Q2 2022 Honest Company Inc Earnings Call

August 12, 2022

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Okay.

Ladies and gentlemen, thank you for standing by and welcome to the company's second quarter 2022 earnings call.

At <unk> 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 Austin Powers, Vice President Investor Relations at the honest company.

Please go ahead Sir.

Good morning, everyone.

Thank you for joining our second quarter 2022 conference call.

Joining me today are Nick Wallace, Chief Executive Officer and Ken.

Kelly Kennedy, our Chief Financial Officer.

Before we start I'd like to remind you that we will make certain statements today that are forward looking within the meaning of the federal securities laws.

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.

Actual results to differ materially.

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 and we undertake no obligation to revise or publicly release the results of any revision to these forward looking statements.

In 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 GAAP 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.

Oh I broadcast of this call is also available on the Investor Relations section of our website at investors Dot honest dot com.

With that I'll turn the call over to Nick.

Thanks, Steve Good morning, everyone and thanks for joining us today.

As noted in today's earnings release, we delivered strong top line growth up 5% in the quarter versus a year ago in line with our expectations.

We saw positive growth across both our digital and retail channels as we continue to expand our omnichannel presence.

Consistent with our prior guidance as we look to the second half of the year, we anticipate delivering mid single digit revenue growth as.

As we will see the full benefit of two rounds of price increases taken in the first half combined with the impact of product innovation and expanded retail distribution.

Just on consumption trends in the quarter I feel confident that the honest brand continues to resonate with a conscious consumer.

Looking at 12 week tracked channel data ending June 12, honest continues to gain market share as our growth continues to outpace the category.

Our unit velocities remained healthy following recent pricing.

As we see solid growth in both volume and sales. This indicates the brand has pricing power even in this challenging economic environment.

The overall category growth for diapers, and wipes was 9% and 10% respectively coming almost exclusively from pricing.

Honest diapers grew 12% and wipes, 20%, respectively predominantly from volume.

The overall personal care category declined while honest grew 15%.

In the highly competitive categories in which we compete honest growth outpaced the category in some cases quite significantly and.

And the growth was up high quality balanced between volume and pricing.

As we execute against our key growth strategies I wanted to provide an update on progress to date, starting with marketing.

Which is the lever we pull to drive brand awareness trial and share of wallet. We continue to invest at a high level in support of our brand with marketing spend at approximately 15% of sales in the second quarter.

Recognizing the rising cost of digital marketing, which we touched on last quarter as well as our meaningful retail expansion in the second half of the year. We are shifting a portion of our marketing investment from digital to shopper marketing to drive awareness and support retail distribution.

Great example is our quarterly beauty at it with a key strategic partner target.

Which recently had a co marketing campaign with our founder on a segment titled <unk>.

Spring clean your beauty bag with Jessica Alba.

Which highlighted nine of our best selling clean beauty products.

This shopper marketing investment is driving awareness and consumption as demonstrated by 13% consumption growth in beauty at this customer.

For our total honest business at target, we delivered our seventh year.

Consecutive week of positive year over year sales growth.

Turning to innovation our initiatives are on track so far this year, we launched our new fresh flex concealer at a variety of retailers, our new acne skin clearing line exclusively at Ulta, and honest dot com and expanded our wellness supplements line with a launch of GNC.

In the back half we're on track to deliver additional beauty diaper in personal care innovation, both online and with strategic partners.

On the distribution side, we are well underway on our retail expansion plan. Specifically you can now find honest products at Walmart Dot com over 630, Ulta stores and roughly 1400 GNC stores nationwide.

The ultra expansion solidifies our position in clean beauty with a largest beauty retailer in the U S. Our new supplements line focuses on wellness oriented sleep stress immunity and her health all of which are now available in store and online at G. M C.

At August Dot com.

New this quarter, we're announcing distribution with publics are strategic grocery retailer in the southeast.

And Djs our club retailer with a strong presence on the east coast.

As a result of these distribution wins, we achieved a brand ACB of over 50% for the first time in the company's history.

Which demonstrates the strength of the honest brand proposition.

We expect further ACB expansion with the upcoming distribution launch into Walmart stores in July we launched on Walmart Dot com and in Q4, we will be expanding into over 2000.

