the first quarter, The Honest Company achieved revenue of $97 million, representing a 13% year-over-year growth. The gross margin was 39%, an expansion of 170 basis points. The wipes portfolio saw over 40% consumption growth, driven by distribution gains, expanded size offerings, and in-store merchandising. The baby personal care collection also performed well, with the sensitive skin portfolio growing 35% year-over-year. However, the diaper portfolio faced headwinds due to a distribution change at a key retailer, but a new and improved diaper with leak protection and gentle features was launched.

• Reaffirmed 2025 financial outlook: net revenue growth in the range of 4%-6% year-over-year and adjusted EBITDA in the range of $27 million to $30 million. - Expected retailer inventory build in Q1 to reverse in Q2, and continued headwinds in the diaper business in Q2, but first half growth within the annual guidance range. - Tariff impact of roughly 1.5 percentage points net on gross margin in 2025, to be offset by cost savings and efficiencies.

• Tariff-related headwinds, particularly from imports from China. - Deceleration in the diaper portfolio due to a distribution change at a key retailer and category pressure. - Uncertainty in broader consumer sentiment and potential changes in shopping behavior.

Q: Aaron Grey asked about sales timing impact and 1H guidance.

A: Carla and Dave explained that there was a pull-forward of shipments in Q1, particularly from Amazon, which is expected to bleed out in Q2, and the first half growth is within the guidance range considering comps from last year.

Q: Aaron Grey asked about marketing plans.

A: Carla stated that the company will continue to invest in marketing and brand building, with a focus on supporting the launch of the new improved diaper and expanding wipes business into new retailers and aisles.

Q: Anna Glaessgen asked about category deceleration and trade down.

A: Carla noted that the company's consumption continued to grow ahead of competitive categories, but there were specific distribution shifts and event-related changes that affected the numbers, while the natural product market remained strong.

Q: Andrea Lisher asked about tariffs and inventory.

A: Dave explained the three-pronged tariff mitigation strategy, including inventory management to delay tariff impact, and Carla mentioned that the company is prepared with ongoing margin enhancement efforts to offset tariff headwinds.

Q: Dana Telsey asked about promotional intensity and long-term margin.

A: Carla discussed the need to work through distribution changes and event-related impacts, while Dave stated that the company continues to find opportunities to expand margin, with supply chain being a key area.