Q4 2021 Honest Company Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the honest company's fourth quarter and year end 2020 one earnings call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to Mr. Steve Boston VP Investor Relations at the honest company. Please go ahead Sir.
Good afternoon, everyone.
Thank you for joining our fourth quarter and year end 2021 conference call.
Joining me today are Nick Vlahos, our Chief Executive Officer.
Kelly Kennedy, our Chief Financial Officer.
Before I begin I would like to remind you of our legal disclaimer that we will make certain statements today that are forward looking within the meaning of the federal securities laws.
<unk> statements about the outlook of our business and other matters referenced in our earnings release issued today.
These forward looking statements involve a number of risks and uncertainties that could cause actual results to differ materially.
Please refer to our earnings release issued today as well as our SEC filings for more detailed description of the risk factors that may.
May affect our results.
Please also note that these forward looking statements reflect our opinions only as of the date of this call. We undertake no obligation to revise or publicly release the results of any revision.
These forward looking statements.
Light of new information or future events, except as required by law.
Also during this call, we will discuss non-GAAP financial measures, which adjust our results to eliminate the impact of certain items.
You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in the financial results section of today's earnings release.
Well I'd broadcast of this call is also available on the Investor Relations section of our website at investors don't honest dot com.
With that I'll turn the call over to Nick.
Thanks, Steve Good afternoon, everyone. Thanks for joining us today.
As noted in our earnings release, our fourth quarter reflected continued revenue growth and market share gains in our core product categories.
Currently we saw 19% revenue growth in our core categories of diapers, and wipes and skin and personal care behind our clean conscious diaper and our beauty restage innovation.
Honest also grew market share in the quarter across these core categories.
Total revenue growth for the fourth quarter was 3% with strong core category growth of 19% offset by a decline in household and wellness as demand for our household sanitizing and disinfecting products remained lower than the prior year as a result.
We have refocused our investments on the core parts of the business and invested in new innovation in the wellness subcategory that will launch in the second half of 2022 .
While gross margin adjusted EBITDA for the fourth quarter were challenged due to inventory reserves taken on certain sanitizing and disinfecting products in response to demand declines.
We believe that the actions, we're taking will improve our margin profile starting in the second half of 2022 .
We're looking at our full year 2021 results I'm proud of our honest team for dealing with multiple macroeconomic challenges head on and continuing to execute against our long term growth strategies around marketing innovation product innovation, omnichannel distribution and social responsibility.
As we celebrate our 10 year anniversary. This year. The honest brand is poised to continue to lead the clean conscious consumer movement.
As we embark on our next decade, let me illuminate what gives our team confidence and conviction that we're creating a modern consumer brand for the future.
First.
The power of the honest brand remains resilient in a highly volatile environment reflected in our strong core category revenue growth of 13% in 2021 behind our diapers and wipes and skin and personal care business.
Second.
Our focus on driving growth with our content community Commerce marketing strategy yielded an increase in unaided brand awareness on diapers from 25% year ago to 29% today, and we were able to expand and grow our household penetration to four 9% by the <unk>.
End of 2021 an increase of $2 7 million, new honest households over the last two years.
Third.
Our investment in product innovation behind our clean conscious diaper and beauty restage continues to pay off as we grew overall honest retail market share in outpaced category growth in diapers wipes and personal care for 52 weeks ending December 26th 2021.
Fourth.
Our Omnichannel go to market strategy is continuing to advance as we expanded distribution to 43000 retail locations.
As of the end of 2021, representing 49% ACB for the entire honest brand up from 40% two years ago.
Lastly, we expanded our ESG efforts with a continued focus on diversity and inclusion environmental sustainability of our products and strong governance practices.
Our R&D team has worked to increase the number of ingredients, we choose not to use from 2500 to 3500 ingredients.
We've donated over 26 million products to date supporting our commitment to social responsibility.
Also we are proud of the progress we continue to make with our honest team, 65% of our leadership is female and 50% of our workforce is diverse.
As we look towards 2022, I'd like to provide an update on our long term strategy and what has evolved since our initial public offering last year.
The honest brand continues to resonate with the modern consumer as we celebrate our 10 year anniversary as evidenced by core category growth increased brand awareness growth in household penetration increased market share and new Omnichannel distribution.
Our core categories of diapers, and wipes and skin and personal care are expected to continue to drive topline growth and grow market share.
We play in a large addressable market and are continuing to see clean and natural brands outpaced conventional brands across our core categories of diapers and wipes and skin and personal care for example.
Our diapers and wipes category, both clean and natural diapers and wipes grew approximately seven times faster than their conventional counterparts for the 52 weeks ending December 26 2021.
And our baby personal care category clean and natural brands grew over 10 times faster than conventional brands during that same time period.
Our household and wellness category continues to be challenged and has not net sales expectations.
Although only representing 5% of our 2021 total company sales, we have not seen the stickiness and demand from our sanitizing and disinfecting portfolio that we launched in 2020.
As a result, we will be deep prioritizing these products, we've shifted investment in innovation resources into the wellness sub category and we will be launching new product innovation mid year, and our vitamins and supplements platform to reinvigorate growth and leverage our honest dot com subscription.
And Omnichannel distribution partners.
In the digital channel specifically.
We like many others in the industry have seen softening traffic rising consumer acquisition costs and stronger than expected return to in store shopping.
In response in 2022, we are increasing our investment in people and technology to improve our consumer online experience and revitalized growth in the digital channel.
Our main areas of focus include further optimizing the shopping experience on our stock com.
Improving our mobile experience.
Streamlining our subscription business.
And building, a personalization and rewards program for our honest dot com consumers.
As a result of the headwinds that we're seeing on household and wellness and digital along with the sale of our legacy beauty inventory in Q1, 'twenty 'twenty. One we're expecting revenue in the first quarter of 2022 to decline prior to the launch of our new innovation and new.
<unk> strategic retail partnerships that will drive growth in the subsequent three quarters.
As we look at our growth strategies, we continue to see strong progress against our three core drivers of marketing.
