Q1 2022 Honest Company Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the honest companies first quarter 2022 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.
[noise] to hand, the conference over to Mr. Steve Austin felt VP Investor relations at the honest company.
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Great. Thank you and good afternoon, everyone and thank you for joining our first quarter 2022 conference call. Joining me today are Nick <unk>, Our Chief Executive Officer, and Kelly Kennedy, Our Chief Financial Officer.
Well, we certainly would like to remind you that we will make certain statements today.
Okay.
Any of the federal Securities laws, including statements about the outlook of our business and other matters referenced in our earnings release issued today.
These forward looking statements involve risks and uncertainties that could cause actual results to differ materially. Please.
Please refer to our earnings release issued today as well as our SEC filings for a more detailed description of the risk factors that may affect our results.
Please also note that these forward looking statements reflect our opinions only.
As of the date of this call we take undertake no obligation to revise or publicly release.
The results of any revision to these forward looking statements.
New information or future events, except as required by law.
Also during this call, we will discuss certain non-GAAP financial measures, which adjusts our GAAP results.
The impact of certain items.
Find additional information regarding these non-GAAP financial measures.
A reconciliation of these non-GAAP to GAAP measures in the financial results section of today's earnings release.
In addition, wed broadcast of this call is also available on the Investor Relations section of our website.
Investors don't honesty dotcom.
I'll turn the call.
Thanks, Steve Good afternoon, everyone and thanks for joining us today.
As noted in today's earnings release, our first quarter results were in line with the outlook. We provided in our last earnings call as we highlighted in that call first quarter revenue was impacted by unfavorable sales comparisons.
Well as consumer channel shifts that resulted in a year over year decline in revenue for the quarter.
Over the last four quarters, our core category revenue was up 6% versus prior year, a solid call over COVID-19 driven demand in the year ago period.
As we look to the balance of the year. We're excited to share that we're on track for delivering new product innovation and expanding our retail footprint to build a solid foundation for future growth.
Unprecedented volatility and macro environment challenges I'm pleased we were able to maintain our financial outlook for the year.
Today, we are reaffirming our full year outlook with mid single digit growth over the remainder of the year as we gain distribution with new strategic retail partners launch new margin accretive products and continue to invest in our digital capabilities.
I'd like to start by sharing some thoughts on the macro challenges the industry is currently facing starting with inflation.
Also affecting every part of the P&L, the rising impacting product logistics warehousing labor and administrative costs.
In response, we remain in close contact with our suppliers and partners to understand and address any potential cost impacts. Additionally to help mitigate inflationary pressures we've executed mid to high single digit price increases on our product portfolio.
While it is still early and initial read of our first round of pricing is in line with our expectations. We have seen a modest decline in volume, but over time, we expect velocities to rebound.
As indicated by track data sources, the demand from consumers looking for clean natural solutions remained strong despite higher shelf prices, we expect to mostly offset the current inflationary impact in 2022 through these pricing actions supported by cost savings and favorable mix.
If we see further input cost escalation. We believe we can take additional pricing later in the year to preserve margins.
Turning to supply chain.
It's important to note that a majority of our products are manufactured in North America.
Our diapers, which are nearly half of our portfolio has seen limited supply chain issues, our skin and personal care products, which represent roughly a third of the portfolio of ingredients and packaging that are sourced internationally, but are predominantly manufactured in North America.
As a result, we've experienced some supply chain impacts in personal care and beauty, our main exposure to global supply chain disruptions as with our baby wipes, which represent less than 20% of our revenue.
Over the past six months, we've experienced intermittent auto stocks on key items due to COVID-19 related factory shutdowns and demand driven ocean freight and port delays.
We're predominantly back in stock and baby wipes by the end of the first quarter, but expect a continuation of supply chain constraints for the foreseeable future.
During Q1, we invested to increase core inventory levels by roughly 10% to mitigate the impact of supply chain delays.
We also want to address the impact of conflict in Ukraine.
Our business.
Similar most beauty brands, we source certain ingredients, specifically sunflower seed oil for which Ukraine as a key producer the conflict in Ukraine has disrupted supply.
Driven higher prices all these ingredients from that region and impacted the market for certain ingredients from other regions like palm kernel oil.
While this represents a risk we believe we have supply assurance or alternate sources of supply to continue to meet consumer demand.
Lastly, I'd like to reinforce that honest remains in a healthy balance sheet position with no debt and sufficient cash available to fund our growth investments as a result, we are not directly impacted by the rising interest rate environment.
Now turning to our core growth drivers marketing innovation and retail distribution.
Starting with marketing.
