IPO Watch – The Honest Company (HNST)
Founded by actress Jessica Alba, The Honest Company (HNST) is focused on leading the clean lifestyle movement, creating a community for conscious consumers and seeking to disrupt multiple consumer product categories.
The company believes that the “clean and natural” segments of the Diapers and Wipes, Skin and Personal Care and Household and Wellness markets are growing at outsized rates, as a result of the increasing shift in consumer demand for “better-for-you” products. Diapers and Wipes, Skin and Personal Care and Household and Wellness markets, which they estimate generated approximately $8B, $81B, and $41B of retail sales, respectively, in 2019, and which they estimate will grow at a CAGR of 2%, 3% and 2% from 2019 to 2025, respectively. Combined, they believe their market share is less than 5% of these markets overall, thus providing significant room for growth. It should also be noted that these three categories represented 63%, 26% and 11% of their 2020 revenue, respectively.
The company’s omnichannel approach seeks to meet consumers however they want to shop, balancing deep consumer connection with broad convenience and accessibility. Since their launch, they have built a well-integrated omnichannel presence by expanding retail accessibility across both Digital and Retail channels, including the launch of strategic partnerships with Costco (COST), Target (TGT), and Amazon (AMZN) in 2013, 2014 and 2017, respectively. In 2020, they generated 55% and 45% of their revenue from Digital and Retail channels, respectively.
“We maintain direct relationships with our consumers via our flagship digital platform, Honest.com, which allows us to influence brand experience and better understand consumer preferences and behavior. We increase accessibility of our products to more consumers through both the third-party pureplay ecommerce sites that, with Honest.com, comprise the rest of our Digital channel, and our Retail channel, which includes leading retailers and their websites. Our products can be found in approximately 32,000 retail locations across the United States, Canada and Europe. This distinctive business model has allowed us to efficiently scale our business while remaining agnostic as to the channel where consumers purchase our products.”
Digital Growth – In their S-1 filing, they state that in tandem with this category growth, a fundamental channel shift is underway across the Diapers and Wipes, Skin and Personal Care and Household and Wellness markets. Historically, products in these markets have been sold through traditional, wholesale, store-based channels, which accounted for approximately 80% of U.S. retail sales in these markets in 2019, according to their estimates. In recent years, consumer behavior has transitioned toward digital and direct-to-consumer channels. According to their estimates, from 2014 to 2019, total ecommerce sales grew at seven times the rate of brick and mortar store-based sales. “We see consumers increasingly self-educating on the benefits of clean and natural products through social media, influencers and other online content, driving digital engagement and purchasing that supports continued outsized growth of the ecommerce channel.”
International Growth – In 2020, international sales represented just 2% of total revenue while a significant number of Jessica Alba’s social media followers were located outside the United States. “We plan to accelerate our growth outside the United States by leveraging the Honest brand and global reach of Jessica Alba. We plan to prioritize markets where consumer trends towards clean, ingredient-led products in our categories are accelerating. We have entered Canada and Europe through partnerships with leading retailers and intend to leverage our proven consumer resonance to expand our footprint across existing and new accounts. We have a meaningful opportunity to leverage Jessica Alba’s large following in Asia to tap into one of the largest addressable markets for baby and personal care products. We plan to partner with leading international retailers and third-party ecommerce platforms to allow us to efficiently expand our international reach.”
Existing Products – The company strives for continuous improvement in their existing products’ safety, sustainability, efficacy and design profile, as exemplified by the introduction of their clean conscious diaper in January 2021. “We believe continuous innovation is important to accelerating our growth, deepening consumer connections and improving the profitability of our product offering.”
New Categories – The company intends to leverage their in-house innovation capabilities to launch new products that disrupt adjacent product categories. Their direct relationship with their community of consumers provides insight into those categories in which latent demand exists. “Moreover, our consumer research indicates that our brand resonates in a broad set of adjacent product categories, including new product categories within Household and Wellness and Skin and Personal Care.”
In terms of financials, the company stated that they grew revenue 27.6% from $235.6M in 2019 to $300.5M in 2020. Meanwhile, it grew revenue in Diapers and Wipes, Skin and Personal Care and Household and Wellness categories by 16.4%, 35.5% and 116.5%, respectively, from 2019 to 2020. Lastly, its gross margins increased from 2019 by 370 basis points to 35.9% in 2020.
Hedgeye’s Daniel Bilosi, in their Black Box Pre-IPO review, stated, “Ultimately The Honest Company seems destined to be acquired by a large consumer goods company…HNST will be attractive to potential acquirers after it proves out its brand as a consumer lifestyle.”