Innovation and distribution.
On the marketing side, we continue to focus on driving brand awareness through our content community and commerce strategy and expanding our share of wallet with consumers by cross selling our products across our portfolio.
We have seen strong results in 2021 on expanding awareness and deepening our household penetration and that continues to remain a focus for the brand in 2022 and beyond.
On product innovation, we continue to focus on delivering breakthrough innovation for our consumers across categories in 'twenty 'twenty. Two we have exciting new products coming to include a new line of acne focused skin care products expansion of our mass Skara platform, new concealer lineup and it.
Packaging restage on both our baby wipes and personal care business.
As we look to revitalize household and wellness, we are launching a new wellness supplements platform focusing on her sleep stress and immunity support.
We also have a long term pipeline of category Adjacencies that we plan to methodically enter over the coming years, where the honest brand has a right to play and win we're excited to continue to bring newness to our categories in 2022 and drive growth through continued innovation.
Finally, we continue to grow our distribution footprint and expect to expand our ACB overtime.
In 2022, capitalizing on the strength of our Omnichannel strategy, we feel we are well positioned to capture the shift that we're seeing.
From digital to retail.
We are excited to announce key partnerships for each of our categories for our diapers and wipes and skin and personal care business, we're launching with Walmart dot com in the back half of 2022 .
With an in store.
Walmart launch slated for late 2022 .
In skin and personal care building upon the strength of our beauty restage.
We will be launching a set of skincare products with Ulta in store.
To complement our ultra dot com business in the back half of 2022 .
Finally, we have partnered with GNC on our new supplement platform within household and wellness that we are launching in 2022 in.
In summary, our long term growth strategy still reflects our belief that honest growth in our core categories will outpace market growth.
Consumer demand for clean and natural products is more relevant today than ever before.
Our core categories of diapers, and wipes and skin and personal care continue to perform and capture market share.
We recognize that the household subcategory.
Of household and wellness has not met our expectations as a growth company. We are shifting our focus with new innovation in the wellness subcategory.
As more consumers seek out our brand we believe we're well positioned.
As a 10 year old omnichannel business to deliver growth starting in the second quarter of 2022 and consistent growth in 'twenty, two 'twenty three and beyond now I will turn it over to Kelly.
Thank you Nick and welcome everyone.
This quarter reflects our ninth consecutive quarter of year over year top line growth.
We are pleased with the underlying performance of our core category. This quarter as we faced a challenging macro environment, including significant levels of cost inflation.
Supply chain disruptions and continued decline in our household and wellness category.
Starting with our financial results and key drivers.
Fourth quarter revenue totaled $80 million.
3% increase over Q4 2020.
This was 26% growth compared to the fourth quarter of 2019.
Our core category diapers, and wipes and skin and personal care represented 94% of total revenue and collectively grew 19% in the quarter.
Diving into key drivers by product category.
Diapers and wipes grew 16%.
Our diaper business grew 24% behind the continued adoption of our clean conscious Viper innovation launched in Q1 of 2021.
White's revenue declined largely due to out of stock driven by supply chain challenges.
Based on retail consumption data for the fourth quarter, our diaper consumption was up 32% and our whites consumption does that 34% year over year with both achieving market share expansion.
Skin and personal care grew 26% driven by additional retail distribution incremental assortment.
Retail unit volume and investment in our content community Commerce marketing strategy driving volume growth across both our digital and retail channels.
Based on retail truck consumption data for the quarter, our personal care consumption was up 24% year over year.
So having higher market share penetration during the quarter.
Household and wellness represented 6% of total revenue and declined 68% versus prior year.
Consistent with an industry wide trend, we've seen consumption and customer demand for these products significantly decline as consumers have become vaccinated and return to pre COVID-19 with team.
As a result of declining demand or inventory and sanitizing and disinfecting products without thought.
Which resulted in increasing inventory reserves over the course of the year, including a $3 $2 million increase in Q4.
Now turning to results by channel.
In Q4 of 2020, we saw a surge in retail revenue as a number of retail partners had merchandising program and sanitizing and disinfecting products.
This quarter, we saw a normalization of the split between digital and retail with retail accounting for 49% of total revenue and digital accounting for 51%.
Digital channel revenue increased 17% to $41 2 million, while retail channels revenue decline, 8% to $39 2 million due to the prior year Spike reflected in the household and wellness product category.
Notably retail grew 16% and our core category of diapers, and wipes and skin and personal care versus Q4 2020.
As we have previously highlighted we believe our Omnichannel model is a true competitive advantage, especially as the industry faces rapid and unprecedented shift in shopping behavior.
Given our balanced digital and retail business and upcoming distribution expansion, we are better positioned as we strive to be wherever our consumer chooses to shop.
Turning now to gross margin.
Gross margin was 30% for the quarter, reflecting a 400 basis point negative impact from the sanitizing and disinfecting product inventory reserve.
Excluding this impact gross margin for the fourth quarter would have been 33, 9%.
From 33, 6% in prior year.
Gross margin headwinds for the fourth quarter of 2021 versus the fourth quarter of 2020, including higher input costs as well as the normalization of trade spend as retailers pulled back on trade promotion during 2020.
We were able to partially offset these costs with our clean conscious diaper and beauty restage constellation project as well as better product mix and operating leverage.
Given record levels of cost inflation, we will be focusing on pricing cost efficiency and productivity as levers to drive long term margin and profitability expansion.
We talked last quarter about our first round of pricing, which went into effect in January of 2022.
Given continued cost headwinds, we have taken a second phase of pricing action on additional items in our portfolio focused on select personal care White beauty in diapers that will go into effect at the end of Q2 2022.
In total we expect our price increases from the first and second quarters of 2022 to impact approximately two thirds of our revenue base.
Total operating expenses decreased $5 9 million versus Q4 of 2020, primarily driven by IPO related expenses that occurred in the fourth quarter of 2020.
We invested $12 million in marketing this quarter, which reflected 15% of revenue behind our content community and commerce strategy to drive higher household penetration.