Walmart stores across the country.

This will include an assortment of August diapers.

Wipes and personal care items.

As we continue to grow market share the opportunity with Walmart expand honest penetration into the south and southeast regions as well as across the country will make honest products more accessible as we reach consumers with a leading type of retailer in the U S.

On the international side, we're expanding our skin and personal care business with the largest beauty retailer in Canada shoppers drug Mart.

This past week, we launched honest beauty products in China through our partnership with Super ordinary with our flagship store on Tmall.

We are pleased to be partnering with Super ordinary who has a proven track record of launching Premier U S beauty brands in Asia.

This new partnership will set the foundation for future global expansion.

We also remain focused on driving growth in a responsible manner honest was founded nearly 10 years ago with ESG principles at heart and we remain committed to diversity and inclusion environmental sustainability of our products and strong governance practices.

We plan to publish a summary on the progress of our ESG program in early 2023.

Overall, we continue to focus on executing against our key growth initiatives in marketing innovation and distribution that.

That will drive growth for the remainder of 2022 and beyond.

As we continue to see positive top line trends and reaffirm our full year revenue outlook we.

We need to recognize the headwinds we face in today's input cost and inflationary environment.

We've continued to experience rising costs across the supply chain and expect these pressures to continue across the balance of 2022.

This cost inflation is putting additional downward pressure on gross margin requiring us to update our outlook for the year and response, we plan to take additional pricing.

Execute incremental cost savings and focus on key initiatives to improve margins I feel confident in our ability to sequentially improve our margins as we continue to execute these plans.

In closing the honest brand remains strong delivering on its commitment to the clean and natural consumer we've significantly grown our brand awareness and household penetration over the last two years, while our market share continues to increase.

We maintain our conviction that August could be the new modern CPG brand.

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.

I'll start by saying I'm very pleased with our strong topline performance in the quarter as well as our ability to reiterate our revenue outlook for the year, which reflects mid single digit growth in the second half.

Input costs of accelerated further leading us to update our gross margin and adjusted EBITDA outlook.

But we believe and pricing and other cost saving measures will be able to offset these headwinds overtime.

Now turning to the financials.

Revenue increased 5% to $78 million for the second quarter of 2020 compared to the second quarter of 2021.

Growth was broad based across both digital and retail channel.

Although we did see stronger than anticipated growth in the digital channel this quarter due to strong shipments ahead of Prime day.

Diving into the key drivers by product category.

Diapers and wipes.

Our diapers and wipes business, representing over 65 protecting the portfolio was up 9% as we continue to see acceleration. After the 2021 launch of our clean conscious diaper and benefit from increased inventory level on white.

Both diapers and wipes grew consumption at double digit rates in the quarter outpacing category growth.

Skin and personal care, representing over 30% of total revenue declined 2%.

The decline was driven by two things.

First we had a timing shift on a shampoo and body wash shipments ahead of our annual promotion and a key club retailer.

We were also negatively impacted by key item out of stock, which were most pronounced in the beauty business.

Excluding these impacts the skin and personal care business would have grown in double digits.

We were particularly pleased that both our personal care and beauty business color and skin outpaced category growth.

Our household and wellness business, although a.

Part of the portfolio had a rebound in the second quarter up 15% due in part to strong sales of our sanitizing wipes and expansion of our wellness supplement fly.

Growth in this category was also driven by increased royalty sales on SBB clothing line, which has seen strong demand in the marketplace.

Now turning to results by channel.

Revenue was balanced between channel with digital at 48% of sales and retail 52% of sales in the quarter.

Digital saw a rebound in growth this quarter up 9% behind stronger performance in orders ahead of Prime day as compared to last year.

As a reminder, at times, we've experienced a key digital partner optimizing the weeks of supply.

And result in shipments outpacing or under pacing demand and our revenue can shift from one quarter to the next.

Spike positive consumption trends.

Separately, we are actively investing in our digital platform, which has driven improved site speed at <unk> Dot com.

Enabled frictionless ordering and provided customers more options and customization for subscription.

These investments will support our digital business in 2023 and beyond.