We continue to invest at a high level in support of our brands with marketing spend at 20% of sales in the first quarter well that was down on a dollar basis versus year ago. It is important to recognize we are supporting a significant launch our clean conscious diaper in the year ago quarter.
What's more important is that our high level of marketing support this quarter reflects our commitment to supporting our brand in two ways.
First is.
As noted last quarter rising digital marketing costs are leading us to shift traditional marketing investment more towards shopper marketing and other vehicles to reach consumers in store. This is a good example of our return based approach to directing brand investment to where it will drive growth most cost effectively.
Second shifting dollars from marketing to in store demand billing activity supports the strong growth, we see with key retail partners and aligns with our retail distribution expansion in the second half of the year.
In short honest as a strong lifestyle brands that spans across multiple categories with a high degree of consumer loyalty continue.
Continued market share gains against conventional brands and increasing household penetration, which grew to nearly 5% by the end of 2021.
Turning to innovation, we have a robust innovation pipeline coming out in the second half of the year. In addition to a packaging refresh for our personal care line and training pants, we are launching a new conceit myrta line.
Sweet of clean clearing skin products and extension of our best selling clean mascara.
And expanding our supplemental slides.
The new innovation is on track to ship across the second and third quarters.
On the distribution growth or expansion in store with key strategic retail partners is on track to rollout in the second half of the year.
We will be launching honest diapers wipes in personal care on Walmart Dot com in early Q3, and then launching in Walmart stores across the country in the fourth quarter.
Not only is Walmart the largest seller of diapers in the U S. But there is strength in the south and southeast regions will significantly benefit audits as our ACB in those markets is underdeveloped.
The lowest of all U S regions.
We are also expanding distribution nationally at Ulta.
We will pivot from being solely online to launching in store across the country.
In addition, we're expanding our supplements Y Tec sleep stress immunity and her health.
These will be available in store and online at GNC.
<unk> dot call.
On the international front, we're pleased to announce that we have signed a partnership with Super ordinary a leading global brand accelerator to launch our products in Asia in the back half of 2022 through our flagship store on Tmall.
Super ordinary has a proven track record for launching Premier U S beauty brands into China.
Management efforts will be focused on delivering our strategic growth initiatives in North America in the near term.
We are pleased with this new partnership that will set the foundation for future global expansion.
Overall, we're excited about our progress delivering marketing innovation and retail distribution initiatives that will drive growth for the remainder of 2022 into 'twenty two 'twenty three.
I'll close by saying that despite a tough Q1.
The honest brand continues to resonate strongly with the consumer.
We've significantly grown household penetration and brand awareness over the last two years and our market share continues to increase.
We maintain our conviction that orders could be the new modern CPG brand, while driving our mission to inspire everyone to love living consciously.
Now I will turn it over to our CFO Kelly Kennedy.
Thank you Nick and welcome everyone.
Start by saying that our first quarter results and 2022 out like are consistent with what we shared with you during our last earnings call.
Our Q1 results reflect difficult year over year comparison that we do not expect to continue into the remainder of the year as well as elevated cost pressures that impacted margins.
Looking ahead, we continue to expect honest to deliver mid single digit growth over the remaining three quarters of the year compared to 2021 as we introduce innovation.
Expand with strategic retail partners and improve the digital experience honest dot com.
While cost pressures are expected to remain elevated we anticipate much of the margin impact will be offset by the benefit of recent pricing actions.
Now diving into the financials.
Starting with our financial results and key drivers for the quarter.
Revenue decreased 15% to 69 million for the first quarter of 2022 compared to the first quarter of 2021 with.
The decrease in revenue for the quarter, partially reflects liquidation of legacy beauty inventory in the first quarter of 2021.
Last year's BTB stage as well as a tough comparison I guess elevated sales in the year ago period related to sanitizing and disinfecting products.
Combined these two items impacted revenue growth for the quarter by approximately six percentage points.
The other key driver is the consumer shift to digital to the retail channel.
Given our high digital penetration our revenue has been negatively impacted as consumers return to in store shopping as our ACD lag leading conventional brands with honest products only on roughly half a retail shelf.
As we expand our retail distribution later in the year most.
Notably our launch with Walmart, we anticipate significant <unk> expansion.
It will help to capture this consumer shift to recount and restore growth in the back of the year.
Finally first quarter revenue was also negatively impacted by out of stocks on several key items due to supply chain disruption and higher overall trade promotion level due to a lower revenue base.
To the first quarter of 2021.
I think the key drivers by product category.
First papers and white.
Revenue from diapers and wipes represented 63% of total revenue.