Now turning to the bottom line.
Adjusted EBITDA for the fourth quarter of 2021 was a loss of $3 9 million.
This number was heavily impacted by a $3 2 million dollar sanitizing, and disinfecting inventory reserve and a $700000 donation of face masks to our charitable partner baby the baby as demand for these products waiting towards the end of the year.
We ended the year in a healthy position with $93 million in cash and short term investments with no debt on our balance sheet.
We believe we are well positioned to execute against our long term strategy and continue to retain financial flexibility to invest in incremental marketing product innovation and domestic and international expansion over the coming years.
Now turning to fiscal 2022.
We believe 2022 will be a year filled with continued progress against our strategic initiatives offset by significant challenges, including input cost inflation.
<unk> decline and sanitizing and disinfecting demand.
Increased marketing costs impacting the traffic to our digital platform.
And the lapping of a few significant retail program.
2021.
We are facing significant headwinds in the first quarter, including $5 million of revenue that occurred in Q1 2021, primarily related to the sale of legacy beauty product ahead of the restage.
The first quarter also includes a roughly $7 million headwind on the digital business driven by increased cost of marketing and declining consumer traffic.
As a result, we expect Q1 2022 revenue to decline roughly 15% versus Q1 of 2021.
For adjusted EBITDA in Q1, 2022, we expect a loss of approximately $10 million.
In total we expect the subsequent three quarters to drive mid single digit growth as we introduced new innovation launch new strategic retail partners and improve the digital experience honest dot com.
As such we expect total revenue for 2022 to be flat versus 2021.
As it relates to margin similar to the entire industry. We are seeing continued input cost inflation and in some cases and acceleration of headwinds in areas, such as <unk> resins, surfactants transportation and freight costs.
In total we expect higher input costs to impact gross margin by around 300 to 400 basis points for fiscal 2022.
To help mitigate these headwinds we expect our pricing to improve margin by about 300 basis points.
And expect to have improved product mix operating leverage and cost of eastern projects also positively impact breast market.
As a result, we expect our annual gross margin for the year to be roughly flat to our gross margin of 34, 3% from 'twenty to 'twenty one.
Both gross margin and adjusted EBITDA will be negatively impacted in 2022 by the implementation of a new lease accounting standard.
The impact will be a decrease of approximately $3 million to adjusted EBITDA of which approximately $2 million will negatively impact gross margin versus the previous accounting standard.
On operating expenses, we expect marketing for the full year 2022 to be 15% to 16% of revenue roughly 12% to $13 million per quarter.
We expect SG&A for the full year 2022 to be 25% to 26% of revenue.
Roughly 20% to $21 million per quarter.
For R&D, we expect the full year 2022 to be 2% to 3% of revenue.
Finally, we expect full year adjusted EBITDA to be in the range of negative five to negative $10 million, reflecting a loss of $10 million in Q1 and sequential improvement over the remainder of the year as our strategic initiatives come into play.
As we embark on our next decade, we are pleased with the momentum and core strength of the business and diapers and wipes and skin and personal care, which collectively represent 95% of our 2020 revenue and have grown double digits year over year.
We are facing an extremely challenging supply chain, an inflationary environment.
Remain confident in our ability to expand margin and profitability overtime.
As we continue to execute our long term strategy, we have conviction in our long term growth algorithm.
The clean and natural market is outpacing growth versus conventional brands.
As a leader in the natural space, we will benefit from this trend to grow market share in our core category.
Honestly as a lifestyle brands with the power to expand our points of distribution.
Drive, our omni channel strategy and extend into adjacent categories over time.
We expect to see sequential improvement in revenue gross margin and adjusted EBITDA as our strategic initiatives are executed over the course of 2022 and into fiscal 2023.
We are focused on executing our growth plan and driving higher long term shareholder value, while solidifying honest position as the next generation modern CPG company.
With that I'll turn the call over to the operator to begin the Q&A portion of the call.
Good afternoon, and good evening, everybody, it's neck and before we get started with Q&A.
Wanted to take a moment and just address a question that I expect you all to have based on kind of what we shared today.
Our expectations for Q1, and does that really raise questions on the fundamental health of the business.
First I think it's important to remember we're building a business for long term with a focus on long term shareholder value.
We're not managing the business by quarter.
But we do recognize quarters matter to our investors and our visibility in future expectations matters.
As a result, we want to provide insight into Q1 and to answer kind of that last question first we have a fundamental issue with the business and the answer is no we.
We don't have an issue on the underlying health of the business and I'm going to tell you why.
95% of the business you look at diapers and wipes you look at our skin and personal care business witnessed double digit growth rates.
We've increased our market share in these categories. Our growth is outpacing conventional products. We've increased household penetration and we have increased our brand awareness and we're happy with that scorecard, it's green across the board, but we acknowledge.
There were challenges on 5% of the business household and wellness has not met our expectations.
Even though it only represents 5% of the.
The overall business.
We need to address it we can address it head on.
So we're quite confident that our outlook for Q1, it doesn't change our view and the fundamental health of the business it remains quite strong.
So let me kind of give you guys can shed some light on on Q1, specifically.
Our outlook of <unk>.
Negative 15% top line comes down to three things one when I call onetime items from last year to slowdown in digital and three household and wellness transition.
So kind of let me walk you through these three areas number one this onetime item amount of $5 million is connected to this elevated sales last year due to the beauty restage and some of the Covid related disinfecting and sanitizing products.
Two when you look.
Look at digital and just kind of help it will take a step back within CPG and within the market.
When COVID-19 hit and retail stores shut down everybody shifted to digital now all of a sudden you see digital softening in more people going into brick and into retail.
We're blessed to have roughly 50 50 split between digital and retail our ACB breath on retail still growing so.
So in the near term kind of the shift to retail does impact us, particularly when you look at the fact that we have limited presence in the south southeast southwest.
So what are we going to do about it.
We're sticking with the strategy, we're being strategy lead and we're going to build out our distribution.
Walmart.