In the near term however, we expect headwinds in our digital business as we face the continued rising cost of paid advertising and the industry wide shift of consumers back into solar.

Retail revenue increased 2%, reflecting consumption growth across our key customers.

Revenue growth this quarter reflects the shift in timing of shipments for a promotional event for our key club customer that negatively impacted overall revenue growth in the channel by 5%.

With sales nearly equal we slipped across digital and retail we continue to believe our Omnichannel model is a competitive advantage, especially given volatility in consumer shopping behavior.

Given our balanced digital retail visit and upcoming distribution expansion, we are well positioned to support the consumer wherever they choose to shop.

Now turning to gross margin.

Gross margin was 30% in the second quarter of 2022 compared to 36% in the second quarter of 2021.

This reflects approximately 875 basis points of additional comp versus the prior year offset by roughly 275 basis points from pricing and other actions taken to date to offset the impact.

The biggest impact came from higher product costs, including inbound freight, which increased approximately 500 basis points versus a year ago.

In the second quarter, we saw an acceleration in input cost inflation above our original forecast, particularly.

Particularly as we strive to get back in stock and build up our inventory position on baby wipes and key components in our beauty business.

A longer lead time and supply challenges.

In addition, fulfillment cost increased approximately 150 basis points versus a year ago.

We now expect these input cost headwind product com inbound freight and labor rate to remain elevated versus our prior forecast.

In order to support new retail distribution, and offset headwinds and digital due to declining traffic and higher marketing costs.

We invested at a higher trade promotion rate to drive sales in store.

It had roughly a 225 basis point impact to gross margin versus last year.

To offset input cost inflation.

Executed mid to high single digit price increases across approximately two thirds of the portfolio in the first half.

Pricing and cost savings benefited second quarter margin by approximately 275 basis points.

Since our second pricing action just went into place in early June of this year. The full benefit of those price increases will impact the second half of the year.

So far we've been very pleased with the execution at retail as our price gaps versus conventional products remained in line.

As Nick noted we've continued to grow both volume and sales.

Given the favorable elasticity impacts so far competitive actions, we're seeing in the market and the continuing inflationary environment, we plan to take additional pricing that will benefit 2023.

We're also being as aggressive as possible to drive cost savings for example in Q2, we consolidated distribution centers on the West coast, which provide savings of roughly $2 million anyway.

We're also optimizing our operating expenses.

We're attacking areas of higher return reducing.

Reducing discretionary spend and looking to offset some of the cost headwinds with SG&A savings.

Turning to operating costs and profitability.

As anticipated operating expenses were down materially primarily due to a year ago costs associated with our IPO.

As we move into Q3, we've now cockpits onetime costs and going forward will be a like comparison.

Of note this quarter marketing expense with that 15% of sales in line with our planned support for the honest brand and reflected a higher level of detailed marketing support versus a year ago.

Adjusted EBITDA for the second quarter of 2022 with negative $5 million, which reflects a $5 million improvement versus the first quarter of 2022.

We ended the second quarter with $67 million in cash cash equivalents and short term investments with no debt.

The cash balance reflects an increase in our inventory position to the longer supply chain lead times and in anticipation of the new distribution gains coming in the back half.

Turning to our fiscal year 2022 outlook at.

As Nick highlighted we are reaffirming our full year revenue outlook, reflecting mid single digit growth in the back half of the year with high single digit growth in the fourth quarter as we rollout new store retail distribution.

From a channel standpoint, we anticipate the consumer shift to retail to continue impacting our digital business offset by acceleration in our retail business.

Recognizing the current cost pressure, we expect gross margin for the second half of the year to be in the range of 31% to 32% versus 33% a year ago.

This reflects approximately 700 basis points of additional costs versus the prior year.

Offset by roughly 550 basis points and actions taken to date to offset the impact.

The 700 basis points includes 550 basis points of higher input costs.

50 basis points of higher fulfillment costs.

And 100 basis points of higher trade spend to support new retail distribution.

Pricing will benefit the second half approximately 375 basis points.

And cost savings mix and other items are expected to provide about 175 basis points of benefit.

We expect the gross margin headwind to be partially offset by optimization of operating expenses.

Taking these factors into account.

Adjusted EBITDA is now expected to be in the range of negative $10 million to negative $20 million.