Decreasing 13% in the first quarter of 2022 compared to the first quarter of 2021, driven by declining digital traffic and purchases.
This category was also impacted by supply chain disruption, which led to out of stocks on a white fitness, resulting in an approximate low single digit impact on the category.
Skin and personal care.
In personal care represented 31% of total revenue and decreased 19% in the first quarter of 2022 compared to the first quarter of 2021.
This reflected a $3 million liquidation sale in advance of our BTB stage in the fourth quarter of 2021, representing a 13 point impact on revenue for the category.
The category was also impacted by a decrease in beauty product sales in our digital channel.
Our digital traffic and out of stocks on key items.
My challenge.
Household and wellness.
Revenue from household and wellness represented 6% of total first quarter revenue and decreased 20% compared to the first quarter of 2021.
The decrease was due to declining consumer demand for standardization and disinfecting products versus the year ago period.
Now turning to results by channel in the first quarter, our revenue was equally split between retail and digital.
Digital revenue declined 19% year over year behind an industrywide consumer shift from digital in.
The in store shopping.
Also as the industry faced escalating cost of paid advertising our ability to cost effectively drive traffic online platforms was negatively impacted.
But I think if you go back again.
Retail revenue declined 11% looks like.
Acting at approximately 12 percentage points impact due to prior year liquidation of legacy Lincoln place and its tough comparisons get elevated sales in the year ago period related to sanitizing and disinfecting products.
Excluding these impacts retail revenue was up slightly.
As we highlighted on our previous earnings call. We believe our Omnichannel model is a competitive advantage, especially as the industry faces.
Unprecedented shift in shopping behavior.
Given our balance with retail business and upcoming distribution expansion, we are well positioned as we strive to be wherever consumers choose to shop.
Turning now to gross margin.
Gross margin was 30% in the first quarter of 2022 compared to 35% in the first quarter of 2021 generally in line with our expectations.
Lower sales revenue versus the year ago quarter resulted in approximately 400 basis points of fixed cost deleverage.
In addition, the decrease in gross margin reflected approximately 150 basis points of higher transportation.
<unk> freight and warehouse labor costs as compared to the first quarter of 2021.
Higher trade support of 150 basis point and the adoption of the new lease accounting standard, which had an approximate 60 basis point impact.
These factors were partially offset by the January price increases, which benefited gross margin roughly 200 basis points as.
As well as the impact of 60 basis points from favorable product mix and cost savings.
Operating expenses were up in.
In the first quarter of 2020 compared to the first quarter of 2021 generally in line with expectation.
Looking at the primary component SG&A expense with higher versus prior year, reflecting cost of operating as a public company, including higher stock based compensation and insurance expense.
Marketing expense was down from the prior year, when we were supporting the launch of our clean conscious.
However, advertising fell nearly 20% of sales in the quarter and we continue to expect to spend at a mid teens rate for the rest of the year on a growing back in the day.
R&D expense increased as we continue to invest in growth.
To support new product launches and cost efficient.
Now turning to the bottom line in the balance sheet.
Adjusted EBITDA for the first quarter of 2022 with negative $10 million.
We ended the first quarter with $78 million in cash cash equivalents and short term investments as we increased our inventory position to proactively manage longer supply chain lead times and delays.
Looking forward, we expect our quarterly cash balance to range between 65 and $75 million for the balance of the year.
Turning to our fiscal year 2020 outlook.
As Nick highlighted we are reaffirming our full year guidance, which is unchanged.
The earnings release.
Revenue is expected to be flat. This is 2021.
The remaining three quarters growing at a mid single digit rate.
Our core category that doesn't whites and skin and personal care are expected to grow slightly ahead of the company average with household and wellness declining as we continue to see reduced consumer demand predicting backing and standardization product.
Adjusted EBITDA is expected to be in the range of negative 5 million to negative $10 million for the year, reflecting steady improvement as the year progresses.
He didn't record levels of cost inflation, we are focusing on pricing cost savings and productivity as levers to drive long term margin and profitability expansion.
As we highlighted on our last call. We had two rounds of price increases go into effect in the first half of 'twenty two.
Our first round of pricing went into effect in January .
Given continued cost headwinds, we've announced to our retail and online retail partners, a second phase of pricing action on additional items in our portfolio.
Just on select personal care wipes PD and factors that go into effect at the end of Q2.
In total we expect our price increases from the first and second quarters impact approximately two thirds of our revenue base and benefit future margin by 375 basis.
We expect 2022 margins to be flat to slightly down versus prior year.
Our market outlook reflects current levels of cost inflation.