Helps us because we've secured a partnership with Walmart not only in dot com, but also with physical retail helps us in the south as well as the southeast.
Our beauty restage has been successful we're expanding our footprint with Alta historically, we've had ultra dot com, we're now going into broad based distribution and physical ultra stores across the U S.
And then GNC, which gives us additional credibility around supplements across the U S I'm going to significantly increase our ACB in the back half of 2022 with.
More to come.
As we look at the rest of the year and it really positions us well as we always talk about not just the short term, but the long term not only for the back half of 2022, but also in 2023 and beyond.
Number three let me kind of turned to household and wellness and we all know when Covid hit.
Being agile and being nimble as an organization, we took advantage of that opportunity and capitalize on the consumer need around disinfecting and sanitizing <unk> when the industry struggled to meet consumer demand.
But what we see now is consumer needs have changed.
This household part of the business is not as sticky.
Consumers are starting to move away from sanitizing everything in their home to really taking care of their bodies more and being more and more focused on self care as well as wellness.
So for us it honest, we're gonna be agile and we're going to pivot.
But at the same time were to stay on strategy by leveraging the honest lifestyle brand for an opportunity that's been part of our innovation plan and we're introducing a lineup of supplements that are going to be focused on where the consumer is today and where the needs are around sleep immunity stress.
And that starts with this partnership with GNC starting in mid 2022.
So yes, we have some revenue challenges in Q1 with a meaningful portion being due to your go activity that only affects Q1.
And on digital and household and wellness, we're taking steps that are going to yield better results. This fiscal year.
We're expecting mid single digit growth beginning in Q2, and the rest of the year.
So in the end we.
Really believe it is helpful to keep in mind and honest is still unique in three ways.
One this whole focus around wellness, we call it living consciously we've been doing it now for 10 years, and we have a right to win and wellness.
Number two when you look at Omni channel the 50 50 split around digital and retail.
This is the most balanced in the marketplace. So as consumers gravitate right now theyre interested more and more in retail tomorrow.
Tomorrow in the future if gas prices continue to escalate it might be more interested in less trips and more focused on digital we're well positioned to capture that consumer and then three we're agile but allows us to take advantage of opportunities last year. There was this big move to more digitization, where people shopping via digital and sandwiches.
Nation.
Was a need due to COVID-19 , we capitalize on that.
This year, we're going to pivot to self care and wellness in the supplement space that continues to evolve and we've got the right to win based on our innovation and our capabilities.
And lastly, we have a we have a strong balance sheet. We have cash we have no debt, we're going to continue to invest in growing our business. The right way as we embark on this next decade. So hopefully I hope that gives you guys more context and more visibility I know that's very important.
And with that let's open it up to additional questions.
To ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
These standby, while we compile the Q&A roster.
Our first question comes from the line of Laurent Rhonda <unk> of Guggenheim. Your line is open.
Okay. Thank you very much for it or I appreciate that so.
Wow, I don't know where to start but maybe let's let's focus on the top line for fall 'twenty pits or is it too.
And separately in the first quarter from from the Rice, So if I understood well under the second third and fourth quarter, we'd be about mid single digits. So you've been assuming your household and when those come off good to you.
The room was 2 million barrels a quarter, so that would be minus 30 means stacked.
Diapers hoopla.
It means diapers is growing.
Half of what it was growing.
In 'twenty, one, which which is come up with challenge. It would mean and that's my question about skin and personal care. Despite the beauty restage is just growing 10% yeah.
So that's.
My question is really I mean, how do you think the beauty restage its working.
And the why if it's working.
The plan to get better growth.
'twenty two.
Yes.
On your first part of your question, which is around beauty.
Generally in beauty.
It was pretty well received I think that will impact the beauty restage.
Again, it's early stages is really around these distributions.
So as we roll outs.
Afforded us the opportunity to get into ultra dot com.
Pulling out kind of over the course of 'twenty two in mid 2022, So we won't get full year impact of that.
When we think about kind of beauty innovation that we put in we actually think it's been quite successful when we think about your question around 2022.
What are the puts and takes as you think about kind of what's going against afterwards Kellie.
Kind of in our benefit will breakdown.
We're seeing with the number one driver being around velocity so seeing.
Thank you Steve.
Neely.
And the retail and particularly in the truck space, we expect that for 2020.
The largest single driver of growth.
Also we will have a benefit of <unk>.
Distribution, new distribution as well as the innovation that we talked about them being smaller players.
I think the thing that's critical their losses.
They're rolling out kind of in the back.
So theyre not early in 2020, so they're more of a benefit as we think about 2023.
'twenty two.
The next thing as we think about pricing.
Honest and our brand has never taken pricing on Cypress before.
While we're taking pricing on two thirds of the portfolio, we're taking a pretty conservative.
Approach on it thinking that we will be hit with velocity when he's rollout the launch out you'll see you know what we've talked about the 300 basis points of improvement on pricing where it is.
<unk> two thirds of that.
Come back and hit on lower velocity, we hope to do better than that weekend, what we've seen in the marketplace as a short term hit that over time is it.
It's back to regular velocities.
Not planning.
We're providing today is not expecting a significant benefit out of pricing on the revenue line. Although it certainly is driving benefit on the gross margin line.
As we think about kind of the year over year headwinds that we're seeing in 2022 that are reflected in the guidance.
Household can we expect it to go down versus 2021.
Household is going to continue to be a pretty big headwind brought in 'twenty two.
Couple of other items that we just want to mention is we mentioned some of these one time program again going into the year.
Kind of with an approach that we haven't we entered a program it's not going into our numbers. So as we think about programs, we had a lot of it.
Programs such as the Cosco.
In the.
The past few years, we haven't kind of hit and landed a rotational program for 2022. So that's not in the numbers at this point.
And that uncertainty is year over year headwind along with the beauty restage.
As well so that's kind of the buildup on the positive negative.
We are expecting mid single digit growth in Q2 forward.
But a big drag based on kind of the visibility and what we're seeing in Q1 on the full year top line.