<unk> improvement over the back half achieved.

Achieving positive adjusted EBITDA for the fourth quarter.

The fourth quarter will benefit from the highest revenue of the year.

Additional pricing actions.

Auctions in low return marketing and prudent management of SG&A.

Overall I'm pleased with the momentum on the business as we expand our omni channel footprint and make honest products more accessible to consumers in the U S and abroad.

With that I'll turn the call over to the operator, we look forward to answering any questions.

Thank you.

And as a reminder, ladies and gentlemen to ask a question you will need to press star one one on your telephone.

Once again to ask a question. Please press star one one.

Please standby, while we compile the Q&A roster.

And our first question comes from the line of Dana Telsey with Telsey Advisory group.

Good afternoon, everyone as you.

You unpack seasonal.

Price increases along with data.

Reception with expanded distribution.

Envisioning fulfillment costs and price increases going forward.

Mid single to high single digit price increases that have been taken already.

What percentage of the portfolio against additional price increases and by what range and how do you envision fulfillment costs.

Lastly, with digital and retail.

The expanded distribution what do you see penetration rates that you are ultimately looking at with the public's announcement that just happen how do you how do you see that scaling.

You.

Hi, Dana this is Kelly.

Start first with your question about what we see in the input cost environment and I think you've heard us mention that the biggest headwinds that you see.

And are any imbalance cost, both ocean and trucking as well as labor rates in our fulfillment center.

We did kind of outlined the outlook for the balance of year, we anticipate that the current rates, which are kind of.

Historic High we are seeing that those will continue through the balance of the year.

So thats really when you think about the change in the margin and the headwind on <unk>.

Now forecast to be 31% to 32% in the back half, that's really reflecting about 700 basis points.

<unk>.

Cost Samsung fulfillment.

And then on the additional spend as we look at supporting the new distribution with training.

We'll offset that we mentioned that pricing is the biggest components.

Offset those headwinds at 375 basis points, but we also will be benefiting from cost savings.

And certainly just.

Other other cost impacts.

And to the tune of about 175 basis points.

Headwinds, we're seeing about on a year over year basis, roughly 200 basis points of additional pressure.

Where we were a year ago.

Yes.

Yes, I can take the second question as it pertains to kind of distributions.

All of this all plays out for us what we're really.

Good.

We've always had this opportunity.

Southeast corridor to really make honest more accessible to consumers in that area and what's really important areas in the southeast region of about 42% of all new growth happened in the southeast So having this Walmart partnership as well as public obviously gives us that accessibility to consumers with digital.

And in retail stores standpoint.

In that area. So if you look at the 2012, a Walmart store.

The piece that we have announced around distribution roughly those stores around.

We won both of those are in the southeast and the roster across the country. So that gives you on tax and then concerning home Lloyds.

Disproportionate amount of the business to be focused on personal care. There. Initially so it will be against our screen personal care business. They will be even greater detail next quarter around kind of what that footprint. What that mix is going to look like with that gives us really the opportunity to kind of build out the overall distribution of that.

We currently sit at about 50% ACB. So there's still a lot of opportunity for us across the country as we drive the success ability strategy.

I think you had a last question on pricing Dana Youll recall at our January price increases on about a third of our portfolio primarily diapers.

<unk> price increase that was not on the same products. It was on <unk> and personal care.

So as we think about taking pricing roughly two third.

Additional pricing action, we still Havent thought about third of our portfolio that is not taking pricing up.

In addition, unlike competition could come back and taking a second price.

Price increase on the same products.

Something that we've chosen not to do but we do think we have some ability and as we book on.

Later in the year 2023, <unk> when we look at elasticity is and what the impact is and the fact that we continue to be able to use our category growth and a nice balance between price and volume.

Feel really confident in kind of our pricing actions and ability and that the timing was right to kind of be a follower behind that.

Thanks.

Thank you.

Thanks, Dan.

Thank you and our next question comes from the line of Laura Champine with loop capital.

Thanks for taking my question.

In Q4, what can you be more specific about the sales benefit that you would expect from the initial shelf stocking at Walmart.

Yeah, when we talk about and think about top line revenue for the back half I think.