Environment remains volatile and subject to a high degree of uncertainty.
We continue to monitor the cost environment and will take additional pricing if needed to offset further unanticipated increase it.
Considering all of these factors, we expect to achieve positive adjusted EBITDA in the back half of the year.
In closing I wanted to invite all of our shareholders to attend our virtual annual shareholder meeting scheduled for May 25.
With that I'll turn the call over to the operator, and we look forward to answering any questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone again star one on your Touchtone telephone to ask a question to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of Dana Telsey.
Chelsea Group your line is open.
And please make sure your line is immediate and have seen a speaker phone lift your handset.
Oh, Okay, Yes, I think it was muted sorry about that.
As you think about the guidance that you're giving for the remainder of the year do you think about the price increases being taken is it more than the mid single digits is it ranging differently by category.
The increase distribution channels, which are impressive in terms of where you're going into its alta.
Walmart how does that phase in and what are you budgeting for an uptick in revenue from the expanded distribution channels, whether its this year or.
<unk> anniversary next year. Thank you.
I'll start by taking a pricing question and I will come back on the distribution question. So the pricing the first pricing that went into effect in January again, both of these price increases.
Cover about a third of our portfolio selling total IV and.
Of course, the second pricing going in at the end of Q2, so in terminal.
I've taken maybe a high single digit increases on two thirds of the portfolio and that is across the entire portfolio. So it will cover diapers personal care.
As well as PD items, as well, so kind of pretty robust.
We do anticipate this pricing benefit margin.
<unk> hundred basis points in 2022 of course, it's going.
The year on an annualized basis would be closer to 400 basis points.
And when we think about the impact on the pricing.
Of course mentioned in our last call that we're keeping a really close eye on the elasticities and the impact on volume.
And the pricing out in the market.
Just roughly 90 days.
Pretty much just seasoning and volume are right, where we anticipated that to be.
Certainly hopeful that over time the consumer is.
That will rebound later in the year.
And so we haven't built in significant revenue upside for the pricing is predominantly can benefit our margin.
Hey, Dana its near concerning the distribution pick up everything is on target as I referenced earlier on the call and as it pertains to Walmart national distribution broad footprint on our diapers wipes as well as our personal care business. The dotcom portion of that is going to get in.
Q3, and then retail stores Q4.
Then with all time again broad distribution against our skin business.
To hit stores in Q3 also show real nice complement at Ulta, we've been.
With ultra on the Dol.
Comm side of the business at all to Dot Com now for a while and just a testament to the strength of the business as we're as we're now driving distribution and store or so.
Pretty much right on target from a plan perspective on the distribution side.
Got it and then just on supply chain with the constraints on inventory levels. How do you. How do you think about that pacing through the balance of the year, how you're thinking about supply chain.
Yeah, certainly we have the biggest piece of our business the diaper business really havent been impacted by supply chain and you haven't been in and out of stock we have been able to get regular supply on that you'll have noted in Q1, we did actually expand our overall inventory position.
10% that was really to address longer lead times across the board, but predominantly in the white, where we are seeing what had previously been.
Short lead times coming from China, while representing less than 20% of our overall.
We did want to take that into account and we've had out of stocks and were impacted by out of stocks. In Q1, we're now back in stock, but we expect to be continuing to see longer lead times and some supply chain constraints in that part of the business and the only other supply chain issue that we mentioned.
Really around some of the complaints that are coming out of China for.
Personal care and beauty business, although those are manufactured here in North America. Some of the clients do come from China.
And also some of the oil.
Impacted more by conflict in Ukraine as well.
Well, so as we think about supply chain continue to be a little bit of a drag in the first half and we're anticipating some intermittent out of stocks in some of the beauty is we continue to change the component.
We feel we've been able to secure alternate sources of supply for many of those ingredients that are being impacted.
We don't anticipate especially as we get into the back half of the year, we're seeing feeling very good about our ability to deliver on the new distribution new product innovation. Those are all as we highlighted on schedule and on time.
As anticipated.
Our projections for the year.
Thank you.
Yes.
Thank you. Thank you. Our next question comes from Laura Champine.
Loop capital your question please.
Thanks for taking my question, it's about your digital marketing, which I think you mentioned that digital impart was weak because just the CAC was much higher.
You anticipate that changing or do you expect to spend up specifically.
On digital marketing in order to drive the growth you expect in the next few quarters.
First about what we're doing in the marketing and I'll talk about our digital digital initiatives on the marketing front. There's two things we're doing the first is really changing the way we're spending against digital a great example of this.
Able to refocus spend with our key digital partner really on the top items, and we were actually able to deliver higher sales consumption data.