Yes, the only I'm sure honestly.
Just the fact that with we're very pleased with how the beauty restaged performing that's why customers like ulta or going to be bringing in a subset of our items into their assortments.
Fortunately when you look at that.
A restage we also have.
Q4 in places like target, where we expanded the distribution of our Q1 and an incremental.
Five stores.
<unk>.
<unk> hundred stores as well as there was pipe with Walgreens that came in Q4. So as you look at that 26% growth number for the quarter.
There is a component of a lag as you go into Q1 as those start to get established one last thing I'd mention as it relates to 2022, you heard us talk about that a little bit as it relates to Q4 is that we were not immune to some of the supply chain challenges one of the things that we saw kind of incrementally as we won't be.
Q4 was the impact.
Fly chain.
A couple of areas that he hit us with the largest being in baby wipes.
You heard US mentioned in Q4 was actually a decline although our consumption data was extremely strong.
Youre chasing.
Great.
Afterwards.
From Barclays.
<unk>.
We had great success with beauty.
And so we're certainly chasing the strong demand that we're seeing in the beauty restage.
But we are also being hit with some supply chain challenges.
Thank you. Thank you I'll pass it on I'm pretty stout plenty of electricians come. Thank you bye bye.
Thank you.
Thank you. Our next question comes from Jonathan Q4 of Bank of America. Your line is open hi.
Hi, guys. Thank you for taking the questions.
So it seems like out of the 400 basis points of gross margin impact in <unk> 390 bps was from the inventory reserves is that correct, which implies it.
Only 10 basis. Okay. So then 10 basis points from inflation in <unk>.
Yeah. So when you think about breaking down the gross margin if you take the.
The 30% and exclude the $3 2 million dollar increase in our inventory reserve.
The gross margin would have been 33, 9% so kind of that puts and takes were basically off lead our input cost inflation.
With constipation, better product mix and operating leverage so the inflation that we're seeing is accelerated in 2000 and trying to you versus 2021.
The input cost inflation that we saw in Q4 was predominantly around transportation.
In some kind of component cost areas in personal care and beauty.
Higher higher cost levels from suppliers, Okay and then.
So will there be any continuation of the inventory impact into <unk> or <unk>.
All of the margin compression in <unk> basically.
The full brunt of the inflation we're seeing.
Yeah.
We were actually taking.
The increase in inventory reserves throughout the year as we thought demand, but basically that large Q4 with kind of a cleanup of our outstanding inventory to completely align with the current demand that we're seeing in sanitizing and disinfecting with our our inventory positions.
Okay, and then if I can ask a follow up.
The.
$5 million of the beauty restage impact.
That was predominantly in retail correct is that is that right.
Yes that was completely in retail.
So that's.
And so we should think about that as being.
I mean, thats going to be the driver of the weakness in in <unk>.
But that's only.
It's only about 6%.
Yeah.
$5 million is kind of kind of one time impacts in terms of the.
The bump that we got the year before and the beauty of the stage as well as some standardization impacting demand.
And so that was in that was in <unk>, where are we going to see the $5 million in <unk>.
<unk> okay.
So first of all that's about 6% of sales.
As part of the <unk> five.
<unk> 5 million is only 6% of sales and were looking at down 15, and then and then I'm just curious about what drove the softness in retail in <unk> and why we should be.
Because you've added 10000 stores around about in 2021 distribution has moved up pretty significantly I am just wondering how we should think about.
The strength of retail going forward, especially.
It's hard to square.
No.
As consumers move back into retail you guys add distribution, but the number is down 8% year over year I'm, just wondering how to balance that out.
Yeah, I think that there is in Q4.
Had really large standardization and disinfecting products, if you kind of take that out of the equation retail actually grew 16% in Q4. If you take our household model. This is kind of that the COVID-19 driven demand.
So I think with unusual there.
It was really what we were seeing in sanitation and disinfecting sales that were in the fourth quarter of the prior year. So again, what we're saying is it was kind of unusual in the prior year and back to normalization back to kind of our half and half between <unk> digital in the fourth quarter.
The other thing that I would just add is when you look at retail for 2021 in totality was up 20%. So as you think and that's coming off about 25% growth in 2020, so the last few years, but 25% 20%.
You look at the distribution and you look at.
What we're adding to the mix. We're seeing is consumers are gravitating more towards retail right now, but they're gravitating more towards big box retail and specialty retail so it's important for us as being in the right retail. So as you look at the back half of this fiscal year.
The importance of the rule Walmart is going to play from a big box perspective, as we see consumers start to gravitate in that space and we're filling out an area of the country, where we've had a significant void in the southeast.
As well as the South and then second specialty retail is excelling in Ulta as a key player and that's an important piece for us around the beauty personal care business. So between diapers wipes skin and personal care beauty. We now have the right partners to be able to continue to grow and accelerate our business is bigger.
Go into the back half.
Can you give me some color on expectations for 2022.
As it relates to channel split you'll expect more strength in retail versus digital we expect to be down mid single digits for the year and retail to be up mid single digits for 2020.
Okay, great. Thank you guys.
Thank you.
Thank you. Our next question comes from Andrea to Sharon.
J P. Morgan your line is open.
Thank you I have two questions for me and then a clarification for Kelly first unique what gives you confidence that the deal.
With phase you will have a better results than the products that were just made obsolete.
What went wrong.
Learnings from holiday Skus and more a broader question as you have created an overhead rightfully so was dimensionalize for.
We're not a company that would grow at a much faster pace and what makes you believe that the new Vms adjacency.
Will help the company make money on an EBITDA level for the for the first six months as it is embedded in your guide.
Since its relatively new to you.
You can give us some of the economics or some level of comfort.
The question for Kelly is breaching the negative EBITDA in Q Q1, I think Jonathan had tried to breach that I understood that you. Besides the 5 million for the BD we stage.
The remaining inventory you also have a 7 million negative impact from digital is that everybody just alluded to.
Now that you have some negative impact already in the first quarter.
Youre Comping very tough comps in your comments. Thank you so much.