It's pretty important to point out that we're talking about sequential improvement from where we are in Q2 to Q3 and being much more heavily weighted in terms of where we're going to see the new distribution shipped in Q4, So the way to think about the mid single digit growth.

Given for our outlook for the second half.

Basically it's high single digits in Q4, and predominantly focused on growth in Q4 versus Q3, and one highlight I will just mention.

Last year Q3 was our largest quarter. So we had some big shipments going out, particularly around the rotational program it's Eric.

And so on.

When we think this year Q4 will be our market revenue quarter.

When you think about that.

Walmart, but also continued consumption trends, which were seeing extremely.

Good good consumption trends, particularly in volumes and balance with price.

Growth in BD.

12%.

Strong trends as well within beauty skin color and double digit growth kind of across mass Amazon our DTC, we do anticipate continued.

Consumption trends balanced between pricing and volume in the back half.

Yes.

And the only thing that I would add.

Kind of a finer point on it as you look at Q3 and when you look at Q4, as we talked about mid single digit growth.

One thing that existed in Q3, a year ago was our largest quarter. We also had a significant.

Program.

Customer.

Which really was roughly about.

$6 million.

Of revenue that will not be repeated.

That has about a mid single digit impact in Q3, but you will see or really kind of high single digit as Kelly referenced from a growth perspective, as we start to see some of the pipe.

Come in from a Walmart respective is more with the new distribution relative to consumption. We continue to see kind of the trends is the latest IRI data through July .

We continue to see the trends in diapers wipes evolves personal care, our growth kind of outweigh the category growth.

Those businesses so at some point.

On site to run the balance between shipments as well as consumption.

Right, So I'm trying to get a better sense of what's happening with volumes back up a little bit.

Half of the year is over or Youre expecting revenues to be flat, what's the expected change for the full year in volumes.

Yes.

In Q2, specifically, if you breakdown, our 5% growth it was roughly half from pricing and half from volume. So we would expect in the second half as we move into that could be relatively consistently balanced between pricing and volume.

Got it thank you.

Thank you.

And our next question comes from the line of.

Okay.

<unk>.

Thank you we have a follow up question on Walmart and publics, if you could share little bit about the merchandize strategy I think Nick you mentioned <unk>.

<unk> and <unk>.

<unk>, maybe even a little bit personal care into Walmart and then more personal care focus that publics are those curated assortments special makeup items or did they come from your existing line and just more of a curated selective assortment.

So excellent question.

Number one when it pertains to the missile Walmart, we're making sure.

We've got an offering that makes sense for that Walmart consumers across the country. So in flavors youre going to see us have.

A different accounts within that offer more value to the Walmart consumer youre going to also see larger account size across the wipes business again additional value on a price per item basis frequency per diaper.

And then the third is on personal care and skin and Youll see a curated collection of skin care products that are going to be unique to Walmart again, so thats going to be the offerings, which can be holistic as producers diapers wipes as well as personal care and then as it pertains to publix.

I'll give more context to the next fall will be a subset of our personal care items that are going to be spot within publix.

And through the southeast corridor from a personal care skin standpoint, so that gives you some context on both of those.

Yes.

Okay, that's great and Kelly, just really quickly to help US bridge. The adjusted EBITDA step function from Q3 to Q4. If you can just help us think how much of that is related to the high single digit revenue growth into Q4 and the leverage.

Or is something else within the body of the P&L of that might be improving to get to that positive EBITDA inflection in the fourth quarter. Thank you.

Thank you Scott, yes, the inflection point I would point to three impacts. The first is revenue is distributed.

And part of that is pricing you talked about additional pricing actions, we're taking as well as cost savings. So we'll get some additional benefit in Q4 versus Q3 and.

And the last thing I'll highlight.

You probably have noted from last year as we think about how we spend our marketing in Q4.

Unlike other retailers.

<unk> had.

<unk> that are very seasonal in nature, we're not we tend to see a little bit of a shift up in the overall cost of <unk>.

Media, we really focused our marketing on shopper marketing.

And we tend to kind of temper our spend we see that shopper marketing for us is much more efficient. So generally as you think about marketing it tends to be on.