On those items.
So we're changing the way in utilizing things like our on the analytics to really drive and spend digital in a more cost effective way given that we've seen escalation in the cost structure there.
<unk> piece, we did is we really shifting into retailer marketing. We are Great example, in Q1 with our Oscar television campaign, and we partnered with a major retail partner to really serve those add specifically to their customer do screening TV and we're able to see and we're extremely pleased.
They saw that trying specifically customers into their stores and its product two efforts.
Being much more thoughtful and utilizing our tools.
That's behind what's working and digital spend and then.
Retail and where the consumer is going on the digital front end.
Last call about various initiatives really to optimize the shopping experience.
The biggest thing that has gone live in Q1 that we wanted to highlight.
Given that 76% of on traffic comes from mobile, we just implemented a new optimized design for onsite.
Which actually is posed for desktop and mobile it's really a dynamic play out content. When it allows for things like personalization and improved shopping cross category coming up in the back half of the year we have.
Holding schedule of new improvements honest dot com and will be doing things in the back half of the year like changing the way our subscription business works with new bundles.
More cross category, Croatia, and that we anticipate will launch in Q3, and then as we get farther in the year things like loyalty personalization.
Other main features to really drive an increase in our <unk>.
And digital again, we know the headwinds or advances in digital and we're not the only one experiences we're really focused on driving conversion. So the traffic that is coming to our site really ensuring that we make it as seamless as possible for our customers, but we do think digital of course this year to make those investments for the future.
And we'll be coming back and talking about additional initiatives in 2023.
Okay.
Got it so is it fair to summarize that cost to acquire customer is expected to be reduced but because of your own efforts to be more efficient and drive conversion not necessarily because the market is coming to you.
Alright.
Got it.
Thank you. Our next question comes from Andrea Teixeira of Jpmorgan. Your line is open.
Hey, there. This is drew Levine on for Andrea Thank you for taking the questions.
I wanted to circle.
Circle back on the elasticity in conversation.
So just curious if it's kind of differing by channel or by category.
<unk> talked about the second price increase going in I think at the end of Q are you modeling for the sort of levels of elasticity that <unk> seen thus far are you modeling for sort of more historic.
Historical elasticities.
And then just anything Youre seeing.
I guess quarter to date in April and May.
There has been any sort of shift and things progressing as consumers are trading down more.
Just sort of like any changes I guess that youre seeing in the marketplace or what gives you confidence that the U S. These are going to hold.
To your expectations.
So I'll start and then I'll, let Kelly.
Just based on the data that's out there in the marketplace. If you take a look at IRI can move low data.
<unk> latest 12 weeks.
For the quarter, what we've seen is take diapers the price per count has gone up about roughly 9% and the categories up roughly about 12, 8%.
Honest during that same time period, our pricing has moved up about 5%.
Our results are we're up about 22, 5% during that time period. So what we're seeing kind of based on our current plans for example, with fibers based on our elasticity assumptions. There we're seeing the consumer continue to pick on us when you look at the category overall.
Performing from a consumption perspective, and again, that's going head to head when you look at those consumption numbers versus the national players that are in the marketplace that are also reflecting price. So from that standpoint that gives us conviction that as it pertains to kind of the second round of that we're also talking about because again.
Some of those individual players have already pass through that pricing and we're going to be following and be able to continue to maintain kind of our price gap relationships versus the rest of the marketplace.
Kelly.
No.
Net.
You have to see impact from what we've seen historically and also on our expectation that is what we have known for that.
The second price increase which is on a different set of product. The only thing I want to highlight we've seen consistency across the visa just needs with the one exception of white.
Not see as much impact on unit volume, but we do think that that was partially due to not just ours, but.
Not just on us, but other cutting.
Coming from kind of being short on Michelle. So we think that that might be a little bit more noise will be keeping a close eye on it we're happy to come back and provide some additional color on our next call.
Great. Thanks, and then I just wanted to ask.
About.
This shift to retail from digital I think.
Last quarter, you may have said that.
For the year.
Banking digital to be down mid single digit and retail up.
Mid single digit if I, if I have that right or not but.
Is that still the case are you seeing kind of acceleration in the shift relative to.
Relative to your expectations heading into the year.
So just anything there would be helpful. As well I think you've moved past maybe.
Toughest compare from a mix perspective.
On the channel so curious thoughts there.
Yes, no no change you're exactly right on mid to high single digit decline in digital for the year.
Mid to high single digit increase.
Increase for retail.
Okay.
Thank you.
Thanks.