Yes. Thank you I'll answer first the last question because it is exactly the $7 million is around consumer shifting to.
From digital into retail.
What we're seeing is kind of two impacts we're seeing really across the board throughout digital not just ISI comp as well as Amazon, we're seeing declining traffic.
As consumers go back to store, we're also seeing considerable increase in just the cost.
Digital marketing that are making it more and more expensive to drive traffic to the site and are making it kind of unprofitable not a great return for us. So we're planning to kind of shift our overall the way that we invest in marketing to support what's working right now which is the shift from digital into retail.
Marketing.
No.
The question you little hard to hear but I believe Andrew we're talking about confidence around the beauty side of the business and Theres a couple of things that give us confidence. One is the fact that we continue to increase our household penetration within the marketplace, which for the overall honest brand we've picked up roughly two.
$2 7 million new households, so we feel good about the fact that.
Our penetration is now up to four 9%. So we continue to make progress there number two when you look at the restage and the expansion.
The partners that we've added to the mix our consumption data that we see is running in the double digit.
Levels from a consumption standpoint. The key now is we're also adding the ultra piece to the business, which is scheduled to come in the second half.
Of 22, so there's a little bit of a transition around.
And kind of where the timing is going to land, but the overall health of the business for US were very pleased when we look at the ratings and reviews of the beauty restage for averaging around anywhere between $4 five to $4 eight and then we're also adding new innovation to the mix as we referenced.
A little bit earlier on the on the prepared remarks.
No.
We do have are really the three areas covered but we'd like to talk about around one kind of the marketing support behind this business to really drive marketing innovation over the next year. Two we have new news around product innovation. We are poor consumer lineup that we're gonna be introducing that also offers hydro.
<unk> kind of a dual benefit from a consumer perspective, and then three we're driving the incremental distribution in the productivity. So those are the areas that give us confidence as it pertains to any business.
Yes, I think when you talk about lessons from household I think it's right up the alley of what would be our new playbook for beauty.
We were very resourceful, we were able to act quickly to launch in the household space.
We have it lined up kind of the right distribution partners. So we can be as we think about the right way to methodically launch innovation going forward, we're going to ensure that we have lined up distribution.
So that kind of we can be successful and one of the other early indicators that we've seen we had several weeks in the first quarter that were our best week ever as it relates to our color on again.
Great.
We are chasing some skus, but we as Nick mentioned, we have really exciting innovation lined up including an expansion to our our best selling mascara concealer, He mentioned as well as some other kind of skincare products that we'll be launching over the course of 2022.
That's helpful. I mean, the one the one piece and I apologize I Hope you can hear me better now.
He is the.
Is the fact that the Vms what makes you think I understand that of course the honest.
With those and the right to win in this category, but with the learnings that you've had and making this business profitable because you're starting the year with about minus span right. And then you are guiding on a EBITDA level, you're guiding for a minus five to minus so I understand so you have to at least breakeven to reach the bottom of your <unk>.
In the remaining of the year and Youre up against much more.
I mean, obviously headwind so what makes you believe that as you pivot out of out of some of these skus you're going to make money already in the first few first six months of Vms allowances. So I get that you get the gene that you see and the lineup, but even in the <unk>.
Even in the wipes.
<unk> got Costco at the time, so what makes you believe that now.
To be able to do a complete new category and you're still going to be able to make money on an EBITDA basis, given those given those headwinds.
Yes, I guess, there's two things that I would look at number one I think it's from a category perspective, it's really the margin structure of the category.
Important compare to kind of a disinfecting and cleaning so we like kind of where the margin structure sets were not novices. We are a small business in prenatal vitamins and postnatal that we've been involved with.
Quite some time, so we're familiar with the category.
When we look at kind of our offering and how we're approaching it it's not a traditional player.
Here's a vitamin we're really looking at spaces that are unique so take an example, the sleep product that we're going to be offering most companies now military and from a base perspective on something like this.
This does not have melatonin will have a proprietary magnesium based kind of formula.
Well as natural rooms that are going to be able to deliver against the consumer delight. So my point here is hey, we've got one the margin structure, that's attractive to we have some experience from an innovation perspective, and a strategic plan from an adjacency perspective that we've been evaluating and then number three when you look at yes, there is headwind.
In Q1, as we highlighted around the $10 million, but then from adjusted EBITDA perspective, as we look at the netting of the sequential Q2 Q3 Q4.
We've got the right mix as it pertains to skin and personal care diapers wipes as well as the vitamins and supplements to be able to deliver against our expectations.
Yes.
Yeah.
Okay. Thank you I'll pass it on.
Thank you.
Thank you. Our next question comes from Jon Andersen of William Blair. Please go ahead.
Oh, good afternoon, and thanks for the question.
I wanted to start just by asking looking.
Looking past the first quarter.
Turning to the balance of 2022.
You're kind of calling for mid single digit growth.
And.
There are a lot of puts and takes which we've talked you've talked about but it does seem to me that.
You do have strong consumption trends in the core part of the business.
At present.
There is innovation to your point Nick coming.
These new distribution partnerships with.
With some key retailers.
Our encouraging, but you're kind of calling for mid single digit growth.
Kind of a run rate basis Q2 to Q4.
Is that.
Is there a certain measure of kind of conservatism in your forecast at this point in light of what's happened.
Subsequent to the IPO.
Or and or is mid single digit growth kind of the right way to think about.
The new way to think about kind of the top line growth algorithm.
Longer term basis.
I'll take I'll take the start John It's a great question of what Kelly also piggyback on it I think first and foremost as Youll look at the world and where it sits today versus from when we did the IPO.
The geopolitical challenges of supply chains, the input cost headwinds.
Well as how consumer behavior continues to shift we think it's super important.
From a visibility perspective that each of you our investors have clarity around our plans and we are going to err on the side of being more conservative I think its prudent I think it's important and based on what we can control and we've got a great team here focused on what we can control the cost side of the business.
<unk> that we're obviously addressing with around two thirds of the portfolio, where we're taking pricing.