Our marketing percentage in particular tends to be better in Q4 than it would be in Q3 and often on a dollars basis. It tends to be a lower quarter for us in terms of marketing spend I think what's really important is that all three of these benefits together will shift us and be able to take us into positive adjusted EBITDA territory.

Thank you that's very clear much appreciate it.

Thank you and our next question comes from the line of Andrea Tahira with JP Morgan.

Thank you operator.

Good morning there.

Just wanted to go back to the channel and marketing and merchandising shopping shopper marketing commentary you gave.

I think I can answer based on spend reduction you called out in your prepared remarks, So a question to Nick.

And then a question to Canada filings make more broadly on the strategy there.

The comments on the volatility for digital sales and of course, I understand you're getting into Walmart and <unk>.

Several other.

More.

Store level customer so wondering what's happening with your key Doc calls.

Our partner and you highlighted that the shipments to them may be a bit volatile.

And consumption may diverge, even more so is that a function of your Walmart dot com move or is that kind of reducing inventory or seeing that its basically similar overlap.

Overlap final consumer that is switching from.

Prime into Walmart Dot Com and then I'll have a.

A question for Kelly.

Yeah, I'll start just by talking reminding you that in the quarter a year ago. We didn't have the disconnect between at this key digital partner between shipments.

And the consumption that we saw and that was predominantly about that reducing weeks of supply ahead of their big national events. This year, we actually saw consumption and.

And that was predominantly around them reducing weeks of supply ahead of their big National event. This year, we actually saw consumption and shipments in line and so we do have that impact this year.

As we think about kind of results coming out of that the national event. We were highlighted as what is the brand that was really driving and featured with their growth and their kind of there.

Amazing results for that.

Events, which we're pretty excited about and as we think about just our performance at that level.

Retail around consumption I know, it's a little math between personal care and beauty, but we are pretty excited about the consumption trends that we're seeing in beauty by now for.

For example, we Nick highlighted on that quarterly.

And she's really gets rebound downtown shopper marketing that we do and are able to do with our largest.

Customer and our largest partner around clean beauty.

And we did see in addition to kind of having that 78th consecutive week.

Positive year over year growth in beauty at target, we had 13% growth and we had 25% growth on Amazon and honest Dot Com was also double digit. So we're seeing really in addition, just outpacing the category both in skin and color, we're seeing really good traction overall, which we're excited as we layer in ulta.

And being in over 600 stores and one of the Premier.

Retailers in the country on clean beauty.

The launch of the Acme line I think as we think and invest behind retail and shopper marketing. We're seeing good results, we're able to measure it and as we mentioned that shift.

We will as we go into retailers such as Walmart will continue to make investments there and we are seeing them more efficient in some of our digital spend.

On that call.

Okay.

And the one I want to take a bit Andrea just to give some additional context. On this is if you think of target dot com and our retail store as you think of ultra dot com and our retail stores Walmart Dot com retail, we're driving content leveraging their digital footprint number one so that's when we say shopper marketing.

Where you're gaining the eyeball the awareness and then we're fulfilling also within the store.

<unk> looked at if you go to the shelf off shelf display leveraging our shopper marketing investment to really get the surround sound going around kind of the desire within the marketplace to drive the attraction via digital all the way through to the point at the side, whether it's the digital shelf with a physical shelf in store and Thats the key.

Commentary around things like the beauty of it that we did with target to be able to program. So you're going to see more of that as we go into the back half because youre seeing in the marketplace. The investment right now when it comes to marketing kind of from a traditional perspective and digital is really from our increased perspective and reach and close.

Sure is really continuing to go up and we're seeing more efficiency and effectiveness leveraging the sharper marketing component of this and it plays well with the added distribution that we're now building upon as we go into Q3 Q4, and then really the impact when we start looking at next year.

So that's yeah. That's helpful. So just two.

So kind of like go back to the beauty with fat.

And I appreciate Kelly you clarify that the commentary about that key digital customer is on the base period, right, so but going back to the numbers you gave for the beauty.

The clean beauty numbers I can decide target up 13% and then 25 kind of Amazon Dot call.

Is that.

Is that also going to be reflected.