Thank you. Our next question comes from the granting of Guggenheim. Your line is open.
Hey, good morning, everyone and great to see you meeting your expectations in the quarter and Richard to your guide for the year.
That's a good change okay. So two questions.
First is really about.
To.
Shoot for the mood and about to try to frame for a bed or the size of obvious upside for Walmart Dot com.
I would March so could you could you pre.
Tell us a bit more about the number of skus, you're trying to get maybe the liner versus target. So trying to frame what the upside would be for for you on Walmart and Utah.
Clearly Walmart being the largest some of the diapers is really a big potential for US we don't have broad based distribution, but each launching at the end of the year.
And so this is really a 2023 play.
And we will be on the shelf in store.
Diapers wipes as well as personal care.
So across our product categories.
We will be as we get closer to launch date will be providing more color on what the launch looks like including launch support.
But again as Nick highlighted earlier.
Pretty excited by the potential, particularly as it relates to creating more geographic diversity for honest and really getting into the south and southeast where things such as new birth in the U S. 42% of them are in the southeast we know that we're underpenetrated our ACD in the southeast is the lowest if all the regions that ramp properly.
20%.
That certainly is the potential breadth of time.
Certainly.
While this may not be a fit for all Walmart stores, but we're pretty excited that we expect to get broad based distribution nationally with Walmart.
Okay.
Thanks.
And others, who would like to understand.
The potential for the <unk>.
Ranch at GNC I saw that they were.
Sure.
Doing a press release this morning mentioning.
And ultra furnace brands, so that you understand the size of its a nice weekend.
Help us and resource for these international X.
<unk> in Asia with Supermodel January how should we think about this.
Was the resource.
Europe , where we are.
Willing to indicate for those initiatives.
I'll give you some color here on the launch number one as it pertains to the supplements.
With number one the consumer.
As always given us the credibility around better for you from a lifestyle perspective to kind of play in this space from a brand perspective, and we've been in this category with our prenatal vitamin business is a great acquisition tool as you think of Dot com and digital in this space the way we've identified this.
Area right now, it's really around kind of a holistic health and wellness specifically around that traditional vitamins.
It's really around sleep around stress immunity around here, we believe we've got a right to win because from a formulation perspective, we've got proprietary blends that are unique in the market. For example, if you look at sleep a lot of.
Loans out there talking about <unk> and our product does not have things like melatonin and it's got a different magnesium based proprietary blend. So we believe that this gives us a nice for array.
Into a space that also benefit us as we think of our dot com business as we think out subscription and point of entry with new consumers. So we like that.
I would highlight the fact that this isn't a major huge bet we've been in this space before.
We're going to be methodical about the distribution getting the credibility with the GNC. That's a preeminent player in the space, but then also be able to drive it within our offerings. So that's kind of the supplement kind of takeaway.
Super ordinary piece, obviously super ordinary other the premier partner when you look at beauty brands that get introduced in China, we've partnered with them specifically.
To introduce our honest beauty business in China with <unk> mall execution.
They've got a history with a variety of brands that you can look at that we've been able to scale a very significant way, we want to make sure that from a prioritization resource standpoint that we've partnered with the preeminent player there because theyre going to be managing the business and then obviously the team here is going to be obviously prioritizing.
We haven't changed.
Teams to North America, as well as the European business that we've been driving with Duvelisib.
Partners, but again these are areas that from a strategic perspective, as we've talked about from a global perspective.
Political introductions around one adjacencies, which is a supplement.
And then to the geography pieces routines to beauty and in Asia.
Thank you guys I'll pass it on thanks.
Lisa.
Yes.
Thank you. Our next question comes from Jon Andersen of William Blair. Please go ahead.
Hey, good afternoon. Thanks.
First question just to follow up on I guess, the Ron's question on supplements.
I may have missed it but could you talk about the timing of the launch and then.
Could you talk a little bit about your broader plans for.
The household and wellness segment.
Yes, I would say John .
Ah supplements perspective, you're going to start to see those start to show up this quarter within GNC in the market and then obviously on the stock comp is the second component of that and then as it pertains to household and obviously the wellness piece. This walnuts element that we talk about as I can.
Key play for us because as we think of honest from a solution set innovation perspective, we've always identified one was around kind of what you put in your body what goes on your skin and what can impact you bound you from an environment perspective, and again, when we say and we're not talking about food, specifically, but areas like this around supplement.
And being in a position to start to address released with these key consumer dissatisfy errors that are in the market as it pertains to formulations that can address the sleep distress the immunity the air growth et cetera, and it also is a good precursor as you think of evolution around innovation in the future as we talk about beauty from within.