We can control our marketing investment around focusing on good growth within the categories of diapers wipes and skin care and supplements and then making sure that we can drive our thesis around accessibility and distribution from an omnichannel perspective, and that's where we have the new partnerships with the ultimate Walmart.
But we're going to err on the side of being cautious because the world keeps evolving and we want to make sure that we are giving these were giving you the right visibility based on what we can see but at the end of the day, we still have conviction in our long term thesis from an orders perspective, we have a 10 year history.
Celebrated our 10 year anniversary of we've seen trials and tribulations along the way, but guess what we've got another 10 years ahead of us with a strong balance sheet and great partnerships and programs from an innovation perspective, as well as from an accessibility omni channel perspective to drive this business not just in one.
Full year, but 'twenty, two and beyond as we look at 2023 et cetera.
Donald Kelly.
I would just add that John and I would say, we don't think that there's been a change to our long term growth thesis.
Between marketing innovation as well as our distribution.
We need to get past the headwinds that are hitting us on.
Not just in Q1, but in 2022, and if you think about the distribution wins and even the innovation there back half okay.
We are not getting a significant impact in 2022, and what they're doing is setting us up.
For a really strong foundation for 2023 and beyond.
I think that is a way to think about 2022 is that.
We believe that the category growth is still there we're seeing high single digit category growth wrap pacing to category growth.
We do think kind of getting past these headwinds and one time impacts on it and we'll return to some growth acceleration.
Again, I think it kind of recommitting to double digit long term growth once we get beyond.
And kind of the near term years.
Okay.
I have one more but it's kind of a multi parter on the digital part of your business.
So you are calling digital kind of.
Down mid single digits in 2022 I guess.
Would you say that's kind of the.
Category level performance or are you.
Losing share online and is that related to.
Or maybe you could talk a little bit about some of the investments that you feel you need to make in the digital side too.
I think you put it.
Prove.
Awareness building and traffic.
Driving to the sites.
And then and then.
Cost of digital marketing is that it's going up is that an industry wide issue is it something related to just tapping into that next customer is getting harder and harder costing more for the honest brand.
I know theres a lot there, but anything you can do to help us understand that would be great. Thanks.
Yeah. Thanks, John Good question, Let me, let me start number one when it comes to digital and kind of where is the consumer we followed the consumer, whereas where does that consumer today, what we're seeing with some of our pure play digital players that we have partnerships with there.
They're being impacted in these core categories that we're in because they are seeing a shift into kind of the big box formats from a retail perspective and remember for us in retail we also capture the retailer dot com in the retail part of the business not in the pure play digital side. So there is a component.
Around our partners, who are on the digital side, but are facing some headwinds routines to these categories as we see the consumer shifts more and more into big box retail as well as into retailer dot com with the click and collect that you start to see so that's the first piece that we're seeing and the good news. There is we are well positioned.
<unk> with those retail partners to be able to drive not only the brick component, but also their retail dotcom component for us from an honest perspective, what we're seeing and what we're anticipating is the fact that the consumer is going to continue to look for better experiences and even more value when it comes.
As to on a stock comp so there's really kind of four.
Four key areas that we're focused on which is one we're optimizing our honest dot com experience. So things like our site speed one click checkout, that's going to be a key area that we're going to be investing in two <unk>.
An enhanced mobile experience to continue to improve shop ability and the experience around the mobile web view and improving in that space. Three is really our subscription and how we expand kind of the subscription benefit program, because what we're seeing values, becoming a bigger deal in the market today.
As you look at kind of these macroeconomic issues inflation. So how do we put benefit type programs with additional value.
Within our subscription expansion and lastly, loyalty and rewards again, theres a value connotation, there, but how do we continue to reduce churn kind of improve the overall experience around omnichannel retail as well as in store and dotcom and that's an area that we're investing in from a technology perspective to continue.
To stay ahead of the curve as a consumer gravitates within the marketplace.
Tag onto that John as we see the traffic declines and this is something that industry wide the constitutional marketing increases 20% to 30% those are industry wide not just to us.
On.
We really think is investing digital that we have to make the kind of the honest dot com experience completely seamless so that the traffic that's coming we can impact our conversion and can we can really connected.
That consumer that's kind of the investments, we'll be making over the course of 2020.
And I think one advantage we have an honest is the fact that even as we see cost per click going up in Google almost 40% were seeing the whole marketing piece continue to accelerate we've really built out capability around social too.
To be able to leverage social marketing.
Obviously with Jessica Alba, the forefront as not only as our chief creative but also a mega influencer being able to really drive organic as we look at our programming in the back half of the year. So those are areas that we're going to continue to invest and coupled with the technology investment around digital to position us not just as we go into kind of 'twenty two.
The back half and also as we go into 2023 and beyond.
Thank you very much.
Thank you John .
Thank you our next question comes from.
<unk> Wissink of Jefferies. Your line is open.
Afternoon, everyone two questions as well one Nick for you and one for Kelly I want to go back to John's question on CAC, and just understand a bit more about the order of magnitude that you are seeing in terms of your acquisition costs give us a sense of how sustained that is and just point of clarification are you, saying, it's mainly AD rate driven or is it something about.
The competitive nature of the category that you are seeing cost to acquire is going up.
And the answer is actually both.
Again, we're seeing the impact predominantly kind of in the digital paid search space. The level of competition, we just seeing more and more people chasing the same consumer because the number of consumers coming on line is down.
And so that's impacting both media costs going up in that as well.
More and more competition and bidding higher cost.
It would be in our category.
We are understanding it's not specific to our category.
Okay. So translating that your implied marketing expense step up you're still anticipating to acquire net new customers, but it wouldn't be at the level you experienced in the past.
In digital we're actually shifting our marketing spend into areas that support for example, the new distribution more retail marketing.
Really investing behind where the consumer is going.
And we are we know that Youre, winning right now which is kind of in the retail channel.
Okay. That's helpful and then Nick a question for you and this is just more I think philosophical but.