And that type of inventory that type of initiative that you had for the beauty added is that something you're looking to do as well as the <unk> or the assortments seamlessly in other words like the same kind of success youre, hoping to achieve and the other channels.

Absolutely we're launching of course with the App designed to focus on skin at Ulta, but absolutely you wanted to.

I think we're excited about too as we go into the back half as we have been challenged like everyone else the supply chain, it's been a drag on both the personal care and beauty business as were out of stock on some key items at <unk>.

We are getting back in inventory in Q3.

The majority of those items, so that will certainly help.

We've also seen some of our key retailers struggle with labor and getting the labor in the store to reset the shelves that we havent had the best execution kind of add that labor market softens as you go into the back half of the year, we feel like we'll be better positioned with our personal care and beauty.

What we've done is targeted to Amazon.

As it relates to both SKU count and breadth of Skus and tower on the shelf as well as with the support that Nick mentioned and sharper market marketing in particular, we plan to replicate policies.

Retail distribution come onboard.

And on that that was my second question on the numbers on the on the promo expand in the second half I think the puts and takes correct me if I'm wrong.

You had a lot of.

From a spend and I understand it's part of it is above the line. So it's part of the impact that you had in that and the reduction in the gross margin, but I was wondering what happens below the line. So in other words the SG&A line.

Just shift to more digital into merchandising and stopped probable.

Yeah, I think in Q2, when you think the level of the mine marketing spend for the back half is going to be kind of in the range that we've highlighted.

Kind of in that mid teen and win the way, we think about R&D and certainly SG&A. We continue to take a very cautious approach on overall, we bought we've always had caution as it relates to head count and growth, but we feel we have the right kind of level of X Gene X gene.

Supporting team to support what are some really ambitious growth initiatives as we go into 2023, we think of R&D and SG&A more on a dollar basis and Youre relatively flat certainly as the top line.

<unk>.

We can really leverage overall, our SG&A, but we did highlight that we are going to offset a small portion.

The headwinds that we're seeing in margin with some SG&A savings and those are predominantly around.

Where we are in support of growth things that we can just be more cautious in terms of how quickly we ramp up and grow our internal.

Kind of keen to hear as well as our overall expenses.

Great I'll pass it on thank you.

Thank you again.

Thank you and I'm.

Showing no further questions at this time, so with that I'll hand, the call back over to CEO , Nick <unk> for any closing remarks.

Great well, thanks, everybody for participating as you've heard we have a lot of conviction as it pertains to the plan that we've put into place as we embark on the second half of the year and on behalf of the team I want to thank you for your participation today and we look forward to sharing our progress with you on our next quarterly earnings call take care everybody.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

[music].

Okay.

[music].

Ladies and gentlemen, thank you for standing by and welcome to the honest companies second quarter 2022 earnings calls.

At <unk> 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.

Now I'd like to hand, the conference over to Mr. Steve Austin felt vice President Investor Relations at the honest company.

Please go ahead Sir.

Good morning, everyone.

Thank you for joining our second quarter 2022 conference call.

Joining me today are Nicolas Chief Executive Officer.

Kelly Kennedy, our Chief Financial Officer.

Before we start I'd like to remind you that we will make certain statements today that are forward looking within the meaning of the federal securities laws.

Putting 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 actual results to differ materially.

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.

In light of new information or future events, except as required by law.

Also during this call, we will discuss non-GAAP financial measures, which adjusts our GAAP results to eliminate the impact of certain items you'll.

You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures.

The financial results section of today's earnings release.

<unk> broadcast of this call is also available on the Investor Relations section of our website at investors Dot honest dot com.

With that I'll turn the call over to Nick.

Thanks, Steve Good morning, everyone and thanks for joining us today.

As noted in today's earnings release, we delivered strong top line growth up 5% in the quarter versus a year ago in line with our expectations.

We saw positive growth across both our digital and retail channels as we continue to expand our omnichannel presence.

Consistent with our prior guidance as we look to the second half of the year, we anticipate delivering mid single digit revenue growth.

As we will see the full benefit of two rounds of price increases taken in the first half combined with the impact of product innovation and expanded retail distribution.

Just on consumption trends in the quarter I feel confident that the honest brand continues to resonate with the conscious consumer.