And as you talk about your health.
Also from inside out so that's kind of another element as we think of innovation our cadence moving forward.
The second piece around the household specifically, obviously standardization continues to be a component of our offering as well as our household cleaning lineup that we currently have and we're going to continue to look at innovation.
That we work on to be differentiated within the marketplace in that space, but currently we're satisfied on the household side with the product offerings that we have.
Thanks Thats helpful.
As you you have a lot of obviously you have a lot of new.
New.
Products new distribution.
Year proceeds.
Do you have any plans or report needs to heavy up on <unk>.
Marketing spending.
Throughout the year in order to support these launches either some of the mid year.
Developments or the.
The Walmart National rollout, which I guess is happening later in the year.
Yes of course, it will be supported.
All of our other retail partners, we will open up.
Cooperatively with them utilize our kind of content.
E Commerce continued ecommerce strategy to build content for their customers.
But as we look at our overall marketing spend.
We did mention that we expect to be in the mid teens, we think that's the right level to be able to support the retail distribution growth that we have planned for the year, which is.
<unk>.
More of a 2023 and 2022.
As we launch those is the biggest focus will be execution and landing both our new product innovation and distribution getting those on.
On time into the stores and as we think about marketing longer term we have.
Historically said, 15% to 17%.
We'll scale that as needed, particularly to support specific product launches on probably more than distribution market.
Okay, that's great a.
A couple of housekeeping questions Kelly you mentioned that.
I think you said margins on the year are expected to be flattish to slightly down were you referring to gross margins when you said that.
I was speaking to gross margin that's correct.
Slightly different than what we communicated in our last call you'll recall that we said flat now.
Based on some of the Escalations, we've seen some things like the <unk> and the other components.
Predominantly by the conflict in Ukraine, we are seeing some slightly higher.
Cost comes through then.
The last time, we spoke and the one thing I wanted to mention just as you think about going over the course of the year each quarter, we will be aggressively.
Better as it relates to revenue gross margin as well as adjusted EBITDA and progressive over the quarter didn't want anybody to highlight particularly for Q2 since our round two pricing is not going to be until the end of Q2 some of that margin pressure, particularly in Q2.
Yes, that's understandable.
Kind of gets to my second.
Question on EBITDA you mentioned.
EBITDA positivity in the second half of the year do you mean, the second half an aggregate or.
In Q3 and Q4.
We said in aggregate.
Okay.
If I can squeeze one broader question.
It sounds like you know as you are.
<unk> seen more emphasis to retail and more marketing dollars to retail.
How do you think about that.
In terms of affecting.
Your ability to acquire.
New households are consumers and do you I guess do you lose something in the.
Lack of I guess first party data maybe that you acquire.
And Andrew your ability to cross sell using some of the tools you use an honest dot com or.
Do you just see this as a great opportunity to try and bring new users into the franchise.
Perhaps then kind of usher.
Assure them into the to the digital side of the business as well thanks.
So it's a it's a great question John I think for US what's really important is if you recall, we have limited amount of partners from a retail perspective that we work with.
So our ability to work with them on their card data their loyalty programs as a precursor to where we invest our shopper marketing dollars. So there has to be a connection around marketing that's being done with those partners on the digital side to be able to drive acquisition to be able to drive trade up in <unk>.
Mentality across category.
As well as the support that goes then in with those partners to go beyond the specific category. So that's the type of business.
Our wipes business and our personal care business. So it's really around driving number one awareness and being able to drive a shopper.
And make them that honest shopper and then to the marketing that we are doing is cross category oriented that takes that consumer to that second or third item both for the baby business as well as our beauty business as we talk about different solution sets around scan as well as color. So it's kind of a $2.
For us and we think it can benefit us and we're seeing it when you look at the consumption data that I referenced earlier when you look at over the last 12 weeks, how our business is performing and outpacing the category in both for example in diapers as well as in wipes as well as in personal care. So.
That gives us confidence that.
We're definitely driving not only the trade up but we're also driving it.
Great. Thanks.
Thank you. Our next question comes from Steph Wissink of.
Jefferies. Your line is open.
Hi, everyone I have a couple of technical questions. So my apologies I just want to go back to Kelly. Your response to a prior question. The guidance is in aggregate to grow mid single digits are each quarter, you expect to grow mid single digits.
In aggregate.
Okay. So if we use that as a base I think that would imply about $12 million ourselves in growth year over year, maybe help us think about the contribution of price, which I think you mentioned with mid to upper mid single digits.
The new distribution.
Maybe how much conservatism you're building in.
