May’s highlights include when the Honest Company (NASDAQ: HNST) listed on the Nasdaq exchange at the beginning of the month, raising $412.8 million. It was the culmination of a long recovery for the baby and clean beauty products group that was co-founded and led by the Hollywood actress Jessica Alba as the company sealed $1.44 billion valuation after reviving its fortunes. Nasdaq has been enhanced with a company that sells diapers, nursing pillows, vitamins and non-toxic beauty as well as household products.
The Market Debut – A Comeback
Since it was founded in 2011, the company had been valued as high as $1.7 billion in 2015 before company came under scrutiny in 2016 due to its claims to be using only natural ingredients. After a lawsuit that claimed its products contained a harsh chemical that was among those that the company pledged to avoid, Honest reached a $7.35 million settlement for wrongly labeling some products as natural, plant-based or chemical free.
Alba and her team honestly worked hard to shake off much of the reputational and financial damage from a series of product lawsuits and recalls. In 2017, the company also recalled baby wipes because it found mold in some packages, along with baby powder over concerns it may cause skin or eye infections. As a result, sales plummeted and the company lost its “unicorn” status. In a statement released in the IPO prospectus, Alba wrote that the company’s rapid growth ended up compromising key business functions.
Financials
Honest has never been profitable, but its revenue rose from $236 million in 2019 to $300 million in 2020 as the pandemic fueled demand for cleaning and home beauty products, helping the company enjoy the level of sales it had back in 2016. Losses also narrowed last year from $31 million in 2019 to $14 million.
Scrutiny, Lawsuits And Recalls – Honest All The Way?
Despite statements by the FDA and USDA regarding the appropriate use of the word ‘natural” in the personal care industry, there is no U.S. government-regulated definition of the term. Honest markets all its products as ‘natural’ and takes great pride in banning 2,500 questionable ingredients. While advertising its products as non-synthetic and sustainable, it faced many “health and safety incidents or advertising inaccuracies” and listed them as a continued risk factor in its IPO prospectus. These troubles aren’t history either as in January this year, the brand issued a voluntary recall for one of its bubble baths due to concerns it could cause infections.
Speaking of honesty, here are a few things you should know about Honest.
Diapers Play A Central Role
Honest’s products fall under three main categories, but its diapers and wipes line generate about 63% of total sales, with skin care and personal care chipping in 26% and household and wellness bringing in 11% the table. According to the prospect, diapers are a “strategic consumer acquisition tool” as nearly 90 percent of its diaper buyers went on to buy something else last year, with nearly half buying two or more non-diaper products.
It Sells Its Products Online And Offline
Online sales make 55% of total revenue as they either come through its own website Honest.com or through third-party platforms like Amazon (NASDAQ: AMZN) or Walmart (NYSE: WMT), whereas 45% is generated through partnerships that span across 32,000 retail locations across the U.S., Canada and Europe, including Costco (NASDAQ: COST) and Target Corporation (NYSE: TGT).
Growth Is Slowing Down
Growth is slowing as total sales grew 27 percent to over $300 million last year, while the company forecasted in the prospectus that its yet-to-be-released Q1 results from 2021 would be far more modest. Q1 operating results are still unknown but the company’s biggest segment, again diapers, grew more slowly last year than its smallest category, household and wellness, 16 percent and 116 percent respectively, with skin care and personal care growing 35 percent.
Profitability Is An Issue
Last but not least, the company is still not profitable despite all of the fanfare, hype, celebrity testimonials and nearly a decade in business, along with a market value that is well above $1 billion.
A thousand rejections in Hollywood gave Alba the resilience to push organic beauty and baby care brand to listing but despite the 40-year-old founder’s innate and invaluable ability to resonate and engage with 40 million social media followers, Alba can’t reach the shore alone. This is why she is handing the role of the chair of the board to James White, former chief executive of Jamba Juice, while she will remain as the company’s chief creative officer with a yearly salary of $600,000.
But it is up to the CEO Nick Vlahos, who was formerly an executive at Clorox (NYSE: CLX) and Burt’s Bees to show clean beauty can be both honest and profitable. Vlahos was brought in for a $6.8 million salary package, roughly triple Alba’s non-stock compensation. Although Alba’s original idea and philosophy are still intact as she aimed to “build a mission-based, for-profit business that addresses health equity, sustainability and social justice” — the path leading to that ideal is clearly filled with many challenges that still remain.
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