How has your <unk>.
<unk> ability to forecast the business changed or improved if you could just walk us through a little bit of how you sharpen your forecasting process to give us some degree of conviction that this guidance is what you expect to achieve.
I think we're just I'll, maybe having a little bit of a confidence Greg here today understanding that the ability to forecast.
I think it's a very fair question I think what's really important and what we've learned kind of this past year.
Had one quarter that impacted us coming out of the gate, which was Q2 and what we're doing right now is making sure that each.
Each of you have visibility as it pertains to Q1, and I think what's important for us and the investments. We've made here is really refining for example, our <unk> process from a team perspective to ensure that not only do we have visibility, but then also working with our strategic customers closer to.
Be able to create from a joint business planning process visibility around inventory as well as to supply so between S&P as well as you know.
Partnerships not just the senior level, but really grassroots when it comes to being connected with the customer those are improvements that we've made to be able to make sure that we've got the right demand signals and then obviously as as it pertains to procurement and how we're developing kind of our mix as there is an environmental component too.
This or excuse me macroeconomic component to it.
That we're dealing with a lot of the headwinds the industry is dealing with but I think we're doing a pretty good job in being able to mitigate.
Lot of the supply side risks in the marketplace based on the work that we've done this past year, leading into this year with even refinements around national So I hope that gives you context.
One thing I'll add to that status I think one thing you'll see have learned about our businesses. There's a lot of volatility from quarter to quarter. So a couple of things I think we have to take that into consideration in our guidance to ensure that we have kind of a baseline level and that we can provide as much insight and color like we're not giving quarterly guidance, but we.
Feels appropriate to make sure that everyone understands what we're seeing within our individual quarters that we give a lot of qualitative as well as some quantitative expectations and insight into specific.
One time unknown trends in the quarter, especially coming off of Covid, There's a modest thing.
Back into each individual quarter. So I think our philosophy that has changed is really about how do we really get a lot of color on and provide more insight as it relates to kind of the quarterly flow that we will.
In fact to see in our business.
Yes.
Okay. Just a clarification Kelly are you guiding the Q2 to Q4 combined up mid single digits or would you like us to model in that mid single digit range and then just translation. When you say mid single digits could you give us a magnitude every company's uses that phrase slightly differently. So helpful to have clarification.
Yeah, we are calling mid single digits kind of across key team through Q4.
And so we're not getting into kind of a deeper but when you model Q1 is negative 15, you'll be able to back into.
A flat year.
Hopefully, giving you that much.
X will allow you to kind of but.
We mentioned that progressively.
Each quarter on a revenue basis, a margin basis, and EBITA basis will get sequentially better.
Percentage year over year growth again, roughly 4% to 6%.
Thank you very much.
Thank you. Our next question comes from Laura Champine.
<unk> capital your line is open.
Thanks for taking my question I understand the issues impacting the household business and the personal care business. You won do you also expect diapers and wipes could decline.
Dan.
It seems as if you're not going to.
Share in Q1 are you losing share to math brands given the inflation that consumers are basing it on necessity is across the board.
Well based on a 15% decline we are expecting kind of across the board declines across all of our categories.
The way to think about the decline in digital specifically is as consumers have gone from kind of.
Online, where we have very strong penetration in market share and as consumers have gone back into stores, having less than 50% ACB. Our consumers are not finding us on the shelf when they go in store, especially with the math.
And so that's going to be a drag as we start getting distribution rollout Walmart later in the year. We think we can make a really great dense and that's more of a short term impact and a long term impact, but absolutely you know from consumers.
We declined and seen traffic down.
Moston share digital channel.
In the retail channel, we're not losing share in the retail channel. We are just not in enough places to be able to make up and one for one between digital and retail yes. What we've seen is over the last couple of quarters two to give confidence are diapers wipes business. In Q3 grew 16% Q4 grew 16% also and then.
And on top of that we had growth on our diapers a 24%.
Last quarter. So there is a timing component and the fluctuation based on where the consumers gravitating, but thats why as Kelly highlighted we're well positioned because folks are seeing the strength of this diaper as well as our overall wipes business and are interested in the plants are in the proposition and Thats why as we speak.
Dan.
With Walmart in the back half of 2022 we're going to be able to now accelerate the distribution and the footprint to drive that accessibility based on where the consumer shopping.
Got it and then lastly, I think you mentioned, specifically that Costco would not in your numbers because we don't have a program for this year does that for some reason disproportionately impact Q1, and any more color you can give us around that situation would be helpful.
Yeah, we have a base program and our shampoo and body wash with Costco and that's continuing in 2022, we've had the past two years. In addition to that base business, we had a vocational business.
This past year in 2021, we had a bubble bath program in the back half.
Which would predominantly impacted Q3, and Q4 and that is a program that we're in and where.
Actively talking and trying to sell in and you know what.
<unk> programs coming down but that was a very successful were pretty large program for us given the headwinds given the innovation that we have in the distribution that will be rolling out in the back half you know that's not as impactful.
But certainly I think the way to think about Q1 as the disinfecting and sanitizing action program as being a one time pretty big headwind.
That was the tail end in Q1 of 2021 was kind of the tail end of those kind of rotational programs, we still had and disinfecting and sanitizing programs, both with Costco and other retailers that were onetime in nature.
Okay. Thank you.
Thank you at this time I'd like to turn the call back over to Nick allows for closing remarks, Sir.
Very good I appreciate everybody, making the time to spend your afternoon and evening with US I think the key takeaway for US is we have conviction in our business you look at the skin personal care business in diapers and wipes, it's actually delivering against our expectations that we set out early on so.
We like the fact that we're driving double digit growth in that space for growing market share we are increasing our household penetration.
And then we have good news on the horizon around our expansion from an omnichannel standpoint, with distribution with partnerships with Ulta as well as Walmart and GNC and I just want to.
Yes.
We appreciate everyone spending the time with us on behalf of the team I want to thank you and we look forward to sharing our progress with you on our next quarterly earnings call. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Sure.
Sure.
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