To that assumption just given the timing of that new distribution and then as it related question. It would seem like your legacy distribution might be down. So just trying to understand a little bit of how we kind of bridge the total amount of growth.
Given the distribution, you're gaining the pricing that you're putting into place.
Relative to the performance of the legacy distribution. Thank you.
Thank you.
Good question I think when you think about the new distribution, we laid out a couple of points of growth in 2022 on our last call on also from innovation as now I think the headwinds on.
We are seeing is as we think about the digital and declining traffic.
<unk> really being kind of offset.
The new distribution and innovation I think we are seeing growth as you've seen the contract data.
R R.
Our legacy distributions actually seeing great growth in the retail side and we are really seeing the headwind as we mentioned in our last call is we.
We have our boutiques in a program that we've landed for the past two years and that we are not comping in 2022.
A very successful program in the back half of 2021 and that is the largest single headwind that we have on that program.
In total.
Is kind of a decline on the year over year business.
Certainly we've got a good business with them and we periodically have had success and certainly over the last few years have had great success getting rotational programs.
That's really offsetting that.
The strong growth that we're really seeing with our legacy retail partners.
Yeah.
The price that would be very helpful.
The only thing I wanted to mention on the pricing is because we are kind of assuming especially this is the first price increase it honest consumers I've ever seen from US we did take a conservative approach in elasticity, so far that's tracking versus our expectation, while we're hopeful that over time the velocity unit lost people come back we did not see.
No.
Overall revenue.
Any significant ways as a result of the pricing that was really a margin improvement.
Strategy.
Thanks, Kelly that was my final question. So you got it thanks so much.
Yeah.
Thank you. Our next question comes from Bryan Spillane of Bank of America. Your line is open alright. Thanks, operator, good good morning, everyone.
Good afternoon, I should say.
Here at least.
Just a couple of questions first.
And should we.
We think about the.
More of a shift in the marketing mix or the B.
Sort of demand spend going from digital to supporting.
Brick and mortar retail is there any change in the geography of the P&L of where that where that was expenses will be sort of realized so I guess, what I'm thinking is will there be more debt is more like trade spend above the revenue line versus being captured in SG&A, just trying to understand if theres going to be any kind of shift in where wed.
Is that spend.
Yes, there wont be meaning it will not be a shift there is a shift but it's already been reflected in our outlook.
So the revenue outlook.
<unk>.
Some spending above the above the net revenue line.
Okay. Okay.
Any.
Any any can you give us any sort of idea in terms of just size just how much of the spend is shifting.
Or how material that is.
So we don't break down the components really buy.
By channel.
Overall I think the highlight to say is that we are seeking.
The year in which kind of volume was slightly weighted towards digital to moving towards.
What's unique out.
We've always said.
It's 50 50 scenarios of the years would've been a little stronger retail.
You can expect the strength in retail as we pull out of <unk>.
But it's going to be more like 45, 55 really big departure from what you've seen from us.
And therefore, we're not calling out.
Not material in nature.
Okay, Alright thats helpful. Thank you and then.
In the Q there is.
There as I mentioned about two two co manufacturers, who I guess inflation triggered.
Renegotiation of the rates I guess can you.
Give us a sense of just.
How that impacted your fleet inflation assumptions and then.
Should we be is there a is there a possibility that maybe more of your your co manufacturers might be in that same position and we may see more of that over the course of the year.
Yeah. So we have about 80% of our overall product cost of the three manufacturers and those those are negotiated in advance. So typically we have complete line of sight to kind of what our pricing structure look like for the year and in 2021.
Their contracts do have escalation if there are two quarters in a row.
Input cost escalation above hurdles that are within the contract.
And it gets triggered to renegotiate and so that actually happened already and was built into the outlook that we provided to you on when we can.
Talk just seven weeks ago.
And so we have good line of sight kind of those manufacturers we've agreed on pricing for 2022.
And we don't well certainly.
Then we need to be a very significant.
Escalation above where prices are now for an extended period of time for that to trigger an it would trigger.
And to the year.
No.
We have pretty good confidence.
Perhaps versus maybe other people's out there other companies out there.
We're getting surprised by the I think we have pretty good on overall visibility to what our cost structure for the year. That's great. Okay. Thank you.
Thank you.
Thank you at this time I'd like to turn the call back over to Nick Vlahos far any closing remarks Sir.
Great well. Thank you so much everyone. Appreciate you spending the time with us today.
Behalf of this team just want to thank you for your participation and we really look forward to sharing our progress with you at our next quarterly earnings call. So have a great weekend everybody. Thank you.
And this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yeah.
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